"The Inflationary Catch-22: How bailing Out is Setting the Stage for the Next Financial Crisis"

We are on the verge of an inflationary nightmare. The sheer irony behind our current bailout spending is that in the end, it is doing nothing but reinforcing patterns that will result in the next housing and financial crisis. Our reckless spending habits are infusing currency that has no real value or must be borrowed into a highly unstable economy. Macroeconomics 101: if the supply of money rises while demand remains the same, the value of that currency will fall. That principle, however, assumes that demand will not respond to the devaluation of that currency - largely a negative trend that further increases the rate of inflation.

Other nations are apparently seeing things our own leaders are not. Most notably, China. Zhou Xiaochuan, Governor of the Beijing Central Bank, has expressed his concern as to the risk the rise in inflation will have on securities the bank holds, totaling at this point around a trillion dollars, and has called for a stable, global currency to remove the danger of inflation's impact on investment.

Banking in itself is just as much a gamble as investment. Money is borrowed from the Federal Reserve Banks and other private banks and loaned into the private sector with the intent to turn a profit. This, of course, occurs with the gamble that the rate of the loan will not exceed the rate of inflation. Inflation always benefits the entity receiving the funds because as time passes, every dollar of that loan has lost value in relation to the value of the currency they are using to pay down the balance.

With the fed funds rate as low as it is, loans are being issued to primary resident consumers at around 4.25% prime. This is not half a percentage point off of the inflationary rate of last year. The loans between banks are generally short term, curbing the effects of inflation at that level but loans to the public are generally longer term. Auto loans are normally 4-5 years and home loans normally fall between 15-30 years. That leaves a large potential for risk of devaluation from inflation.

The financial industry is changing its ways, hopefully for the long term. The eligibility requirements for a loan have returned to the old ways, where income, credit history, and other factors weigh in much more than the desire of the bank to make money on the loan and many who would have no issue receiving a loan four years ago are no longer eligible. This is a necessary change in order to stabilize the housing market. The inflation that is to come from our reckless spending, however, is working again to destabilize the housing market.

As inflation rises, banks need to raise their rates on loans to compensate for the devaluation that will come over the life of the loan. If we see inflation rates of 6%, mortgage rates will rise to almost 8%. If we see the inflation that came during the Carter administration in the 1970s, we again will see high double-digit mortgage rates. If these rates rise that high again, the ability for the average American to secure a loan quickly diminishes - even those that are eligible today.

With increased rates and reduced eligibility comes a smaller pool of buyers in the market and will again create a surplus of housing. As we experienced in the last few years, a housing surplus paired with a limited credit market will slash housing values yet again, destroying the equity people have built. This will inevitably again lead to lowered consumer confidence and another drop in the stock market and investing.

Banks are at risk from the current lending practices as well. if loans are issued at the current rates and inflation exceeds the value of the loan, the bank is losing money by the day. Banks rely on the profits from these loans in order to fund many day to day operations as well as investments held by the bank. If the bank is not making money on the old loans, they must raise rates on current loans or they will again require assistance to stay afloat. If the drop in housing values brings a drop in investment and stock values, the investments of that bank will also suffer, further placing the bank in economic peril.

Our current outlook is the here and now. We cannot extend irresponsibility to lessen the current pains we are experiencing without investigating the long-term ramifications that will follow. After all, a good crisis is nothing to waste. What good has this one been if we have learned nothing?

marking so i can read it tomorrow...


I just skimmed it but it seems like a good article...

Great post bro...


I think that is our problem and you hit it on the head. People are much too focused on the "here and now" to think about the consequences that come from these policies. We need to start focusing on building a world for our children instead of seeking short term ideas for artificial prosperity.

I heard somewhere that they doubled the amount of money going into circulation. The consequence of that money being circulated is just plain scary. They will wonder why within the next 5 years gas will reach $6 a gallon and the cost of food will double. All while wages don't adjust enough to compensate.

I agree, that was a good read.

We have a nation of people who have been trained to accept that they can get whatever they want right now, including things that folks from 30 years ago would have saved to buy outright, like homes and cars.

Thanks guys. I'll see if I can post the full text once I get around to finishing the full paper. it's such a broad topic it'd be no chore at all to write a book.

What's stopping you? LOL. I'd buy it.

lol, time. 60 hours a week working and driving nearly an hour each way to class 4 nights a week leaves very little time to play. I get online occasionally on campus on my laptop but I don't have enough time to fully research the topic. I was planning on using this for a term paper but being the class was involving micro, opted for an analysis of the downfalls of hybrid vehicle technologies instead.

I'm extremely interested in that too, because I saw the failure signs before they begun to advertise it.

Well, those same disappointments are awaiting all and every one of these new "green" technologies. When we wake up from this stupidity, and look back at the waste of time and capital, we will unfortunately realize that all the dumb chick that "felt good" about "the environment", that we have laid as a reward, are too old and full of drama.

This is how a good tragedy supposed to end, and it does, every time.

I wouldn't call them all failures - that was much of the comparison made in the paper. Solar and hydrogen hold huge potentials for vehicles. Unfortunately, hydrogen fuel celled vehicles are impossibly expensive and solar is not really viable because there is simply not enough square footage on most vehicles where it could still look attractive and provide enough power. The costs would offset in the end for that option but 90% of those out there would simply not be accepting to the idea of their entire car looking like a solar panel. Once they can make is so it's just the roof, I imagine the idea will take off

Is there enough energy being projected to an area of a car roof? If there isn't, then it doesn't matter how efficient the solar panel will get. If so, is this not a failure to attempt to build a solar powered car?

If hydrogen fuel celled power train is more expensive than a hydrocarbon based internal combustion power train, then I think it is a failure, as far as it pertains to the idea of replacement of the latter with the former.

To solve this, first, we need to have it realized as a problem. This means that the HCIC power train must become prohibitively expensive to use.

This is only achievable in free market, which we destroy on a daily basis. There are substitutions, such as taxes and no oil, but then one will disturb something else in economy, and the other isn't a reality yet.

As there is no economic need to replace HCIC, then there will be no solution, as one cannot have a solution without first having a problem.

there is enough energy hitting the roof of the car, solar panels are just not efficient enough yet to transmit it. hydrogen fuel cells as of now are a failure as an alternative, yes, but in the future they may prove a viable option if the technology can advance.

I'm not saying any of these are good options today - I simply argued that these have potential in the future while modern hybrids and plug-in hybrids are in the same situation today (economically impractical) but have no further future due to the nature of the design (i.e. solar captures energy from its environment while hybrids still use a power resource we've already created). They are impractical today and have near zero room to advance in the future.