Friday, March 15, 2013

Foreign Demand For Domestic Savings: Part III

Rising demand for savings (to borrow against) should lead toward rising interest rates and, according to monetarist Milton Friedman, should cause inflation to rise.  In the context of demographics for the US, by the 1970s and 1980s the baby-boomers (having reach adulthood) began to marry and raise families.

Family formation necessarily leads toward credit creation as parents, in order to raise their children, purchase houses, college educations, cars, food and much more.  The rise in debt relative to the liquid money supply shows and increase in debt relative to money supply from the late-1960s to the early-1980s.
Total debt divided by the liquid money supply.
The repeal of the equalization tax coincided with a six-year rise in oil prices. Inflation during the mid-1970s was two fold: monetary and commodity. Money was being sent off-shore as a result of borrowing and investment, and money was also being sent off-shore as a result of higher commodity prices.  Both, in many ways, driven by changing US demographics.

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