The dramatic rise in interest rates caused havoc in the financial markets last year as inflation accelerated. Now, with interest rates much higher, everyone is wondering where they go from here. The focus is on inflation, but there is another driver keeping interest rates high. It will become more apparent soon.
World War II devastated the developed world’s economies. Fortunately, the United States remained intact and had a plan. First, it set the Dollar as the Global Currency. Any nation, all economies, could freely trade with each other using the Dollar common currency. Second, the U.S. Navy patrolled and dominated the global oceans, making sure nations were able to trade with each other uninterrupted. World economic growth boomed, millions upon millions throughout the world were lifted out of poverty. It was one of history’s greatest economic miracles.
Over the last 70 years, the global economy has had an unending thirst for more and more Dollars to meet the needs of Interglobal economic transactions. Now there is a change coming. More and more nations are regionalizing. Russia is pricing their oil in their Rubles, not Dollars. China is buying oil and raw material from Africa and South America using their Yuan. The Eurodollar and Petrodollar are now not the linchpin of these transactions.
Higher interest rates are not just about Inflation. The external demand for Dollars and U.S. Treasury bonds is waning. This has major implications for our domestic economy. The world will no longer be there to soak up the Dollars from excess government spending of borrowed Dollars. Attractive interest rates will be necessary going forward to support the Dollar. Do not expect a return to the record low interest rates experienced over the last decade.
In the coming years, bonds will offer a return to attractive yields that may soon be of interest to many investors.
At WST, we believe the solution is a thoughtfully built and monitored portfolio of investments. We suggest you look through the short-term noise and towards the future. You may see opportunity.
Know what you own, do not overinvest, and stick with quality.
-Cliff Jarvis