Part 5/8:
Every loan effectively increases the money supply, impacting inflation rates. An increase in money supply without a proportional increase in goods and services leads to a rise in prices, thereby contributing to inflationary expectations among lenders.
The Relationship Between Inflation and Long-term Rates
Consequently, as inflation expectations grow, lenders demand higher long-term rates to offset the erosion of purchasing power over time. This dynamic is evident in the rise of mortgage rates and government bond yields, with long-term rates skyrocketing to approximately 5% from historical lows under 2%.