Interest Rates: A Barometer of Pressure or a Thermometer of Heat?

By David Clamage

thermometerHistorians have suggested that the concept of charging interest today for the use of money, goods or services to be repaid in the future goes back thousands of years, when a farmer could borrow a seed to grow wheat and repay that loan with “interest” in the resulting crop. Not much has changed since then, except for maybe the price of the tie your banker wears.

In today’s world, the price of money — as a commodity that is bought and sold much like the loaf of bread in your supermarket or the gallon of water in your utility — is based on a very long list of factors that influence that cost. Of course, traditional supply and demand comes into play and, actually, that’s fairly simple when it comes to the business of being a utility. There is a limited demand in the financial markets for the various kinds of tax-exempt debt you generally use: Institutional investors are limited by their own balance sheets and various tax and accounting rules; retail investors like your own individual savings and investment accounts are capped by personal finances and even more tax rules; and, foreign investors are generally limited, if not excluded, from this marketplace altogether.

When the economy is strong and there is growth, there is generally more demand for money. As you need to grow your system to meet the demands of your water and sewer infrastructure, you’re likely on a growing list of similarly impacted systems around the country, so the demand for money to finance that growth gets higher and higher while the supply of money generally doesn’t grow at the same pace. After all, you have a limited appetite for strawberry ice cream no matter how tasty, and the tax-exempt lending market, (bonds, loans, leases and more), does too. In 2010, the Federal Reserve purchased $1.25 trillion of mortgage-backed securities to prop up the sagging mortgage market. These purchases increased the monetary base in a way similar to a purchase of government securities. One would think this would result in inflation, but we — myself included — were proven wrong. According to the Consumer Price Index (CPI), inflation has actually been modest.

Source: U.S. Treasury Department

And, of course, we have the often secret and incomprehensible machinations of the Federal Reserve and their counterparts around the globe — the Chancellor of the Exchequer in Britain, the Banque de France in France and the Deutsche Bundesbank in Germany. Policies like Quantitative Easing can often make your eyes water, and while the current chairperson, Janet Yellen, is uncommonly transparent, economists often speak a language all their own. Statements like those of Yellen in December, “…while it would be desirable to have tax policies that do increase the productive capacity of the economy, an increase in the pace of productivity change is one of the factors that does affect the economy’s neutral rate,” often require a translator present. The key at the end of the day is you must be prepared and learn to read the signs to access capital when needed. It’s a bit like buying in bulk the commodities you use at home every day — timing is everything.

The chart above shows where interest rates have been in 2017. Quite a roller coaster. And to put it into your perspective, the key to this column, how does it impact your business?

If you borrowed $1 million at the low of the market on April 18, 2017, when the 10-year T-Bill was 2.18 percent, your payment would have been $9,282 per month vs. if you’d borrowed at the peak of the market on March 13, 2017 at a rate of 2.62 percent, your payment would have been $9,482.

Like investing in the stock market, it’s darn difficult to forecast the top or bottom of a market or trend. What is important is to recognize the signs to “try” and read the tea leaves — the weather of the economy — and plan for your agency accordingly. Staying in touch with your local banker is one very important tool since they also have to manage these changes in interest rates and the economy for their business. Taking the time to read the news from the U.S. Federal Reserve and U.S. Treasury will be useful — it may be a new language for you but you’ll get the gist of it very quickly, and their websites have quite a bit of very useful data. And, of course, tracking the financial press in your community as well as the Bureau of Labor Statistics will help you demystify the financial markets.

Taking an interest in interest always pays off!

David Clamage is the founder of Saulsbury Hill Financial, based in Denver. Saulsbury Hill Financial specializes in large project and lease financing for virtually all terms and asset types as well “small-ticket” and equipment for municipal finance with quotes and more, available for immediate delivery. Clamage can be reached at or 888-MUNILEASE.

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