I don’t agree with this 2005 prediction

One of the bloggers I read regularly has posted his prediction for 2005 in this post. While I agree with him on many things (that we don’t invest enough in our future as a nation, etc), I don’t agree with this:

So here’s how I call it. Interest rates shoot way up in the first half of 2005. A lot of people sitting on multiple thousands in credit card debt go bust. A lot of mortgage holders find themselves living in McHouses they can’t keep paying for. End of housing bubble. Beginning of fire sale of US residential real estate (and other assets, including stock, SUVs, and signed limited edition Thomas Kinkade prints). Cratering of “consumer” demand. Impressive job loss. Ultimately, deflationary depression.

While it’s too early to post my predictions for 2005 (hm, an entry idea!), I totally disagree with his prediction. There’s no way interest rates will shoot up - that would cause incredible political and economic turmoil. With the increasing number of ARMs (adjustable rate mortgages) and credit card debt, this would bankrupt millions instantly. The upheaval of the middle class would be awesome - and I mean awesome in a bad way.

Rather, I suspect the strategy to reduce the debt will be more like the one in this piece. Here’s a snippet from the end:

But they argue there may be an alternative scenario to Roach’s. Greenspan might instead deliberately allow the dollar to slump and inflation to rise, whittling away at the value of today’s consumer debts in real terms.

You should read both pieces in their entirety. Fascinating stuff.

Nonetheless, I do believe we will find a way out of it. We’ve been through worse before as a nation, and we will surely find a way out of this jam as well.