[quote=ILoveRegulation]If the housing market is going to collapse if interest rates go up, what is going to cause inflation? Wasn’t the ‘problem’ in the 1970’s wage inflation? What is going to cause wage inflation today?[/quote]
ILR, I believe that wage inflation in the 1970s was not the cause of the sustained increase in all price indexes in the 1970s. Please read Milton Friedman’s writings on this. His “Free to Choose” (1980) is very accessible. The cause of high inflation in the 1970s was loose monetary policy.
Policy makers believed then that by allowing slightly higher inflation, they would be able to reduce the unemployment rate. Problem was, over time, wage earners, producers, etc., learned to anticipate the higher inflation and they, in turn increased their prices (wages being one of them).
Fed Chairman Paul Vocker killed the inflationary vicious circle, but at a very high cost: nominal interest rates shoot up into the double digits, and contributed to the 1982 recession (which at the time was the worse we had seen since the Great Depression).
