Friday, July 19, 2024
Chris Judd

High interest rates?

How high can the interest rate go? This is a subject that everyone is wondering about. If you have a million dollars borrowed, then every time the interest rate increases by one percent, it will cost you $10,000 more to borrow it each year.
If you are retired and depending on your investments to live on, the same one percent increase in interest will give you $10,000 more to take a cruise or buy a new car with.
When the rate of inflation is higher than the rate of borrowing, then those who are operating on borrowed money will see a healthy increase on their bottom line at the end of the year. When the interest rate gets higher than the rate of inflation, as it did in the 1980s when interest rates peaked at 21 per cent and the inflation rate was only 10 per cent, unless you were in an excellent financial position, then you could have lost everything.
I still remember paying 21 per cent interest on a used tractor that I bought in 1981 and that was the most expensive tractor that I ever paid for once the cost of borrowing was added on. I also thank my lucky stars that the tractor was basically trouble free and we did our own repairs.
On most farms the cost of interest, feed and labour are the largest expenses. Both the farmers and the lenders sleep better at night when the farm has a good equity position. The 1980s were very tough years for younger farmers who were trying to build up their farms and had considerable debt. Some of the better established older farmers who had stopped reinvesting in their farms were heard saying that those younger farmers should have borrowed less money. The sad part back then was that some of those hard working young farmers didn’t survive the high interest rates and the older farmers got older and no longer produced food to feed the nation. Only for some very understanding lenders who stuck with the younger farmers and advised them to only invest in what would give high returns farm productivity would have plummeted and food prices could have become very unstable, depending on imports.
Today everyone, unless you are quite well off, is very concerned about high interest rates, high fuel prices and high food prices.
Higher interest rates and high fuel prices are the main reasons that food prices are getting higher. Higher fertilizer prices are also a large factor in increased food prices. Fuel is a huge contributor to the cost of manufacturing and transporting fertilizer.
Fuel efficiency of the place you live and your mode of transport are important to everybody. An old friend of mine was involved in the fuel business for many years and he once told me that if oil was selling for $80 per barrel, then gas sold for 80 cents per imperial gallon. Where did that guideline go? A few years ago, when a sports figure received more money for allowing his picture to be printed on each cereal box than the farmer received for the cereal inside the box, we knew that there was a problem!
We must remember that the three things that are most important to man are clean air, fresh water, and nutritious food. A safe place to live and clothes to protect us from the elements are also a priority to us and our family. Most of us will never live in a mansion or drive a gas guzzling Rolls-Royce, nor would want to.


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