Are you worried about interest rates?

Most consumers are worried about interest rates, but recent bloomberg articles and headlines in my local paper are now postulating the theory that Stagflation may rear its ugly head!  What's stagflation, well the simple definition is that it means that interest rates increase, wages decrease, business decreases, and it's a self defeating spiral that is difficult to overcome.

So are these newspaper and media reports correct, or are they overblown?  Historically they maybe correct, but how long before we actually see 1980's type interest rates?  The answer maybe more complicated then this simple explanation, but hey if you can do better then please do so.

Bottom line, oil and energy do affect inflation.  The last time we've witnessed oil increase dramatically was in 1973 and 1974.  Oil went from $4.00 a barrel to over $12.00 in less then 18 months.  That particular crisis had more of a political element due to the embargo, but the current run up on Oil is similar in some ways.  For one, we've had the same markup in oil, but over a longer period of time. 2003 we were at $25 a barrel, now we've hit $102.00 a barrel as of this week.  But how does this affect interest rates?  In the 1970's Fannie Freddie reports the following average interest rates for the following years; 1973 - 8.04%, 1974- 9.19%, 1975-9.05%, 1976-8.87%, 1977-8.85% and 1978-9.64%.  As you can see interest rates never really took off like is suggested by some of these news stories we've read recently.  But in 1980 we hit a major recession, and yes some of this was due to the latent effect of the 1974-75 increase in the cost of oil.  There were a number of other factors as well, but overall energy cost's did not have a direct effect on rates as one might think.  Rates did finally start skyrocketing, but that was in 1980-16.32%, 1981-18.45%, and 1982-17.48%.  I'm not suggesting that oil and energy did not have any affect at all in regards to interest rates in the 1980's, but it certainly didn't cause runaway inflation until much later.  There could be arguments made that the government during the same time period did relatively little to abate the crisis, and their has been criticism of federal reserve policy during this same time period.

There maybe on other time period in recent history that bares some reflection.  In the mid to late 1980's, we had fairly stable interest rates, between 13.87% in 1983, and 10.34% in 1988, but in 1989 we went through a severe market correction in the real estate markets, and the immediate affect on rates actually decreased again to 7.31% in 1993.  We also went through a recession during that same period of time, and rates were fantastic until about 1994 and 1995 when Greenspan and the Fed raised short terms rates to stem the surging economy.

I'm not an economist, nor do I claim to be in the same league as some of these experts, but if historical data is any indicator of future events, then interest rates should continue to be GREAT. Could we go through another early 80's recession?  Sure it's possible, and who knows what is going to happen with world events and the next election cycle.  But I think one subject that I didn't even discuss has more impact then energy or real estate markets, and that's the issue of TAXES.   If the new administration is favorable to much higher taxes, then 1980-1982 could be a certain reality for this country.  If we actually reduce corporate taxes and make them inline with European competitors, then we may actually come out of this present economic cycle in fantastic shape.

Anyway, just one guy's opinion!