Why The Pundits Could be Wrong About Interest Rates

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Today in Los Angeles all I hear about on TV and read in our local papers is the noise about why we can expect much higher interest rates in the near future. It seems to be the majority opinion among the “egg head” economists and news show hosts. They claim the Obama administration’s policies and strong government intervention into the private sector will promote a rising rate environment. They believe our nation’s out-of-control deficit spending, well into the trillions of dollars, only adds fuel to the fire and that inflation is just around the corner. And with the onslaught of rising prices – it’s only inevitable interest rates will increase in the next 12-24 months and beyond. They say we can expect long-term mortgage loans and variable-rate debt to become more expensive for corporations and individuals.

However, I’ve learned in life that whatever the consensus opinion seems to be – the opposite is likely to happen. The one caveat to this rule I’ve pounded into my head over the years is never bet against a heavily favored Southern Cal football or UCLA basketball team. I think today’s news chatter about interest rates is wrong. I think rates are more than likely to remain low for many months and even years to come. When I walk the streets of L.A. now, I see happy-hours extending to 8 p.m. to attract business. I notice retail clothing discounts on just about every city block. And, I see bargains for red-ripe tomatoes at 49 cents and seedless grapes at 79 cents a pound in our markets.

No doubt, today in Los Angeles and nationwide we’ve been in a deep recession. Home values have plummeted in many cases 40-60 percent or more. Trillions of dollars of wealth has been lost with the stock market’s collapse. It’s now down about 30 percent from its all-time high reached in October 2007. Some major retailers, like Circuit City, have closed its doors for good and it’s near fifty-fifty if the once proud and profitable and largest company on earth is going to survive – General Motors. We’re stuck in this recession with the nationwide unemployment rate having spiked to 9.8 percent and even higher at 12.6 percent in L.A. County, according to the U.S. Department of Labor. It’s this nation’s highest unemployment rate in 26 years. Given these pale conditions, how can our economy possibly do an abrupt U-turn and reverse the mounting job losses which would at least provide a signal of inflation and higher rates? I don’t think it can happen quickly. And, because so many of us are out scrambling for work, I just don’t see where the demand is going to come from to heat-up our economy in the months to come. There’s no quick solution this time around – as I see it. I think it will take years to fix unemployment and our housing markets.