Interest Rates and Economic Uncertainty

As I watched President Barack Obama deliver his first address to a joint session of Congress, I reflected on the advice of a much earlier President:

“Never spend your money before you have it.”

Thomas Jefferson

The entire world is looking to the United States to lift us all out of the current financial crisis. The United States’ debt is still viewed as the safest investment in the world. Yet, spending trillions of dollars that has to be borrowed/printed does not bode well for the future. Countries worldwide are on a spending spree in an effort to avert a protracted recession/depression. This debt will eventually lead to higher global interest rates and higher levels of taxation. (Ontario’s top marginal tax rate was 82.4% in 1970.)

Interest rates will probably remain low for the next year or so, but eventually all the money being pumped into the world’s economies will have an inflationary effect, which will bring about higher interest rates. There is currently a huge worldwide economic downturn. This combination of unemployment and lower demand for goods and services will restrain inflation for a while. As the economies start to recover, there will be inflationary pressure.

The structured settlement offers excellent long-term interest rates of about 5.5%. Couple this with no taxation and virtually no risk and you have an unparalleled investment. The tax-free leverage makes most structured settlements currently equivalent to about a 10% - 11% yield. If marginal tax rates go to where they were a few decades ago (82.4% Ontario), the tax-free yield will be equivalent to 31.25% earned in a conventional Bond or GIC. We hope tax rates will not go that high, but we can readily envisage something higher than the current rates.