Easy money is the opiate of the American economy

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Peter Morici at The University of Maryland revisits a sad American reality. We are addicted, completely and totally, to easy money.

We are addicted psychologically as we have come to see near 0% interest rates as normal. As if the current cost of credit will continue as it has forever. We make stupid decisions both on a governmental level and on a personal level based on this assumption. We know it won’t continue but we continue on as if it will.

We are addicted physically too, as near 0% rates have locked us into an economy which falters and shakes anytime it looks like rates are going to rise.

The psychological addiction can be dealt with by a cold dose of rising rates. Americans will snap back to realistic view of what money should cost. It won’t be easy, but people will adjust.

The physical addiction will prove more troublesome as Morici explains.

From CNBC

Homebuyers, farmers and speculators, armed with cheap mortgages, have bid up home and agricultural land values, and should the Fed let mortgage rates rise, many would not be able to sell properties as needed and ultimately would default on loans.

Smaller businesses can’t get credit from disappearing regional banks. Smaller real estate developers are selling out to big national builders, which can access the bond market to finance projects. Reduced competition pushes up new home prices, but when cheap money goes away, those megabuilders will be unable to sell options-ladened homes and some will default on their bonds.

Click here for the article.

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