The Economic Climate (6): Price of Money (Interest rate) rise in hot economy

With new stores being built and factories expanding all over the place, a lot of companies are borrowing money to pay for their construction projects.  Meanwhile, a lot of consumers are borrowing money on their credit cards to pay for all the stuff they've been buying.  The result is more demand for loans at the bank.

Seeing the crowds of people lining up for loans, banks and finance companies follow in the footsteps of the automakers and all the other businesses.  They, too, raise their prices - by charging a higher rate of interest for their loans.

Soon, you've got the price of money rising in lockstep with prices in general - the only prices that go down are stock prices and bond prices. 

• Investors bail out of stocks because they worry that companies cannot grow their earnings fast enough to keep up with inflation. 
• During the inflation of the late 1970s and early 1980s, stock and bond prices took a big fall.

A hot economy can't stay hot forever.  Eventually, there's a break in the heat, brought about by the high cost of money.  With higher interest rates on home loans, car loans, credit-card loasn, you name it, fewer people can afford to buy houses, cars, and so forth.  So they stay where they are and put off buying the new house.  Or they keep their old clunkers and put off buying a new car.

The Economic Climate (4): The Hot Climate

The Hot Economic Climate

Business is booming, and people are crowding into stores, buying new cars, new couches, new VCRs, new everythings.  Merchandise is flying off the shelves, stores hire more clerks to handle the rush, and factories are working overtime to make more products. 

When the economy reaches the high-heat phase, factories are making so many products that merchandise is piling up at every level: in the stores, in the warehouses, and in the factories themselves.  Store owners are keeping more goods on hand, so they won't be caught short.

Jobs are easy to find, for anybody who's halfway qualified, and the help-wanted ads in the newspapers go on for several pages.  There's no better time for teenagers and recent college grads to enter the workforce than in the middle of a hot economy.

It sounds like the perfect situation: 

• Businesses of all kinds are ringing up big profits;
• the unemployment lines are getting shorter; and
• people feel prosperous, confident, and secure in their jobs. 
• That's why they're buying everything in sight. 

But in the world of finance, a hot economy is regarded as a bad thing.  It upsets the professional investors on Wall Street.  If you pay attention to the business news, you'll see headlines that read:  "Economy Strong, Nation Prosperous, Stock Market Drops 100 Points."

The main worry is that a hot economy and too much properity will lead to inflation.