The Two Faces of Interest Rates

In the same manner that a coin has two indivisible sides, rates have two indivisible faces: one faces the borrower and the other faces the investor or lender.

When the borrower looks at it, he wants the lowest rate and when the investor looks at it, he wants to highest possible rate of return he can obtain.

Trying to divide these sides, as trying to divide spending from earnings, leads us into all sorts of problems—at a personal level as well as from a society’s point of view.

An imbalance in one, will sooner or later spell ruin to the other, and vice-versa.

If you focus only on the borrower side and try to force investors to earn less, you destroy savings and investments. An example of this is Europe and their 10 years of negative interest rates. Now their economies lie in shambles, and they are at the verge of World War III.

If you focus only on satisfying investors, then you would eventually reduce everyone to the level of debt bondage as it has happened many times in antiquity, leaving rulers no other option but to declare debts null and void every so often (about every 7 years) in order to stop society from collapsing.

How do you balance each of these sides? Thousands of years of history seem to indicate that the answer to this problem is not so much found in economic textbooks but rather in religious textbooks. Various religions have found ways for both sides to coexist in relative harmony.

The Bible for example details why transactions have to be done between actors (people) out of their own free will, why it is one’s duty to accumulate capital and be the proper steward of resources, and much, much more. The religion of Islam also details how a transaction should be conducted. Further, many years ago when I was a teenager, while at the home of one of my best friends who is Jewish, I picked out a book from a collection of religious Jewish texts and was amazed to see a very detailed code of conduct when doing a transaction and how to manage the proceeds.

Religious practices are codes of conduct which at the time protected and ensured the survival of its followers. These codes of conduct often make more sense, are more practical and, if you follow them, have the potential of catapulting you to success much more effectively than any convoluted modern economic theory.

To me, it is truly revealing that most of the problems we face today have already been solved thousands of years ago!

How is this topic of balancing interest rates addressed today? In one hand, we are told that the way to save is by obtaining extraordinary high interest rates. That is the solution—so they say. The “marketed” solution is to get hold of some money, and by the miracle of high rates of return, without any exchange of valuable products or services, transform it into a tidy sum.

Another variant of this “solution” is to borrow at a low rate and then turn around and “invest” it into a high-rate-of-return “investment”. As if both could coexist at the same time—because remember, one goes in hand with the other.

If you could borrow at a low rate, it would mean that there would simultaneously be no viable investments available at much higher rates. Conversely, if you could obtain a high rate of return on your investment, this would mean there would be no viable means of obtaining debt at a low rate of interest.

This is because in a balanced and free economy, investors provide the funds for lending, and borrowers use them to produce the goods and services.

Money always moves from the saver to the producer, and from savings to production of real goods and services.

This may not always be clear in today’s world.

What used to be the realm of the few: opportunists, short sellers, speculators; people that earn their living simply by moving money has become the expected norm of the “successful” “investor.”

Yes, you need short-sellers, opportunists, speculators. They are the scavengers of the economy. They are the ones that pick up the pieces when something goes wrong and we need them! Otherwise no one is able to re-start or reboot an area of the economy that has failed. But only very few can be scavengers—you don’t need many in a society, because this is just the emergency crew. And it comes with its own challenges and requirements, such as not being afraid of considerable risk taking.

But this is not the business model for most successful people!

An important thing to understand is that to be viable economically, you have to be really clever, work like a maniac, really know what you are doing, and do it over and over and over again while watching your financial basics. Even to be a successful scavenger requires know-how and experience. It’s an actual profession!

The main thing I want you to remember is that the Borrower and the Lender are both part of the same coin! Part of the same team! One cannot exist without the other, and both have to take care of the other and respect, nurture and ensure the other’s success!

This information gives you a window into interest rates at any given moment. If you would like to borrow, look at how much investments are paying, and this will give you an idea of the rates you could expect. Conversely, if you would like to invest and are not sure what a good rate of return is currently, look at how much people are paying to borrow, and this will tell you the rate you could expect to get as an investor.

When rates are artificially forced down, you are basically destroying the future by penalizing savings and investments (and therefore you are also destroying long-term future production). When rates are exorbitantly high, no one can have access to the funds needed to increase production.

Nothing in the last 5,000 years of economic history has been as efficient as the free enterprise system to regulate all this…Oddly enough, that’s what the Bible says! No wonder successful financial advisors are usually religious!

So, don’t fear higher interest rates too much. Higher interest rates stimulate the investments and the production of goods and service that the economy badly needs. Providing that markets are not artificially tampered with, this should result in more jobs, more goods available, more homes, and therefore lower prices.

That said, we are right now still in a period where interest rates are historically low. Looking back thousands of years, the average historical interest rate hovers around 8 percent. For various reasons, I do expect that they will continue in an overall upward trend over the next 10 years. If you are thinking about buying or refinancing and would like more information, feel free to contact me any time.