This week’s midterm elections are shaping up to eerily resemble the 1994 midterm election. Much like the political climate of 1994, the majority of the American people are not currently satisfied with the policies put in place by the Obama administration and the Democratic-controlled Congress over the past two years. Unemployment continues to hover around a dismal ten percent, confidence in the housing market has not been restored, and the government continues to overspend.
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In 1994, the Republicans took over the majority of the House of Representatives and the Senate largely due to the popularity of their "Contract with America" manifesto that resembled many of the same principles that the current Tea Party advocates are promoting. This week, the Republicans took control of the House and picked up at least six Senate seats. That shift could mean significant changes in mortgage interest rates and commodities prices.
Here are some of the ways the economy will likely be impacted by the election results:
Mortgage Interest Rates
The country has seen one of the lowest interest rates in its history of issuing mortgages over the past year, and many analysts and consumers wonder how much longer these rates will last. If Republicans restore some confidence in conservatives and independents who don't agree with President Obama's economic policy, we could actually see mortgage interest rates increase to a more normal level. According to the Gallup Poll in September 2010, the consumer confidence index dropped to negative 33 from negative 23 in September of 2009. If consumer confidence is restored as a result of the midterm election results, then an increase in loan origination demand and an increase in the Federal Funds rate could increase the mortgage interest rates by early 2011.
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What does this mean for you? If you are considering a housing purchase in the next couple of years, you may want to try to lock in these low interest rates while they are still around. With that said, do not rush into buying a house unless you have a stable financial situation that can support such a significant long-term investment. In some cases, it's okay to become a home owner even at a young age, but don't dig yourself into a hole and make the same mistake that so many of us did during the recent housing bubble.
Have you already bought a house and are still working on paying it off? Now may be a good time to refinance your mortgage loan rate in order to take advantage of the low interest rates before they inevitably begin to rise. You don't want to be in a situation down the road where you are unable to refinance and are therefore forced to walk away from your home mortgage loan or go into foreclosure.
The general consensus is that these midterm elections are all about purging the congressional incumbents who have been unable to exhibit fiscal responsibility, which will restore some consumer confidence. History has shown in the 1980, 1984, and 1994 midterm elections that when there was a change in power in Congress, the U.S. dollar strengthened in the short-term. A stronger U.S. dollar diminishes the demand for commodities, which are often viewed as a substitute and safe-haven in times of a weak U.S. dollar. Thus, if history rings true in 2010, you can expect gold, oil, and other commodities to see price declines going into the New Year.
Are you currently invested in commodities in your Roth 401(k) or Roth IRA retirement plan? Have you benefited from the huge spike in gold prices over the last two years? While a strengthening economy and increased consumer confidence is great for everyone, it can also lead to a large decline in commodity prices. It may be time for you to lock in your profits.
No matter who has power going into 2011, inflation could still rear its ugly head in our economy. Republican control or Democratic control of Congress does not change the fact that the United States has a $13 trillion dollar deficit. Conservative Republicans and so-called Tea Party candidates are basing much of their campaigns on the idea that they will help to stop the "spend money like water" mentality in the United States government.
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If they do start implementing policies to cut the national budget deficit and work their way into a surplus over the next two years, then the fear of inflation could be reduced. Unfortunately, our government, whether controlled by Republicans or Democrats, has not shown the necessary fiscal responsibility over the past decade to make such progress. It is very unlikely that the government, even with the best of intentions, can escape our colossal budget deficit. Our mistakes over the past decade may lead to skyrocketing prices in everything from food to clothes to commodities. The best thing you can do as a consumer is to be prepared for the worst. Build up a solid emergency fund, work to get out of debt, and continue to invest through a retirement account.
Will the new Congress start reducing our national deficit? Will they start focusing on policies that benefit small businesses and help create more jobs? These are the major questions that the American people have, and only time will tell if so-called "fiscal conservatives" follow through on their promises and help restore confidence in our economy.
Erik Folgate is a top contributor for the Money Crashers personal finance blog, where he discusses various money topics like banking, getting out of debt, smart spending, and improving overall "financial fitness."