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My understanding if you ask a university of Chicago economist is that you need to follow the playbook of Paul Volcker, and raise interest rates above the rate o

by kyrra 4y ago

My understanding if you ask a university of Chicago economist is that you need to follow the playbook of Paul Volcker, and raise interest rates above the rate of inflation. The fed is slowly working their way there, but they are doing it super slowly because they worry about shocking the market too hard and stopping all investment. But many believe that inflation will continue until interest rates are much closer aligned to it. This is also a failure of the Fed to raise interest rates when times weren't bad. Interest rates should have been at 2% before inflation started taking off, but people were addicted the cheap, almost free money but they didn't want to give it up. This works because having interest rates at the rate of inflation will cause more people and businesses to slow down their spending as they feel like they aren't losing money by not spending it. I believe the Keynesian approach to fix high inflation is to just raise tax rates to get money out of the economy. I believe this doesn't work as well because the extra tax dollars are then spent by the government, which are them competing for goods and services, though probably in different areas, but it's still keeping that money in the economy which will keep prices high. The only way I could see this working is if the extra tax money was used to pay down debt, which I doubt anyone in the US government would do.

kergonath 4y ago
> I believe the Keynesian approach to fix high inflation is to just raise tax rates to get money out of the economy. But this tends to lead to recessionary behavior within the economy. Build some infrastructure with these taxes. In this case, also massive investments towards improving productivity. That’ll put the money to good use and at least prime the pump for recovery, and private businesses do not seem willing or capable of doing that.
- kyrra 4y ago
  I don't think our Congress actually cares about our economy enough to do something that smart. But you also have the problem of those dollars then going towards labor and materials, which will keep demand there high, continuing inflationary pressure in those areas.
  - kergonath 4y ago
    > I don't think our Congress actually cares about our economy enough to do something that smart. Unfortunately it seems to be a pipe dream in most countries I know. > But you also have the problem of those dollars then going towards labor and materials, which will keep demand there high, continuing inflationary pressure in those areas. Yes, and I am not sure there really is a solution to that. I guess hiking interest rates would cause a shift from debt to the new income stream, but it would be complex as ideally you’d still want lower rates to stimulate investment. Probably an increase in corporation and capital taxes as well, but then I might as well wish for a unicorn.
- arbitrary_name 4y ago
  We have an extremely tight labor market, surging commodities prices and other inflationary pressures/symptoms, which large scale infrastructure investment would usually exacerbate. I'm usually a Keynesian, but in this case, i think we should jack up interest rates and deliberately tank housing and asset prices, then use large scale infra investments to stop the unemployment rate rising too high. Easier said than done, i suppose.
  - GoodJokes 4y ago
  - kergonath 4y ago
    > I'm usually a Keynesian, but in this case, i think we should jack up interest rates and deliberately tank housing and asset prices, then use large scale infra investments to stop the unemployment rate rising too high. I am mostly with you, but “deliberately crashing housing and asset prices” is political suicide and I don’t see it happening. Interest rates are a good start, though. Also, I think that considering the current labour shortages the risk of unemployment getting out of control is limited.
    - Auracle 4y ago
      High inflation has also historically been political suicide. The Biden administration has been doing what they can to place blame wherever they can for a reason. I do fear the fed isn’t doing what it needs to because they’re afraid of being seen as political, one way or the other. I hope we don’t have to wait until after the midterms for them to grow a pair.
      - kergonath 4y ago
        > I do fear the fed isn’t doing what it needs to because they’re afraid of being seen as political, one way or the other. I agree and I wish this mindset would disappear. Of course a central bank is political. It’s job is to keep a working economy. There are few other institutions that affect directly so many people every day, it’s the definition of politics. They might not like the optics, but each of their decision is just as political as one from any government agency. There is some sense in insulating them to some degree from short-termist elected politicians looking for a windfall, but their smug “I know better” attitude (and the lack of accountability) is deplorable. Sorry, that was a bit of a rant, but we should remember that a central bank is there to serve a country, not the opposite.
- JasserInicide 4y ago
  I have 0 faith that the US federal government in particular can put money to any good uses like they did during the New Deal era. Look at how much fraud there was in multiple states with the Covid relief money.
- s1artibartfast 4y ago
  Building infrastructure can be a good investment, but that doesn't mean it does anything to help inflation. Massive government spending would probably make the situation worse, because it puts more money in people's pockets to further drive up costs
hgomersall 4y ago
The stated goal of raising interest rates is to reduce business investment, which is code for "increase unemployment", which they want to do because it moves about the treasured Phillips curve to the mythical NAIRU point where inflation and employment are in perfect balance (don't try to ask where that point is though...).
freemint 4y ago
> The fed is slowly working their way there, but they are doing it super slowly because they worry about shocking the market too hard and stopping all investment. If they raise the interest rates anywhere close to the rate of inflation a lot of the 3rd world will have a Sri Lanka style crisis.

