Historical Perspective on Long-Term Interest Rates
Interest rates got you down?
Are you holding off making financial commitments that are tied to long-term interest rates (i.e. structured settlements) because you believe rates are certain to bounce higher in the near future?
While it may seem sensible to stash your cash in liquid, low interest bearing accounts because you believe brighter days are just around the corner, history suggests you may be waiting for awhile.
According to data extrapolated from Irrational Exuberance, (Princeton, 2005), only three times since 1871 have long-term interest rates dipped below 4% and remained there for longer than a year. Most of us were not alive in 1880 and 1924 when those first two situations occurred. But 2008 delivered a dizzying reality check to all of us. In October, 2008, long-term interest rates fell below 4% and have remained there since.
So using the past 138 years as a reference point, how long might we expect these rates to stay at these levels if history repeats itself? Let's have a look:
1880: Rates remained below 4% until 1911 - 31 years
1924: Rates remained below 4% until 1959 - 35 years
2008: Rates may remain below 4% until (gulp) 2041? - 33 years ?!?!
Since no one can accurately predict the future, no one knows for sure how long interest rates will remain at these levels. Sure, they could and very well may head higher. But some historical precedent exists that leaves open the possibility we may need to get used to this new financial reality.
When Neil Young sang "Now that you found yourself losing your mind are you here again? Finding that what you once thought was real is gone and changing?" he likely wasn't imagining the state of interest rates in 2009. But he may as well have been. Certainly what we all thought was real just a few short months ago is indeed gone and changing. And if we are to keep from losing our own minds, the sooner we all adjust to the new reality, the better off we'll certainly be.
Please call anytime I can help and, as always, thank you for the opportunity to be of service!