On Aug 1, 2011, at 5:45 PM, Bill Lear wrote:
My brother has advanced the novel idea that borrowing at negative
real
interest rates is what brought on the inflation of the 1970s.
A "novel" idea indeed. The opposite was the case. The Fed never
lent
at negative interest rates (until a few recent, passing, episodes)
and
it certainly didn't do so in the 1970's. It was inflation that
brought about negative (expected) real interest rates and thus
multiplied borrowing--as has been the case in every cumulative
inflationary process throughout history.
Any way you can share some data to support this? What sorts of
indices
would I look at?
Who needs data? Try a little thought-experiment: you're a businessman
who firmly expects to sell whatever he buys today for 10% more in a
year's time. You need a loan to finance the purchases. The bank is
charging 5% p.a. interest. Can you think of a reason not to take the
loan?
“The law is like a spider’s web; the small are caught and the great
tear it up.”
Solon
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