2 ms·
> Raising interest rates can't create supply on inelastic demand. They don't need to. Interest rates aren't intended to control prices by creating an abundance
by mitthrowaway2 4y ago
> Raising interest rates can't create supply on inelastic demand.
They don't need to. Interest rates aren't intended to control prices by creating an abundance of gasoline, but by creating a scarcity of dollars.
Yes, this can bring down gasoline prices. No, it doesn't mean gasoline gets less scarce in the process. It just means that each $1 gets dearer. It means that the price looks fine but you can't afford it anyway because your pockets are empty. The gasoline is still scarce even though the price is low. That's what they can do, and what they are doing.
And it's best to understand that, when interest rates go up, the first pockets to empty are emptied by falling asset prices. Stocks, bonds, and real estate. That's why high inflation numbers are bad news for assets, even though they'd intuitively seem like inflation hedges.
- akmarinov 4y agoYeah you've completely ignored the inelastic portion of the sentence... There are these products that no matter how dearer $1 gets - you will absolutely buy them. You can't destroy demand on these products like what you're describing. You and your family could literally die without some of these products. And no raising of interest is going to help that.
- mitthrowaway2 4y agoYes; you will buy them with the last one dollar in your pocket, instead of the last two dollars. The price can vary fluidly even if the quantity consumed does not. A century ago, a loaf of bread cost only a nickel and that's not because people ate less or because food supply was more plentiful or demand more elastic. But even setting that aside, interest rates operate on aggregate demand which is averaged across all goods, just like inflation is.