Deflation vs. Inflation

Let's say the government offered me unlimited 0% interest loans and required no collateral (which isn't all that far off the mark if one looks at 2004's interest rates and mortgage offers). What would I do? I'm financially conservative and as you can probably guess I'm somewhat bearish.

However, I'd borrow as MUCH as I possibly could. At the very least I could simply borrow it and bury it. There'd be no risk. I could always just use it to pay off the loan. However, I doubt I'd do that, especially if I saw other people spending their generous loan money from the government. I'd start to think my buried money would soon not be buying as much (think oil).

Let's say they'd offer me a $1 trillion 10 year loan. That means I'd have to pay back $100 billion a year. For five years let's say I spend $100 billion of it and make the loan payments using the other half. At the end of five years I'm completely out of money, but man, I sure helped the economy out during the period, didn't I?

So now what? I inform the government behind closed doors that this consumer, me, is complelely tapped out. They have the choice of a deflationary collapse or a helicopter drop to rescue me. I'm not asking for much. I simply want a $2 trillion 10 year loan under the same terms and I'll be okay. They agree. We all know they can't tolerate serious deflation.

Now I owe $300 billion per year for the next five years and $200 billion per year over the following five years. No problem! I've got $2 trillion. I'll continue spending $100 billion a year on fun and pay $300 billion per year on my loans. At the end of five years I'm completely out of money again.

So now what? I inform the government behind closed doors that this consumer, me, is completely tapped out again. They have the choice of a deflationary collapse or yet another helicopter drop to rescue me. I'm not asking for much. I simply want a $3 trillion 10 year loan under the same terms and I'll be okay.

Now I owe $500 billion per year for the next five years and $300 billion per year over the following five years. No problem! I've got $3 trillion. I'll continue spending $100 billion a year on fun and pay $500 billion per year on my loans. At the end of five years I'm completely out of money again.

Sense a trend here?

It is the Halloween season! Scary, huh?

This is why I have a hard time being a deflationist (at least in the long-term). Of course, it could be argued that $100 billion a year is eventually going to be inflated away. That's no problem! I'll simply mention that to the government and ask to borrow even more money to compensate! At zero percent interest, clearly I can afford as much as they're willing to lend me. Hurray!

Oil is $92 a barrel today, isn't it? *sigh*

That being said, just where are the low interest rate loans these days?

It's Fee Hike Time Again
I listed some banks' default rates last year -- American Express (NYSE: AXP) was charging 28%, for example, and Capital One (NYSE: COF) was charging 27% -- and it seems that some have risen even higher. JPMorgan Chase, for example, seems to have hiked its universal default rate from 30% to 32%. Imagine paying 32% per year on your debt -- that would cost you $1,600 on a $5,000 debt -- just in interest.

Consumers turning to credit cards to pay their mortgage
According to the results of a recent survey many consumers in the UK are having to turn to costly credit cards in order to make some of their mortgage repayments, with many finding it increasingly difficult to keep up with repayments based solely on their income.

Using credit cards to pay mortgages 'isn't necessarily a bad thing'
"There are people out there who have technically bought a house on a credit card and they've done very well. I bought my first property off the back of credit cards and the credit cards were a hell of a lot less than a mortgage."

A recent study by CreditExpert.co.uk found that the vast majority of homeowners in the UK were unaware what the impact of rising interest rates would be on their mortgage repayments.

Yeah, I'm still bearish. Go figure.