Completing the circle

This week, I've been focusing on showing the relationships of financial markets and their indicators. Today and tomorrow, I will complete the circle and show how they interact and influence each other.

Probably the biggest influence of all markets outside of the price of oil is interest rates. I've already mentioned in previous posts that the Federal Reserve controls the money supply by adjusting the federal funds rate. When they lower interest rates, it sets off a chain reaction that affects many different markets. First of all, companies are more apt to borrow money from banks to drive their businesses. This money increases their spending for advertising and other expenses. Consumers in turn will buy more goods and services when rates are low. They are quick to enjoy for the moment and worry about paying later.

When interest rates are lowered, government bond prices go up and the yield goes down with the interest rate. When bond yields are lower, conservative investors will look for higher returns, usually with stocks. The more money put in the stock market, obviously the stock market indexes rise, such as the Dow Jones and the S&P 500.

In foreign currency exchange markets or forex, when interest rates are lowered, foreign investors are less likely to pour money in the US economy. They are less likely to buy US goods and services, US government securities, and US dollars; so the value of the dollar goes down and the currency weakens. This also affects international trade because it will take more US dollars to buy foreign goods and services. As these products become more expensive, foreign trade pours in to the US to make more profit. This widens the trade imbalance with other countries because more and more products are coming into the US and fewer products are exported.

In real estate, as interest rates are lowered, prices will go up because credit is more easily obtained. More houses will be sold and banks will do new mortgages on the houses sold. The more money banks lend out, the more credit becomes available as the loans are paid back as discussed in previous posts.

Agricultural commodities are also affected by interest rates, but not as much. As interest rates are lowered, and the economy speeds up by the increased spending, consumers will spend more on food as well. Futures contracts for cattle and pork bellies will go up because the price of meat goes up. Milk, sugar, coffee, orange juice, etc. will all go up as well. As consumer prices go up, the rate of inflation also goes up as discussed in previous posts.

Are you beginning to see the enormous impact the Federal Reserve has on our daily lives? Banks and companies are steered by its direction, which in turn affects all of us. Even the government's money supply is influenced by how many US government securities are sold. Furthermore, all government spending money is obtained through loans from the Federal Reserve and gets added to the national debt. It is so enormous, we can not even pay the interest on the loan. Thus we have mortgaged our working capital and lives through taxable income for generations to come to the Federal Reserve.

This will be continued tomorrow. Stay tuned ...

He who increases his wealth by exorbitant interest
amasses it for another, who will be kind to the poor. Proverbs 8:28 (NIV)

If you have comments or questions, please feel free to contact me at the address below.
Email: DeltaInspire@panama-vo.com