Interest rates are closely tied to the bond market.
Let's say you are a lender. What you are going to do is issue bonds to investors at a certain interest rate and price, and then turn around and lend those funds as promissory notes out on the retail side of your business at a markup, known as the spread.
Pretty sweet deal, eh?
This works great so long as there is a small and steady rate of inflation. Every time you make a loan, it is listed as an asset on your books, which encourages more investors to buy your bonds. Economic growth (as inflation) ensures that your debtors will be able to continue to make payments on their notes, so that you will be able to make payments to your creditors on your bonds. You keep the difference and everybody is happy.
When inflation gets too high, or rises too fast, you start to get into trouble because each dollar you collect is increasingly worth less and less. Since there is so much liquidity (currency) floating around, you must become more competitive in the bond market. This means raising the interest rates and/or terms of the bonds that you are issuing, and cutting down on the average spread over the total number of bond and notes issued.
You get into serious trouble if the currency itself starts to go down the tubes, which is what is happening now. Since the creation of the Federal Reserve in 1913, the U.S. dollar has since lost over 95% of its purchasing power, and that is likely to reach 100% within our lifetimes.
The final death throes of a currency manifests as hyperinflation and is triggered when your spread turns negative. When that happens there is a crash in the bond market. Your bonds continue to lose their value, no matter how high you set the rate. Though money is everywhere, nobody wants to give it to you, and you drown in a sea of liquidity. It's like the economic correlate to an end-stage diabetic.
To make matters worse, savvy investors who foresaw the crash in the bond market can reap massive profits from you by selling you short, driving you into bankruptcy.
Short selling is a process used more commonly in stock market investments, when an investor is betting that the price of a stock will go down. The investor first borrows a certain number of shares, then sells them at market value. When the price goes down, they buy the shares back. The shares are returned to their original owner, and the investor keeps the difference. Sound familiar?
Well what happens when this little game is turned against lenders in a period of hyperinflation? People who borrowed money from a lender at say, 3%, can turn around and purchase bonds now at, say 7%, and leverage against inflation to come out ahead in the deal.
This sets up a feedback loop which terminates in what is called [/i]deflation[i], or depression. A more or less simultaneous crash in the stock market and the bond market. This happens when lenders can no longer make the payments on their bonds with the funds paid to them on their notes.
Suddenly, the whole merry-go-round comes crashing down, and all that currency being circulated as debt instruments (securities) suddenly goes "poof". It's like a mad game of hot potato where everybody is scrambling to not being the one holding securities when their value hits zero. A country that does not use a central banking system has a better defense against this kind of scenario.
Foreign governments are starting to get real shaky about the U.S. dollar, and the fact that the dollar is the global oil currency is getting the rest of the world pretty nervous about the good 'ol US of A. Hence we are seeing things like the Iran Oil Bourse, and similar measures being taken in Russia.
I can't say how this all will affect people living in Hong Kong, but it depends on how much distance the government puts between itself and the dollar before it tanks, and how well it can function without using U.S. debt instruments as income.
It is not for us to understand love, but simply to make space for it.