Talk about a guy flipping into uncontrollable rage. My old friend Herman Geltenfelter steamed into my office waving a bunch of credit cards in his hand. “I want answers,” he demanded. “Every Tom-Dick-and-Harry news story is talking about how interest rates are falling like rocks because of deflation.
“Mortgage rates are plunging. Auto loan rates are ready to drop. But these things–the plastic–are still costing me 18 percent whenever I charge 10 bucks worth of anything at a store. Card rates aren’t budging one inch. What gives?”
“A different story, old buddy,” I replied. “The only numbers really falling so far are long-term bond yields, on account of when economies get weaker, bond prices go up and their yields go down. They work in opposite directions, and yields are what control mortgage rates. Any day now, you’ll see mortgages dip below 7 percent for the first time in two years–maybe to as low as 6.5 percent before the downturn ends.”
“Meaning . . .?” Herman shoved a Visa and MasterCard under my nose.
“Meaning zilch as far as your card rates are concerned. Other personal-loan rates, such as those on autos and home equity, will decline some if the Federal Reserve cuts one of its key rates and banks chop their prime rate. That’ll happen if the economy slows so much that the Fed thinks it needs stimulating.”
“Hey, just a darn minute,” Herm butted in, “A few months ago–during all of 1997, in fact–the experts were predicting the Fed would raise rates to choke off inflation. Are those guys daft, or what?”
“Nope. When Asian economies started crumbling, the whole ballgame changed. Fears switched to those countries shipping tons of cheap-price goods to the United States, which would eat into our corporate profits and cool down our economy real fast.”
“So all that malarkey about us living in a little global village is really true after all?”
“You got that right,” I responded. “What happens in Seoul and Tokyo can mess up Peoria overnight.”
The veins were sticking out in Herman’s neck, which was getting redder by the minute. “What about the rest of my pocketbook?” he shouted. “Like my CD investments or having to borrow a few bucks from the bank? You mean when Kamikaze Financial Securities goes belly-up in Yokohama, my savings yields are going to get clipped at home?”
“It’s already started, my friend. CD rates are falling three times as fast as a few weeks ago, especially on long-term accounts, and it could get worse. If and when the Fed lowers rates by one-quarter percent this year, CDs will probably drop by about one-fifth of a percent within a couple of months.”
“And the other rates, like those on cars?” Herm asked.
“They’ll fall, too, but not by as much as on CDs. That’s been the usual pattern. Banks are no dopes,” I explained.
“In other words, the one big place I make out is on mortgage rates, but the rest of the picture is pretty dim?”
“Unfortunately, yes,” I sighed, agonizing for my friend.
“What about my stocks and bonds? What happens to them in this deflation scenario?” Herm wanted to know.
“Bonds become the darling investments because their prices go up when the economy slows and when interest rates go down. On the other hand, some analysts think stock performance, especially in the aggressive growth sector, could be stunted.”
“And all the talk about our miracle economy, with low inflation, high employment and a balanced budget–is that baloney or what?” Herm now looked perplexed.
“No baloney. The country’s economic indicators are gangbusters. And the Fed knows when to step in and fine-tune things if the downturn goes too far,” I said.
“OK, so suppose I grab a cheaper mortgage and save all that money. What do I do with it?”
“One shrewd thing: Use it to pay off your miserable debt load, especially on credit cards. It’s a fantastic way to `earn’ 18 percent on your money.”
“That’s fine, pal, but you never answered my No. 1 question. How come card rates stay up in the heavens?”
“A bunch of reasons,” I said. “People stupidly insist on carrying expensive plastic. Plus, most states let card issuers legally charge up to 18 percent, and in some states it’s higher. Now banks have invented new excuses such as covering their losses on customer delinquencies, card fraud and so forth.”
Herman Geltenfelter may be a little eccentric, but he’s no fool. Last I saw, he was cutting his credit cards in half and mailing them back to the bank.
– Credit tip. It’s best to pay off credit-card balances each month. When a balance is carried from month to month, most cards do not offer a grace period on new purchases.
