Phil's Rambling Rants
Federal debt rantings|
|Date:||November 22nd, 2004 02:44 pm (UTC)|| |
Assuming a perfectly spherical, frictionless world, higher interest rates mean lower inflation, but when oil prices in dollars go high enough to start significantly driving up the price of everything else in the economy, there will be inflation, and if there is inflation, nominal interest rates have to go even higher for real interest rates to be high enough to finance the deficit.
We had bad inflation in the 70's driven by oil prices, and high interest rates with it, though the interest rates were at least partly high because the government was trying to dampen the inflation. We're heading for the same situation again, but this time interest rates will be forced up by the market in spite of the government trying its best to stop it. I don't know if we can tolerate $50/barrel oil for the long term, but I'm pretty sure $100/barrel oil will sink us, and I see that as moderately likely in the medium term.