Economics question

Will inflation outpace the interest rate one day?

And if so, will this cause a collapse of our economy?

Maybe and probably not. Inflation in the US remains at a fairly constant rate most of the time. Steady inflation is a sign of a healthy economy, very fast inflation (i.e. Germany after WWI, Mexico some time ago) is bad. It’s the job of the Federal Reserve to keep things steady, which they do by manipulating interest rates.

IANAEconomist (but I do have a degree in Economics (that I never use)).
Simplified, the (nominal) interest rate I is comprised of two parts; a ‘Real’ component R and an ‘Expected’ component E. The real component is the borrowing cost in real terms while the expected component is generally the inflation rate. The interest rate is the sum of the two components. Therefore I = R + E.

So to answer to your first question “Will inflation outpace the interest rate one day?” It is not really possible (assuming efficient markets) if the generally accepted equation holds true.

And to answer your second question “And if so, will this cause a collapse of our economy?” It is highly unlikely. Some have speculated that a decrease in the money supply (a negative inflation rate) could have disasterous consequences on the economy but IIRC this hasn’t really happened anywhere.

NP: Misfits - American Psycho

Just to follow up opengrave.

Remember interest rates are what people will need to be paid so they will delay using their money. Well if they lend out a $100 for a year they are going to want to be paid interest so they have at least the same purchasing power a year from now. So they would ask for an interest rate at least equal to inflation. Of course it is generally higher due to risk.

IAAEconomist (I use my degree all the time…)


This is, of course, the Macro 101 explanation… not being a macroeconomist, I won’t say anything other than that this is a very important point that is made here, that I assume the OP had in mind from the start: the “real” interest rate that is earned is the nominal rate minus inflation.


Given whatever your definition is of an efficient market, I suppose it isn’t possible, but it DOES happen. South Korea was operating with negative real interest rates for years, as a result of relatively high inflation and a central bank that was committed to keeping the official interest rates as low as humanly possible… what happens as a result is the “curb market” for loanable funds where you essentially have a large portion of loans coming from unofficial (or illegal) sources. I’m on lunch right now, so tonight I’ll see if I can’t dig up citations for this business in S. Korea (I learned about this in a comparitive economic systems course, and I know it was at the very least discussed in the textbook we used… I’m also pretty sure most of the cases of negative real interest rates were under the Park regime).


As I said, it’s happened in at least one country and I’m sure there are plenty of others (I’d probably first look at countries with histories of hyper-inflation). It certainly wan’t the end of S. Korea, but there are certainly plenty of inefficiencies that crop up when half the market for loanable funds is illegal… but that’s what happens, isn’t it? If the market needs more money available and there’s a profit to be made, “[the economy] will find a way.”