How important are interest rates? It depends on who you are and what you are. It also depends on whether you are collecting it or paying it. In order for interest to be charged, a debt has to be created. In other words the lender charges a rate of interest to the borrower. Be it a loan, a bond or a mortgage. To the borrower, the importance of the lowest possible interest rate charged is axiomatic. However to the lender, the higher the rate of interest charged, the greater the return on the capital lent. So we have two opposing factors to consider.

To a large extent, the base at which interest rates commence, are controlled by Government. Be it the "Treasury" or a Country's "Reserve Bank." Not always so. It depends on time and circumstance as well. When a government requires a foreign loan, be it from a government, banks or "on the open market," the interest rates charged can vary considerably. A lot of variable factors come into play; some of which are the credibility of the borrower, the currency required and in which currency repayable, the size of the loan and the extended period required in which it is to be repaid. Other factors may exist as well, such as "a tight Money Market" or conversely--a lot of money looking for investments.

We will address a number of these at a later stage. Our primary concern in writing about interest rates is to examine the importance of interest rates to those people who rely on the interest earned as being either their sole source of income, or their major source of income. From the moment people enter the labor market, they are exhorted to save. "Save for your old age. Save so that one day you can invest this money to purchase a pension to cover the remaining years of your life when you can no longer work--or want to work." It is these people that concerns us most--and for that reason given that disturbs us most. If one works on a span of 45yrs., from the age of 20 to the age of 65, one should provide for the possibility that pension, or interest or dividend income shall be sufficient to provide for two people from age 65 to age 85--a span of 20 years. For the 45yr. working period the interest rates that would apply are vital to the formation of total capital accumulation needed for that vital final 20yrs. when no salary earnings are expected to exist. Finally--the accumulated capital has to be invested in order to provide an "after-tax" return sufficient to enable those two old people to live in relative comfort in retirement.

Putting aside the fact that the average person aged 20 to 25 yrs. would not be saving anything meaningful from their monthly earnings, we will ignore this aspect in order to determine what possibly can be accumulated over a 45 year working period. For this exercise we are taking a starting wage of ( in dollar terms) $1760 per month on the basis of say $10 per hour times a 40 hr. week, times 4.2weeks per month. As 22 working days in a 30 day month, or a 176 hrs per month worked. From this point on we have presumed the following.

1) Salary will rise steadily at 11% every 5yrs--at 2.2% per year.

2) 10% of gross income will be set aside monthly and invested in an income interest bearing investment.

3) Monthly interest has been calculated at a rate of 4% per annum, and capitalized annually at an interest rate of
    6%.The following then would be the scenario.

Age 20 to 25 starting at (say) $1800 per month --ending at $2250 per month.

Age 26 to 30 starting at $2250 per month---ending at $2500 per month.

Age 31 to 35 starting at $2500 per month---ending at $3100 per month.

Age 36 to 40 starting at $3100 per month---ending at $3500 per month.

Age 41 to 45 starting at $3500 per month---ending at $4000 per month.

Age 46 to 50 starting at $4000 per month---ending at $4600 per month.

Age 51 to 55 starting at $4600 per month---ending at $5200 per month.

Age 55 to 60 starting at $5200 per month---ending at $5800 per month.

Age 60 to 65 starting at $5800 per month---ending at $6500 per month.

At the conclusion of 45yrs. of saving, including capitalization and re-investment of all interest, the total savings amount to no more than a maximum of $275,000 in total. NOTE , no cognizance is taken of any time lost due to protracted illness, job loss for any period of time or any form of taxation. Nor for reasons of an increase in family costs or money spent on anything such as holidays which would at any stage preclude the standard 10% of gross salary per month being set aside for investment. Finally--in the case of a married couple--no recognition will be made in the possibility that any one partner in the marriage will lose ANY TIME AT ALL in the 45yr. period in which they are either single or married.

Thus we arrive at a total of $550,000 for the couple at retirement age. What will interest rates be on that fateful day? If 6%--then their annual income would total $33000 per year, off which taxes and medical supplementary insurances or medicinal costs may have to be met. Not counting for any of these, the total gross income for the two amount to $2750 per month. Not even enough to pay for ONE PERSON today in an average extended care home for the aged! This is why interest rates, and / or other compensatory factors are of vital importance to those people who are saving for their "old age."

First of all, what is totally lost sight of is the effect that low interest rates has on "savers." This was dramatically "illustrated" in the recent past when a situation was created, and aptly named "the Asian meltdown." Let us examine what transpired in Japan, and the underlying reasons for its creation there. Never for one moment forget that we are talking about the SECOND STRONGEST economy in the world! The Japanese economy was for decades geared to exports, while at the same time their domestic market was jealously guarded against foreign competition. Interest rates were lowered in order to stimulate production, ostensively to feed an expanding export market. However at the same time more goods were also being created for the domestic market. At one time the Japanese population were also among the highest savers in the world. When interest rates dropped to the point where banks were lending money at 2%, several things happened. Companies and people were borrowing money for investment, both domestically and overseas. Real Estate was purchased at inflated values in Hawaii, the United states and Europe and the Far East. Companies and banks purchased or expanded in overseas countries. Property values soared in Japan--and sales and demand kept pace with this. However, in order to be able to lend money at 2%, it was being borrowed at 1.125%.

