Continued from last week Maintaining enough cash float, controlling the supply and demand of money and managing the float to generate a decent return for the company is a delicate and complex balancing act, requiring vigilance, constant knowledge of global market conditions, and expertise in handling money. Because the float needs to be earning continuously, BBSFC makes the decision to expand offshore, investing the excess float in other global markets where they may realise a rate of return higher than in Bermuda, if market conditions are right.

These outside investment actions counter the effects of spread fluctuations on the home front, and helps BBSFC cultivate international clients (and their businesses) who choose to invest their assets within the company and in Bermuda, which also contribute to the bottom line. It is a revolving cycle of earnings capabilities.

Bermuda continues to motor on. From 1991, we see global markets escalate into one of the greatest bull runs in history; personal income here grows to the fourth highest standard of living in the world. Interest rates actually rise; everyone is getting a great return on their savings, but inflation starts to grow rapidly after several benign years; stocks and markets are wildly overpriced, euphoric. People are spending like mad, consumer debt is at an all time high.

This consumption level cannot be sustained. Suddenly, around the year 1999, the US federal reserve puts the brakes on banks and raises the fed fund lending rate, which is the rate that banks must pay to borrow from the Fed.

The United States and global banks promptly increase their lending rates and their deposit rates. In 18 months, economies start to drop from whirlpools to mud flats, barely moving, as the cost of credit and borrowing rises.

Industries slow production, implement redundancies, consumers stop spending, and consumer public confidence in the future drops like a stone. The stock markets punish thousands of investors.

In an increasing rate climate, this is bad news for borrowers and great news for fixed deposit investors. This period may last for years, as the fed tries to control runaway inflation; if they brake too sharply by increasing interest rates too much and too quickly, the economy slows down too rapidly, and as happened in the year 2000, countries may be perceived as heading into a recession.

Then, the opposite strategy must be employed, where United States Federal Reserve cuts, sometimes abruptly, quickly and deeply, the interest rate that banks pay the Fed to borrow money. With the open purse, credit loosens up, more mortgages are written; if yours is an adjustable rate mortgage, you are ecstatic, as the mortgage rate drops and drops again.

In the US, since the cost of refinancing is minimal because of the cutthroat competition, whenever there is more than a one percent interest rate drop, all types of homeowners will stampede to refinance. For fixed rate mortgage holders here, because of the stamp duty and legal fees it may be considerably more expensive to refinance, but given enough of a rate drop (from your current borrowing rate) should be assessed carefully.

Because the interest rate BBSFC is earning has been precipitously cut, they have no choice but to lower their deposit and their mortgage rates. Think of it this way. If you were in the business of loaning money out and could only charge 7.75 percent for a mortgage, how could you afford to pay even seven percent to deposit holders, pay your employees salaries and benefits, take care of your other overhead and have anything left for you. You might be able to for a while, but could not indefinitely.

You would run out of your reserves, deplete the capital you had put into the business, perhaps be forced to personally finance additional money in the business, ultimately you could be looking at no salary for you at all, and possible closure of the business.

Competition is the name of the game. The current interest rate climate benefits the consumer, if they are properly diversified across the investment ladder, because guess what happens in a declining interest rate market? Stocks rise and rise dramatically, as evidenced by reaction to the 50 basis point (.5 of on percent) rate cut. The market may take off and the whole cycle of euphoria, inflation and spending again. Let's hope it last for another ten years! And that, dear readers is why in a very general sense, interest rates are fluctuating and will continue to do so. Do your homework and be ready to take advantage of this investment environment to your benefit.

Martha Harris Myron CPA CF, is a Bermudian, a Certified Financial Planner, holds NASD S.7 and has a US tax background. She is Programme Director for the Financial Planning Association of Bermuda. Questions regarding this article may be sent to Email: marthamyron y northrock.bm Under no circumstances does the information in this column represent a recommendation to buy or sell stocks or any other investments. Readers needing specific assistance should seek advice from an experienced professional financial advisor.