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| Excellent question. Obviously we can't afford treasury bills to pay 10%. Unless we decide to just keep borrowing money as long as someone will loan it to us. The difference in the 80's is that interest rates were used to hold down inflation and we manufactured more in the 80's. If interest rates went up car manufacturers wouldn't increase prices as much, appliance manufacturers didn't raise their prices and home builders wouldn't increase their prices. However, in the new economy we don't manufacture nearly as much. Instead of building machines we borrow money from China in order to buy things from China. Foreign car companies prevent our domestic car companies from increasing prices by having dealers across the street. The fly in the ointment is that housing prices have increased substantially in the last year and inventories of homes for sale have dropped. The fed may have to make a decision to allow housing to go higher and keep interest rates lower. We don't have to worry about labor unions causing inflation by demanding higher wages because union membership has dropped significantly. Unemployment is high enough to keep people from demanding higher wages. When unemployment is low workers demand higher wages which causes inflation. The good ground will also stay high because we can't afford high interest rates. | |
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It IS Different this Time.
