The economic pendulum

TV commentators have been yammering lately about inflation and interest rates as if they’ve never been higher. They missed the 1980s. I was working at the newspaper in Algona during that era of sky-high inflation and interest rates. It caused the Farm Crisis, when farmers who were locked into paying for high-priced farmland and machinery with skyrocketing loan costs were devastated. Desperate farmers were driven to suicide and bankers were scared for their lives. But it didn’t hit home to me until I had to buy a car. My car was just a few years old. It was parked one night when a young driver smashed into it and totaled it. The insurance company offered a settlement for the depreciated value of the car, less than half what a new car would cost. I went to the bank and was told the finance rate on a new car was 22%. I was shocked, but the bank president told me that because the newspaper was a good customer of his, he would give me the loan at 18%. I needed the car, so I agreed to the terms. I was a single guy at the time, bought a modest car, lived frugally and managed to pay off the loan in six months. Back then you could buy a new Ford or Chevy for less than $5,000. Today that same car costs $35,000 but you can finance it for 6-7% at a bank, maybe under 2% if you buy it through the automaker’s finance division anxious to move some slow-selling iron. Mary and I ran into a similar situation when we bought our house in 1985, when loan rates had declined but were still high. At the time, mortgages were running about 13%, down from a high of 19% in 1981. Because Mary and I were first-time homebuyers, we were able to get a 20-year mortgage backed by the Iowa Housing Finance Authority for 10% and thought we’d won the lottery. After a few years, rates started to slide more and we refinanced our house at 7%, saving us a fair wad of money. Also, before our children came along, we paid as much extra principal each month as we could afford, and were able to pay the house off in less than 10 years. That was a huge savings. Now mortgages run to 30 years to make $250,000 homes affordable, and until a couple years ago you could get that mortgage for as low as 2.65%. Now they’re back up to around 7%. That may seem high in comparison to two years ago, but over the past 50 years, the median 30-year mortgage rate is 7.41%, so it’s hardly out of control. In fact, in our nation’s 248 year history, interest rates have averaged 5.18%, according to financial analyst Louise Yamada. The problem with low finance rates is that they have a negative effect on savings and investments. When mortgages were under 3%, bank savings accounts paid as little as 0.1%, so there was no incentive to save. Now that loan rates are higher, savings rates have climbed as well, with banks offering CDs at 5% or more. With the current inflation rate at 3.3%, it actually pays to save money again. Politicians and TV commentators try to make political hay out of interest rates and inflation, but they don’t know history. A look at the facts rather than polemics shows that today’s interest rates are about average over the course of American history. Our economy is a pendulum, swinging back and forth. It’s about in the middle right now.