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Hey Hyper how's come...


mjkst27

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thinking out loud here....

 

I'm still trying to understand why our "system" didn't fall apart during the 70's. How did an economic system just released from any semblance of gold backing manage to survive the inflationary, rising-interest-rate regime of the 70's? I know that relative to today, the debt situation was much better back then. The US govt ran relatively small if any deficits, consumer credit was just a baby compared to today's beast, and people were more fiscally conservative as the adults of the time were children of the depression/war era. Real estate also inflated muchly in the late 70's. But if there was ever a time for "consumers to consume all they can consume", it would seem to have been the 70's, with the very high interest rates discouraging/limiting debt creation.

 

Flipping the argument over, what if we find out in 2004-2015 that a rising interest rate environment is "stimulative", as people/corpses continue to borrow today for fear of higher interest rates tomorrow. Granted it wouldn't be boom times but it might allow the system to crawl along while carrying the burden of blown-out ARM's, large credit card balance holders getting crushed by rising rates, defaults causing house prices to crash, etc.

 

OK, I'll take my machinehead hat off now :P

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thinking out loud here....

 

I'm still trying to understand why our "system" didn't fall apart during the 70's. How did an economic system just released from any semblance of gold backing manage to survive the inflationary, rising-interest-rate regime of the 70's?

 

 

 

Flipping the argument over, what if we find out in 2004-2015 that a rising interest rate environment is "stimulative", as people/corpses continue to borrow today for fear of higher interest rates tomorrow. Granted it wouldn't be boom times but it might allow the system to crawl along while carrying the burden of blown-out ARM's, large credit card balance holders getting crushed by rising rates, defaults causing house prices to crash, etc.

 

OK, I'll take my machinehead hat off now  :P

Well if I got hypertiger right it goes like this.

 

 

From the end of the gold standard to 82 debt burdens expanded. As they were expanding, inflation was increasing. When interest rates were raised up to however high it went (I was just a little tike then) in 82' the monthly debt burden of companies and consumers reached its pain point. Where consumers couldn't stay cashflow positive and companies couldn't keep from going broke. In the words of a relative of mine, "They shut the economy down". We could have had a depression then. Instead they lowered interest rates and. We then began the great disinflation where the interest rates start falling. As rates start falling people refinance and see there asset values appreciate. This relative lack of debt makes them feel wealthier but compound interest is still sucking up the money so they have to eventually take on more debt again until they hit the pain point again and this goes on and on until we hit 0% interest rates at which point deflation is unavoidable. Of course the big problem is is that risk adjusted the interest rates on debt should be much higher at 0% interest rates because when deflation happens credit quality declines because businesses and consumers go in over their heads in debt and the rates go up so the effect compounds and whatever happens after that is financial diaster.

 

Of course my expectation is that the gov will just do what they did in the 80s with the S&L crisis. What they did with LTCM, etc. Bail out all the creditors at a discount and then sell all the defaults via Son and Daughter of Fannie Mae and Freddie Mac and the Resolution Trust Corp for pennies on the dollar to whoever's got gold in their pockets. That, or the North American economy will collapse and the Chinese will invade via Canada and Hyperdude will probably have a lot more to worry about then deflation.

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