Loans, inflation and its affects on FOREX market

Loans, inflation and its affects on FOREX market.

As employment levels and wages rise, people have more money to spend and prices will tend to rise as a result of the increase in the money supply. This is the basic cause of inflation, and while inflation levels that are kept in check can lead to sustainable economic growth, unchecked inflation levels can spell economic disaster as the economy can literally collapse under its own weight leaving hard-working citizens with money that has had its value and buying power eroded. Understandably, the Federal Reserve and all other central banks will monitor inflation levels very closely, and one of the best ways to combat inflation levels is by raising interest rates.

When interest rates are low, you may not be earning as much money on your savings but it is much easier to borrow money for a house, car, business, or any other type of credit. It is this ease of access to new money that can contribute to the cycle of inflation. However there can come a time when inflation levels are rising too far too fast, and instead of creating economic growth in a sustainable fashion it can lead to an out of control economy in overdrive that can lead to something that Alan Greenspan called "confiscation by inflation," meaning that the value of each person's money is eroded by the large increases in the overall money supply.

Raising interest rates will keep inflation in check by tightening the credit markets and making more difficult to gain access to new money, thereby shrinking the growth of the monetary supply and making harder to gain access to loans. The relationship between interest rates and inflation levels is an important one to understand if you are a forex trader, because keeping tabs on these simple metrics can help you determine where the overall trend of the currency is and whether you should be buying or selling. A lower interest rate will mean that your money does not grow as quickly as a factor of time, but it can also mean that the country is experiencing economic growth as loans and credit are more easily available, which means the value of a currency can increase in the foreign exchange markets despite the higher inflation levels.