Finance Based Economy

We live in a finance based economy. High interest rates would wreak havoc on the economy. What would happen to home prices if mortgage rates were 7%? What would happen to commercial properties if commercial mortgage rates were closer to 10%? What would happen to corporations if they had to roll debt at those rates?

We have already seen a run up in commodity prices and many goods coming from China in a weak economy. What would happen if the economy gains some steam? The Fed and other central banks are walking a tightrope. QE and easy money are not a win-win. There are dangers to it and we might soon find out what lies on the other side. I do not claim to know what will happen as the events of the past few years are truly unprecedented. But neither do the pundits on TV claiming the S&P 500 will be up precisely 12.7% next year. There are risks.

3 comments:

Anonymous said...

this is the mother of all bubbles.

Anonymous said...

economic recoveries come from a collective belief that things are better. nobody believing in this engineered frankenmarket amd frankeneconomy.

PJ said...

Agreed, this is why I thought the Fed would never aim for positive inflation, but would follow the BoJ and aim for 0% inflation. They need low rates to keep the bubbles from popping further.

But Bernanke seems to have an unrealistic view of the situation, and high hopes for stimulus and inflation.

He'd rather risk a systemic collapse than accept a transient depression.