Thursday, June 02, 2022
Political Mayhem Thursday: The end of Credit-topia
I recently found some old school newspapers from 1979. It featured the usual stuff-- basketball games, dances, the retirement of a not-quite-beloved teacher. But I found something fascinating: a bank ad. I'm not sure why a bank would advertise in a high school newspaper, but there it was, trumpeting home loans at 16% interest and savings accounts paying 11% interest. Zounds!
It probably will not come to that, but we are headed towards higher interest rates. In the end, that is the only proven tool to fight inflation (other than higher taxes), and the Fed seems likely to lead us in that direction. Gone will be the days of 3% home loans and no-interest car loans from manufacturers. Money is about to get expensive-- and fewer people will be able to live on credit.
I'm no economist, but I know what higher interest rates will mean:
-- Home loans will become much more expensive, and we will finally see the seller's market cool down. The sad part of that is that the lower prices won't help a lot of people who need a house, because of the much higher interest rates.
-- Student loans will be more expensive, too-- and this comes at a time when college enrollment is already dropping. Many were expecting a sharp drop-off in about 2025 because of demographic changes, but economic forces may push this date up.
-- Car loans will get more expensive, which should chill the red-hot market for cars. Again, that's not great news for people who have to borrow, as the higher interest rates will more than cover any drop in prices.
And here is a political truth: other than raising taxes (which reduces spending), there isn't much that the President or Congress can do about inflation. The Fed can, but they are not under political control.
That means that in the mid-term we will hear a lot of Republicans promising to fight inflation if they are elected. That could happen... if they raise taxes. Other "solutions" like pumping more oil would only have a marginal effect, and not for years. But I doubt they will tell us that!
