37 Years of Fixed Mortgage Rates

I love reading history. If anything, it helps give me perspective. It opens the mind to things that were and things that might be again. This same fascination with history is probably why I love reading charts and graphs so much. Life, economics, politics, family, the seasons...all things things run in cycles. If you understand the cycle, you can be prepared and thrive in every season.

Today's chart is on interest rates. Specifically, 30 Year Fixed interest rates:


The first thing you might notice is that big Mt. Everest looking feature that dominates the left side of the chart. We will talk about that in a moment. Our most recent history shows how low interest rates have been since 2001. The past eight years have spoiled us with cheap financing for our homes. This has been a period marked by easy credit, voracious consumerism, home equity line extractions, and overall abundant living. Two other important things also have happened during this time that have had less effect on the average person. One being the Iraq war and the other being a ballooned national debt. More recently, the national debt has gone parabolic with recent Treasure and Federal Reserve bailout packages topping 7 Trillion. See Interest Rates: The Last Days of the Lows for more thoughts on that.

Lets talk about that awful Mt. Everest feature for a moment. In the 1960s Lyndon B. Johnson instituted the Great Society. It was a huge entitlement and welfare program begun with the idea to "spread the wealth" and create a comfortable safety net for those falling into(or perpetually living in) poverty. Medicare was part of this program. Also during this time the Vietnam War began in earnest. The government needed to provide hardware, men, and ordinance to fight the war there.

In the early 1970s, inflation began to show up in the US economy. Where did it come from? Well, the money that was printed to pay for government entitlement programs and the war effort started showing up in the form of higher prices and higher wages. A vicious inflationary spiral began. Wage freezes were ordered with little positive effect. The economy entered two recessions as "stagflation" became the order of the day.

In the late 70's, years after we had left Vietnam and almost a decade after the Great Society programs were instituted, Fed Chairman Volker decided to wake the economy from the inflationary nightmare. The Mt. Everest feature on our graph is how he did it. By pushing interest rates so high, people stopped borrowing, money creation slowed to a crawl. The inflation correction took almost SEVEN years to complete. However, the correction laid the foundation for the next 30 years of relative prosperity.

Today we have an expensive foreign war that needs to be paid for. We have HUGE entitlement programs and government sponsored bailouts that we will be paying for in the future. Yet, todays interest rates are the lowest in history. So where do we go from here? My guess is up.