LoveMoney wrote:
Why is it good to lend when inflation is high?
Why is the interest lower to lend money when inflation is high?
Not sure "why" as inflation IS NOT a good thing. It's the result of currency devaluation...which is never a good thing.
I suppose if you are a lender, high inflation would mean if you are secured (e.g., home mortgage) and you must foreclose, you have a strong security interest. Foreclose on the house and put it on the market and you should have no problem recouping your investment as the "value" of the house has increased thanks (in part) to inflation. However, I'd worry about inflation because inflation = harder to make ends meet which can lead to people struggling to meet their payments. For all the nice bit about being a secured creditor, the lender would much rather have the money.
Interest rates are controlled by the Federal Reserve Bank (aka "the Banksters"). It is used as a tool to shape economic and political policy. Lower interest rates SHOULD stimulate borrowing which can stimulate the economy because most business enterprises (start ups and expansions) need capital and this is often achieved by borrowing. Likewise, things like new homes and cars are commonly paid on time, and consumers are more comfortable doing a "pay over time" arrangement when the interest rates are low. Any banker can tell you that paying something off over time can easily cost you 2-3 times the original price when you factor in the accrued interest over the life of the loan. As such, lower interest rates = money saved.
High interest rates impede the willingness of people to borrow money. This can hurt the economy, but it's not logical to say interest rates are the root of economic issues. Back when interest rates were commonly 12-17%, people bought cars, houses, etc. with no concerns. Banks paid 7-8% APR on savings deposits. People made good money (for the time) and got regular pay raises. In a strong economy, high interest rates are not an impediment to economic growth.
However, when there is a weak economy, thanks to shipping the good-paying manufacturing jobs overseas, and wages grow slowly or not at all, borrowing is a very touchy issue. If you can't pay for it, you don't buy it, and America (like most modern nations) has gone to a debt-driven economy. If people live within their means, the economy will implode...debt-driven economies depend on people spending more than they make to maintain the economic status quo. As such, borrowing must be encouraged.
Bankruptcy used to be a stain you couldn't live with for the next 10 years after filing. Now, it's hardly an issue...with credit scores recovering within a couple of years. The whole "housing bubble" was the result of loose credit standards...a necessity for economic growth at the time, but doomed to long-term failure. 0% APR on lots of items has been going on almost non-stop since 2000...unheard of in a good economy because the lender makes NOTHING...indicating how desperate they are to get people to buy goods in the marketplace.
20 Oct 2010, 2:19 pm
