by MN Gordon, All News Pipeline:
“As interest costs go up in the United States, you get in this vicious circle, where higher interest rates cause higher funding costs, cause higher debt issuance, which cause further bond liquidation, which cause higher rates, which puts us in an untenable fiscal position.” – Paul Tudor Jones, October 10, 2023
Feeling the Pinch
The difficulties that an overindebted economy will encounter from rising interest rates range far and wide. Though they shouldn’t come as a surprise.
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Quite frankly, it’s real simple. As interest rates rise, borrowing money becomes more expensive.
Car payments are an obvious example of the effects of rising interest rates. The average new car loan today has a monthly payment over $750, with an interest rate of 9.5 percent. What’s more, the monthly payment for roughly 17 percent – or about 1 in 6 – of new vehicle loans is over $1,000.
Financing a house purchase has also become grossly expensive. The average 30-year fixed rate mortgage is around 7.65 percent. Several years ago, it was below 2.65 percent.
According to Zillow’s fall housing market outlook, “the monthly principal and interest to buy a typical home has increased 122 percent in the past three years.”
Homeowner’s insurance has also gone through the roof. In fact, from May 2022 to May 2023, the national average home insurance costs were up 21 percent. This is on top of a 12 percent home insurance increase between May 2021 and May 2022.
Naturally, housing affordability is at an all-time low. By one estimate, incomes would have to jump 55 percent for housing to be considered affordable.
But it’s not just those financing car or house purchases that are feeling the pinch. Some companies are also finding that higher interest rates are a great big problem for business operations. As borrowing costs rise, debt servicing takes a giant bite out of profits.
To adapt, businesses must either reduce costs or persuade customers to pay more for their products and services. Some businesses, through a combination of these alternatives, will succeed. Others will go bankrupt.
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