Skip navigation

Two articles caught my eye this morning, one on plans for the Federal Reserve to tighten money growth as recovery allows, another on the growth of the US trade deficit.

I was surprised that the trade deficit had grown lately, thinking that lower exchange rates had already boosted US exports. In fact, that has happened, but the growth in oil imports has overwhelmed the export growth in heavy machinery and commercial airplanes. It is predicted that deficits may continue to grow as American incomes grow and import demand increases.

But how will the Fed’s plans affect that?

Bernanke said the Fed will likely start to tighten credit by boosting the interest rate it pays banks on money they leave at the central bank. Doing so would raise rates tied to commercial banks’ prime rate and affect many consumer loans. Companies and ordinary Americans would pay more to borrow.

Initial response is that borrowing will decrease and import demand–for better or worse–will probably decrease as well. But what happens to the interest income? Just a thought, but if the interest elasticity is inelastic (< 1), the actual quantity of debt will increase with higher rates.

The point of the rate hike is said to be controlling inflation, but what if the rate hike brings more money into circulation?

There is likely a mistake in my thinking here. Please point out my mistakes.

(Don’t forget to visit alphainventions.com)

Advertisements

One Comment

  1. What I thought is that an inelastic need for interest, or debt more specifically, does not have to bring increase of quantity demand. The demand would possibly be steady but not hike.
    Even if I happen to have a indispensable strong need for debt, I might ask for relatively cheaper private borrowing, what we call high interest debt, a kind of black market.
    For more, If we call mortgage is sort of Giffen good, that would happen~
    HAPPY CHINESE NEW YEAR Mr.Phtherwood
    The same for my following fellows.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: