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Just about everyone has been affected by the continuing low interest rates that dominate our economy today. Anyone who survived the economic turmoil of the late '70s and early '80s remembers double digit interest rates. But it is amazing how few people recall inflation rates were only slightly lower and sometimes even higher.

The concept of "real" rates of return is frequently misunderstood. Quite simply, this is the rate of interest you are earning after subtracting the inflation rate. This tells you how much your buying power is increasing, which is a true barometer of growth.

The bottom line is that inflation has dropped faster than interest rates. In turn, this has provided additional buying power which has helped fuel our economic recovery.

Many people fail to understand the true benefits that come from lower interest rates. When corporations borrow money, they pay less interest. This filters down through higher corporate profits which can increase the value of a company. These incremental profits can be rolled back into the company to fuel additional growth, manufacturing capacity and jobs.

Cities and municipalities that borrow money also benefit from falling rates. A drop in rates can allow these issuers to sell new securities at a lower annual interest cost and pay off existing high interest debt. This savings can be utilized by the issuers to provide new or improved municipal services.

If you are lending money or investing in fixed rate securities, rates may well seem low. Again let's look at the real rate of return. Things are not as bad as they seem. While 15 percent returns on treasury bill investments may have seemed good in the past, few remember that the cost of a loaf of bread or a gallon of milk was rising at a greater rate and that their spending power was eroding.

The result is that while rates are near their lowest levels of the past decade, our economic recovery continues, albeit slowly, and investors in Arkansas and nationwide are benefiting whether they realize it or not.
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Title Annotation:Arkansas
Author:Williams, Bob
Publication:Arkansas Business
Date:Aug 16, 1993
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