The Domino Effect of Foreclosures Leading to Unemployment and then to Deflation or Inflation

Share this:

Tweet

Julie Parker

Julie Parker was born in March 19, 1983, in Lancaster – Los Angeles County, California. Her father is an experienced economist and businessman, who motivate her taste for the real estate market. Recently, graduated in Economics and now focus her studies in a PhD. Now she’s a consultant and webwritter of ForeclosureListings.com

Some pundits said earlier in the year that the economy was correcting itself causing business houses to restock; this in turn led to modest hiring in factories. There were hopes that the wages would lead to spending and more demand. So far hope has not been translated into reality. The reverse is taking place with people saving more than spending. The flat rate of prices is raising fears of deflation.

The fundamental way of tackling deflation is to inject the economy with liquidity. The consumers then will overcome their reluctance to spend. At the forefront in this fight against deflation is the Federal Reserve that oversees bank rates that in turn control the rates banks charge for various types of loans and mortgages. The Federal Reserve has used this lever some time ago and since 2008 it has kept the rate hovering around zero.
The Federal Reserve did something more – during the peak of the financial crisis it took off from the banks the toxic investments on to its own shoulders. The idea was to make the banks free to make more loans. This led to hot debates. Some said that the Federal Reserve took the best step while others blamed it for worsening the budget deficit and inviting another bout of depression.

The national debt problem started expanding during the Bush era when huge tax cuts were introduced together with the starting off of two wars. This hiked up apprehensions that foreign creditors like China and Japan would charge higher interest to invest in America to promote spending. Those rates would run through America’s economy and cause the opposite of deflation – inflation. In inflation prices would spiral up as the traders would lose their faith in the value of the dollar. There would be demand for more dollars for buying oil and other items. Thus the domino effect of foreclosures is leading to unemployment and then to deflation or inflation.
Till now the signs are that the investors have lost faith in real estate as well as stocks. They are rushing in to buy savings bonds of the government resulting in the interest rate being kept low. Nevertheless the government is worried about inflation – especially the heads of the Federal Reserve.

The Federal Reserve now wants to gracefully retire from all the interventions it had taken. Its aim is to offload the bagful of mortgage backed securities it had taken on its shoulders and in the distant future increase interest rates.