Debt Consolidation Financing - What Are The Implications Of Inflation and Interest Rates

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Inflation makes tomorrow’s money worth less than today’s, that makes borrowing more attractive to borrowers, however lending less appealing to lenders, in order to compensate this, lenders raise interest rates, since among other things, they too know that the dollars they will be repaid next month are potentially worth less than the ones they loan out today.

Thus a vicious cycle is set up, as prices increase more people including businesses, find themselves requiring to borrow more if they are to buy the things they require such as cars, home and property improvements etc this tends to increase interest rates even further, since there is now more demand for borrowed dollars, more need given a set supply tends to increase prices, in this case, the price (this is interest paid) is the price of borrowed cash.

Since inflation is in the main caused by governments whether through high borrowing themselves or deficit spending or printing of more currency or issuing more credit, there’s not much an individual may do to change the method, all one can do as a citizen is identify the causes and advocate sound policies.

But, as a borrower there is much one may and should do when looking at the problem, after all governments do not continually increase inflation if they did as occurred in the late 70’s, for instance interest rates would eventually reach a level where there are loud demands to do something urgently, when they do something it invariably needs closing down the spigot, this is reversing or at least slowing the process listed above.

These process have a definite impact on everyone looking to borrow money, just as the inflation did, deflation could lower rates, encouraging more borrowing, but it also causes money borrowed today to be potentially worth less than they would be tomorrow, thus you are repaying a loan with cash that is worth more tomorrow if you held onto it (by saving or investing) than they’re today.

So, when you look into borrowing you need to try to make a judgement, just as the banks do about which way inflationary or deflationary pressures are likely to go, that is a hard job for even professional economists, hence how can a layman be expected to do that with any rationality? Whilst there is no sure system there are some indicators that are available to anyone, it used to be that gold and silver were good indicators, however that is no longer correct since the dollar is no longer related to any hard commodity, still there are one or two that can be beneficial.

A few inflation indicators to be considered.

As oil is a very general commodity that is tied to the production of other things, as the price of oil rises inflation is likely to heat up a little, thus look at the price of oil options to see whether prices are expected to be higher or reduced in the future.

Another is the price of bond options, going up is also an indicator, in this circumstance it hints that professional dollar managers are betting interest rates will change sharply over the coming year or two, the relationship is complex and borrowers would do better to contact a specialist.

Just keep in mind that a dollar today is a measure of the cost of goods and services today, just as a dollar tomorrow is a measure of the cost tomorrow, however when borrowing dollars you’re buying cash today to spend today, but will pay these back in the future, the amount of these dollars are worth when you pay these back is a measure of what that loan will in reality cost you.