i caught a cold just before Easter Holidays, and it cost me the whole holiday to recover. i wandered around my neighborhood, which has remained a refreshing experience since i moved in two months ago. In the west-end corner of Hong Kong Island, different things tell different stories. There are dozens of property agencies, but only one securities house, as far as i have discovered. People here are so enthusiastic about trading bricks and mortars, but do not like trading stocks as much. Properties are traditionally regarded as more concrete storages of wealth. Stocks may one day turn to wallpaper, some people wonder. Of course, that really depends on what stocks you have bought. The preference of investing is particularly vivid in this aging community in which housewives prefer the wet market to supermarket.
Walking in the gray street one day, Kit Ping, my girlfriend, curiously asked me why there are so many laundry shops around. Yes, laundry shops outnumber convenience stores there. Some families have washing machines, while others go to laundry shops. It has nothing to do with people's laziness, i explained, although i belong to the latter group of people. Trying to be philosophical, i said it is much more efficient and economical to let other people do the laundry work, rather than to get a machine at home and leave it idle for most days of the week. Later, i wondered if interest rates play a role in such a minor decision as whether to buy a laundry machines or pay weekly visits to laundry shops.
Living in this old town, time seems to slow. But it is always the lack of something, rather than the abundance of it, that makes one aware of its existence. That applies to the passage of time.
If something needed to be done, it is better now than two years later. Most people would agree. But, why does time matter? There are two answers that i can think of. The most obvious answer is people die and cannot wait forever. From the point of view of a company, or a society, which is assumed to have an infinite time horizon, the delay is still costly, because of interest rates. Even if the project bears no debts and there is no need to pay interest, a delay of completing something valuable foregoes the opportunity to earn interest during the time gap.
Interest rates reflect the value of time.
People dream of time traveling. It is impossible for the time being. It is unimaginable to move objects across time, except for one thing -- money. By borrowing, one may spend one's future money. By lending, one may preserve the present money in the time capsule for future use, and earn an interest.
To mail a parcel, one must buy a few stamps. The amount of stamps needed depends on the destination. The farther it is, the higher is the postage. While money moves at the speed of light (at the speed of sliding a credit card), the cost of moving it still depends on the time length. The further into the future from which money is drawn, the higher is the cost. The interest rate is the ticket price.
Middle-aged people (lenders) are packaging luggage of money into the train that travels into the future. The train should not be left empty on the return trip. These people sell the cargo space to youngsters, college students and homebuyers (borrowers) who want to move their future money to the present.
To better match these two groups of mailers, there are box offices collecting tickets and reselling them. With their immense networks, they are able to resell the tickets at higher prices than they previously buy them. They are the banks.
These tickets, just like those of concerts, cinemas and airlines, are subject to inflationary pressure. During inflationary periods, tickets tend to be more expensive, while, during deflation, tickets become cheaper.
The ticket price, just like all other tickets, depends on demand and supply. When more people want to move their future money to buy properties, automobiles, dinners and vacations at present, ticket prices rise. If economic performance is measured by the amount of economic activities taking place, economies with high interest rates are likely booming. In reverse, when many money trains are left empty on the return trips, the economies are probably in the bust.
In the U.S., the supply of the tickets is enormous because people (lenders) are confident to store their wealth in the future America. Tickets have been extremely cheap. Now tickets are getting more and more expensive, in the U.S. and in Hong Kong.
Interest rate hikes are just as scary as price hikes for goods and services, but not scarier, because an interest rate is just one kind of prices.
If tamed inflation is a healthy dose for the economy, why are people so nervous about the rising interest rates. Hong Kong has little influence on the interest rates, or on the prices of most goods, which are imported.
Inflation boosts salaries, although daily expenses become more expensive. Rises of salaries still generate a "feel good" factor that contributes to consumer appetites.
Rate hikes also generate the "feel good" factor that will be welcomed sooner or later. Higher interest rates mean higher interest income for depositors, on the one hand, and higher interest charges for borrowers, including those repaying housing mortgages, on the other hand. Depositors would be happy while mortgage bearers would not. Increases in deposit rates might lag behind those of lending rates. But because, in Hong Kong, deposits outsize loans to a large extent, the benefits should outweigh the cost.
The dose makes the poison. High interest rates, for instance mortgage lending rates at 8-10% in 1997 and 1998, would be discouraging. Now, we haven't yet reached half of those levels. In the U.S., rises of interest rates are to catch up with the inflation, which should be controllable given the vast global production capacity and improving productivity.
Certainly, the period for ultra-low interest rates is over. That should remind us to keep our plans moving on as the clock ticks.
Mar 30, 2005
Copyright Quamnet
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