3 ms·

I understand that logic but the interest rates were not the cause of the inflation. If the FED had made the interest rates negative and that caused inflation th

I understand that logic but the interest rates were not the cause of the inflation. If the FED had made the interest rates negative and that caused inflation then I understand how raising the rates can fix inflation. In this case other “knobs” were turned which caused inflation and now by turning the “interest rate knob” to a new position while leaving the others as they are the economic system will get into a new state which is not the low-inflation state it was in before the pandemic. Why do we believe that this new state will be better than the state the system is currently in?

the_third_wave 4y ago
They were not the cause - that was the heedless use of stimulus funds and the supply chain problems leading to (the former) an increase in demand and (the latter) a reduced supply - but now that inflation has reared its head it needs to be tamed. As it stands now it is better to purchase 'today' instead of 'tomorrow' since prices rise while there is no benefit in keeping funds in interest-bearing accounts given the low interest rates. As long as this remains true demand will stay high leading to higher prices. This can really spiral out of control as has been shown in e.g. Weimar Germany or more recently Argentina and Venezuela although the cause of the rise in inflation there is different from the subject discussed here.
- elwebmaster 4y ago
  Comparing USA single digit inflation to Argentina and Venezuela is quite far fledged. Instead of destroying peoples’ livelihoods with interest rate hikes maybe the government can opt for trying to fix supply problems and improve efficiency, which will tame inflation in the long term. For example, they can reverse the deglobalization movement by signing new free trade agreements with developing nations, they can reduce or eliminate the validity of patent laws which will allow for cheaper products to be produced, they can negotiate an end to the war and remove all obstacles from the extraction and trade of natural resources. All of these policies will lower inflation while increasing employment, a win-win-win situation.

the_third_wave 4y ago

They were not the cause - that was the heedless use of stimulus funds and the supply chain problems leading to (the former) an increase in demand and (the latter) a reduced supply - but now that inflation has reared its head it needs to be tamed. As it stands now it is better to purchase 'today' instead of 'tomorrow' since prices rise while there is no benefit in keeping funds in interest-bearing accounts given the low interest rates. As long as this remains true demand will stay high leading to higher prices. This can really spiral out of control as has been shown in e.g. Weimar Germany or more recently Argentina and Venezuela although the cause of the rise in inflation there is different from the subject discussed here.

elwebmaster 4y ago
Comparing USA single digit inflation to Argentina and Venezuela is quite far fledged. Instead of destroying peoples’ livelihoods with interest rate hikes maybe the government can opt for trying to fix supply problems and improve efficiency, which will tame inflation in the long term. For example, they can reverse the deglobalization movement by signing new free trade agreements with developing nations, they can reduce or eliminate the validity of patent laws which will allow for cheaper products to be produced, they can negotiate an end to the war and remove all obstacles from the extraction and trade of natural resources. All of these policies will lower inflation while increasing employment, a win-win-win situation.