With Real Vision’s latest “debate” between Peter Schiff and Ross Gerber some interesting ideas come forward: the debate about the future of interest rates and inflation. Does the FED have the ability to stop inflation by a subdued rise in interest rates or is inflation out of control? Are much, much higher rates in our future?
“The Fed has a very easy tool book to end inflation if they want to – and it’s simply taking away the cash. And so, as they start to raise interest rates right now, we have every confidence that it will work in slowing the economy and slowing down inflation.”
They’re (the FED is) talking about raising them (rates) from 1% to 2% – that’s not going to slow inflation. Inflation will get faster with these little hikes because you still have negative interest rates. It’s not going to slow inflation – it’s not going to have people stop spending and start saving. If inflation is 8% and rates on your mortgage go from 3% to 3.5%, you’re still getting paid to borrowed money.”
Gerber: “The long-term rate of inflation is not going to stay at 8%. The long-term rate of inflation over the last 30 years is 2% to 3%. 8% is not a real number.”
Schiff: “It’s higher than that if you want to get real,” an exasperated Schiff responds. “Let’s say the Fed has to put rates at 10%. So, mortgage rates go from where they are now to 11% or 12%. Also, the Federal government’s interest on the national debt goes from about $300 billion a year to $3 trillion a year. Now we need massive tax hikes on the middle class – we probably have to double or triple taxes just to cover that cost.”
Gerber responds: “If they raise rates to 2%, inflation’s done.”
There is a real need for people to understand inflation and the FED’s battle to tame inflation with higher rates, which I believe is entirely the fault of the government. Already, the consequences are visible.
Realty Business News reports, “Mortgage rates were at record lows of 3% or even less in some cases last year. Yet, a series of sudden increases have sent mortgage rates to 5.3% as of this week.
The resulting increases mean that some buyers will see their monthly mortgage repayments go up by hundreds of dollars a month. While some may be able to absorb those costs, others told the Wall Street Journal that the extra costs are just too much to bear. As a result, they’re walking away from the deal and sacrificing the deposit they put down.
The 30-year fixed-rate mortgage last week rose again, averaging 5.3% according to Freddie Mac data. It means that the average monthly mortgage payment on a median-priced home has increased by around $520 per month since January when rates averaged just 3.2%.
Buyers of existing homes feel the impact of mortgage rate spikes less as they’re usually able to close on a sale within a month or two of signing the contract. But for new homes, it can be several months between signing the contract, paying the deposit, and actually being able to move in.
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