Thursday, February 25, 2010
Interest Rates in a Deflationary Environment
People Normally Associate Rising rates with Inflation (Since the Value of Dollars is going down, people expect to be compensated with a higher rate of return.)However, This chart displays how it is indeed possible (and I think likely in this environment) to have rising interest rates in a Deflationary environment. When the Demand for money and credit goes down, one would expect the price of money (Interest Rates)to go down as well. However in this case I think the supply of Credit (people willing to lend out) is contracting faster than the demand for money and credit, so the price (interest rate) goes up.