by kyrra 4y ago

kergonath 4y ago

> I believe the Keynesian approach to fix high inflation is to just raise tax rates to get money out of the economy. But this tends to lead to recessionary behavior within the economy. Build some infrastructure with these taxes. In this case, also massive investments towards improving productivity. That’ll put the money to good use and at least prime the pump for recovery, and private businesses do not seem willing or capable of doing that.

kyrra 4y ago
I don't think our Congress actually cares about our economy enough to do something that smart. But you also have the problem of those dollars then going towards labor and materials, which will keep demand there high, continuing inflationary pressure in those areas.
- kergonath 4y ago
  > I don't think our Congress actually cares about our economy enough to do something that smart. Unfortunately it seems to be a pipe dream in most countries I know. > But you also have the problem of those dollars then going towards labor and materials, which will keep demand there high, continuing inflationary pressure in those areas. Yes, and I am not sure there really is a solution to that. I guess hiking interest rates would cause a shift from debt to the new income stream, but it would be complex as ideally you’d still want lower rates to stimulate investment. Probably an increase in corporation and capital taxes as well, but then I might as well wish for a unicorn.
arbitrary_name 4y ago
We have an extremely tight labor market, surging commodities prices and other inflationary pressures/symptoms, which large scale infrastructure investment would usually exacerbate. I'm usually a Keynesian, but in this case, i think we should jack up interest rates and deliberately tank housing and asset prices, then use large scale infra investments to stop the unemployment rate rising too high. Easier said than done, i suppose.
- GoodJokes 4y ago
- kergonath 4y ago
  > I'm usually a Keynesian, but in this case, i think we should jack up interest rates and deliberately tank housing and asset prices, then use large scale infra investments to stop the unemployment rate rising too high. I am mostly with you, but “deliberately crashing housing and asset prices” is political suicide and I don’t see it happening. Interest rates are a good start, though. Also, I think that considering the current labour shortages the risk of unemployment getting out of control is limited.
  - Auracle 4y ago
    High inflation has also historically been political suicide. The Biden administration has been doing what they can to place blame wherever they can for a reason. I do fear the fed isn’t doing what it needs to because they’re afraid of being seen as political, one way or the other. I hope we don’t have to wait until after the midterms for them to grow a pair.
    - kergonath 4y ago
      > I do fear the fed isn’t doing what it needs to because they’re afraid of being seen as political, one way or the other. I agree and I wish this mindset would disappear. Of course a central bank is political. It’s job is to keep a working economy. There are few other institutions that affect directly so many people every day, it’s the definition of politics. They might not like the optics, but each of their decision is just as political as one from any government agency. There is some sense in insulating them to some degree from short-termist elected politicians looking for a windfall, but their smug “I know better” attitude (and the lack of accountability) is deplorable. Sorry, that was a bit of a rant, but we should remember that a central bank is there to serve a country, not the opposite.
JasserInicide 4y ago
I have 0 faith that the US federal government in particular can put money to any good uses like they did during the New Deal era. Look at how much fraud there was in multiple states with the Covid relief money.
s1artibartfast 4y ago
Building infrastructure can be a good investment, but that doesn't mean it does anything to help inflation. Massive government spending would probably make the situation worse, because it puts more money in people's pockets to further drive up costs

hgomersall 4y ago

The stated goal of raising interest rates is to reduce business investment, which is code for "increase unemployment", which they want to do because it moves about the treasured Phillips curve to the mythical NAIRU point where inflation and employment are in perfect balance (don't try to ask where that point is though...).

freemint 4y ago

> The fed is slowly working their way there, but they are doing it super slowly because they worry about shocking the market too hard and stopping all investment. If they raise the interest rates anywhere close to the rate of inflation a lot of the 3rd world will have a Sri Lanka style crisis.