What happened now was the situation that created the swift and dramatic meltdown in Japan. The lower interest dropped, the more one had to save towards one's ultimate retirement. Thus the vast majority of those workers were eventually saving an average of 12% of their income in order to cope with lower interest returns on their investments. Two things were happening simultaneously. While ever increasing money was available for investment--less money was being spent by those savers on purchasing goods and services domestically. Added to all this was the frenetic investment into stocks at any price in order to compensate for the lower savings rate. The result was inevitable when the bubble burst. We are not going to repeat old news as to what happened thereafter. However what never ceases to amaze one, is that hardly anyone anywhere emphasized the fact that low interest rates was the prime cause of all this! One hopes that governments around the world will keep this in mind when they pursue this route in order to stimulate their economies.

When the media and economists state that stock markets reflect the strength or otherwise of a country's economy, one wonders how far from the truth this statement is. What it does reflect, and dramatically so, is that money is looking for investment in instruments other than interest rate investment. It is a sure sign that interest saving rates are far too low. The more one drops interest rates, the higher and faster the rate of investment into stocks. Many years ago--one talks of a time perhaps as long ago as before the last world war, the primary source of capital required for business expansion was from the banks. Perhaps as an incentive to invest into stocks, which is in reality an interest-free loan to a public company in exchange for a share in the company and the right to participate in after-tax profits, governments differentiate tax-wise between dividend earnings and interest earnings. Earnings derived as dividends are on average taxed at about 2 /3rds that of interest earned. The reason given is that dividends are a distribution of taxed earnings, whereas interest paid out is a deductible item in the hands of whoever is paying interest. All this may sound reasonable--but to whom? In the hands of the recipients this amounts to an unfair tax application. Why should the person receiving the income as interest on an investment be taxed at a higher rate than an investor receiving income from dividends? In reality the one who is saving money is being unfairly taxed for doing so. We are not talking about "tax sheltered income" here which would apply equally to both if the funds derived be set aside into a "pension payment scheme." What we would like to see is equal treatment, where interest earned pays the same tax as dividend earnings.

When a Reserve Bank or Treasury manipulates interest rates at the lower scale to stimulate the economy, not only do savings suffer, but as a result it moves into speculative instruments where capital losses may occur. At these low interest rates debt increases, and at the same time additional money is created. The additional money supply puts upward pressure on prices to the extent that inevitably interest rates are raised to slow down growth and hopefully slow inflationary factors at the same time. Why wasn't the money supply controlled at the same time? If an economy is expanding at say 4% and inflation is at 2%, then the money supply should increase at a rate of 6%. Any excess should be siphoned off into a temporary "tax free--interest free" loan to government. In other words, the money is a tax deductible item--and the interest paid by govt. is tax free to the recipients, repayable say either on demand after one year--or repayable in maybe two years. While on the subject; why when trying to "send a message" to investors, are interest rates timidly raised by a 1/4 % after allowing rumors to circulate that interests are on the way up. If one wants "to send a message"--raise interest rates by 1% or even 1 1/4 % OVERNIGHT WITHOUT WARNING! NOW THAT'S MAKING A STATEMENT!! Over- heated stock markets take very little notice of 1/4 % raises in the "BANK RATE", even be it expected that several of these are due over a period of a year.

Contrary to public thought, banks love low interest rates. The lower the interest rate--the larger their profits. At a rate of borrowing of 2%--they will charge a borrower 4%--thus making 100% on your money! At a difference of paying 3% and lending at 5% , the profit margin is lowered to 66% , and at 4 and 6% it is down to a profit of 50%. At 6 and 8% it drops to 33.33% and at 8 and 10% , profit is down to 25%.

One of the anomalies of an expanding economy and interest rates is that of the United States of America which has been experiencing perhaps its finest economic growth ever. Prime Bank Rate, the rate at which banks lend money to their best clients has for the past two to three years been in the region of 8 to 8.5% while the Fed. Rate has been operating in the same time-frame within the 4 to 4.75% range. While "preferred borrowers" or top-rate borrowers have been able to tolerate an interest rate of 8.5% and other companies that of 9 to 9.5%, and still manage their phenomenal growth in sales and profits, why then cannot bond rates be tolerated in the 7 to 7.5% range which would make the world of difference to savers looking for a valid return on their investments. While one cannot ASK for Municipal, State or Provincial bonds or that of Government to be pitched at that level, one is sorry that at this moment in time there are so few if any bonds available anywhere at those interest rates. Unfortunately top class companies find it easier, simpler and at no cost to themselves, to raise finance via a further issue of shares on stock markets than to issue bonds in order to obtain further capital funds. One therefore hopes that government may one day be mindful of those who are saving for their old age or simply require interest as income to live on, come up with a mechanism or a tax saving factor to enhance the returns on low bond rates.

In conclusion, we would like to point out that the use of "dollar figures" or "dollar terms" are not to be inferred as referring to the U.S.A. Where this was meant to be so--we have said so. Many countries today use the word "dollar" as the term for their currency, such as Australia, New Zealand and Canada among others. We have attempted--we hope, to reflect the situation of interest rates as it would apply to most countries around the world