Debt Deflation : The Echo of Inflation

When one spends using credit and the interest rate on that debt is hiked, (arbitrarily to 29.99% in my case) it is the same as a sudden burst of price inflation on every good that one has ever bought with that credit.

It is almost like a strong echo.

This has been happening nationwide ever since the passage of the new consumer finance laws last fall. While the rules are excellent in many ways, they also severely restrict a bank's ability to price risk appropriately. They also have the effect of modifying, in a sense, the contracts that govern credit card master trusts- one of the securitization vehicles that made credit so cheap over the past decade. This dramatic change in their financial architecture has happened without the underlying contracts being strictly violated. The foundations of their profitability, however, been shaken, and since these trusts a revolving this may have caused a profound shift in their desirability as investments. This marks a permanent shift in the credit landscape, partially ameliorated by this recent skulduggery, but likely to have continuing consequences as new credit issuance is restricted to consumers and small businesses.

The jacking up of interest rates on everyone's credit card balances will prove to be highly deflationary. We will see the effects of this disgraceful practice by May.