The Phaserl


Variable Rate World, Part 1: Staring Into the Abyss

by John Rubino,

Interest rates soared again last week. This weekend a lot of people are running a lot of numbers and getting some terrifying results.

It seems that the past few years of falling interest rates have lulled a big part of the global economy into financing with variable-rate debt. So when interest rates go up, there’s a world-wide reset in interest costs that, best case, amounts to a tax increase on individuals and businesses and, worst-case, threatens to blow up the whole system.

The most familiar but least worrisome part of this story is the adjustable rate mortgage, or ARM, which is basically a teaser-rate home loan that rises over time towards the prevailing 30-year fixed rate. This rate jumped from 3.5% to 4.5% in just the past month, which means ARM resets are now aiming at a higher target. For ARM holders, the resulting higher monthly mortgage payment is exactly like a pay cut or tax increase, leaving less around at the end of the month for new cars, vacations, etc. So discretionary spending drops and, other things being equal, the economy slows down. This is serious for a system that, when evaluated using real numbers (see is already in recession.

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2 comments to Variable Rate World, Part 1: Staring Into the Abyss

  • Frank Zak

    I am waiting now for gold and silver to back up and re enter.

    I recommended gold at $1470 an oz and it went to $1920 an oz
    last night where I exited.

    $1500 should be good level if it can get there.

    Posted by: Mike Williams | August 23, 2011 at 01:49 PM
    (Mike Williams is Frank Zak’s pen name on cult buster sites)

  • Frank Zak

    Regarding the variable rate issue on mortgages
    it will have very little impact. Most were purchased
    when the variable rate was at 5%. New loans are mostly fixed
    rate for the last few years.

    And, in places like Los Angeles 35% of all homes
    sell for all cash. 75% of all decent houses get at
    least one all cash offer.

    Pension and 401 k lump sum payouts are making old
    retiring people rich.

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