The Fed is continuing to send out signals that interest rates will be rising here in mid-December. “Lift off,” they are calling it. It may be a lift off, but I’m betting that it will be a very low level flight.

Our economy has two very strong headwinds to overcome and these are not short term headwinds. First is our demographics. We are an aging society. There are more people over age 65 than under age 45. Our largest age group will soon be people in their 80’s. Unfortunately, this group of people over age 65 aren’t contributing to our economic system and are drawing benefits paid for by our economic system through taxes. This leaves those under age 65 with bigger and bigger amounts that they must pay to support those over 65. That leaves them with less to spend on things like cars, computers, phones and the like. With less demand, then production is less and economic growth is less.

A second headwind is our national debt. According to the Wall Street Journal on February 3, 2015, the interest payments on our national debt were about $200 billion1. If interest rates rise only modestly that number could be $800 billion by 2020 and by 2021 interest payments will exceed all money paid to provide for our national defense. That is money that could be used for more productive purposes and improve our economic growth.

According to a recent G20 Economic Forecast, annual GDP for the United States is projected to be between 2.4% to 2.6% through 20192. I would concur with that and with that type of growth rate, the Fed cannot raise interest rates much or they will choke off what little growth we have. In addition, the federal government has a vested interest in wanting interest rates to remain low and that is to keep the interest expense on the debt as low as possible.

So, while “lift off” may occur in a couple of weeks, I again say it will be a low level flight.

 

1 http://blogs.wsj.com/economics/2015/02/03/the-legacy-of-debt-interest-costs-poised-to-surpass-defense-and-nondefense-discretionary-spending/

2 http://knoema.com/qhswwkc/us-gdp-growth-forecast-2015-2019-and-up-to-2060-data-and-charts

 

Mike Berry is a Registered Representative offering securities through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Legacy Wealth Management, LLC and Cambridge are not affiliated. Cambridge does not offer tax advice.

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