22 ms·

Do high interest rates fix high inflation?

• FrustratedMonky 3y ago
  I'd like to believe all the big brains at the FED have teams of math/finance wiz's crunching these exact same points and would not raise rates if this were the case.
  • morkalork 3y ago
    At the end of the day though, I can't help but feel like myself and my countrymen are getting a raw deal. Are high interest rates lowering the cost of groceries, gas, or the cost of living in general? No. Are they blowing up everyone's mortgages one by one as they come up for renewal? Yes. Why am I, an individual, being punished for other's mistakes and mismanagement?
    • realjhol 3y ago
      https://wtfhappenedin1971.com/ https://wtfhappenedin1971.com/
    • frumper 3y ago
      High interest rates are meant to lower inflation. That wouldn't reduce prices, but it would reduce the rate at which prices increase. It seems to be doing that. Also, the article is talking about the FED, so looking at the mortgages from a US perspective, they don't come up for renewal. If you planned on permanently low rates, then that sounds like you have mismanaged your mortgage decisions. Rates have been at historic lows, there isn't much room to go but up.
      • morkalork 3y ago
        I don't live in the US but the country I do live in is closely integrated with the US and follows a very similar trajectory in terms of policy decisions. "If you planned on permanently low rates, then that sounds like you have mismanaged your mortgage decisions" this is the kind of tone deaf, consumer blaming crap that is going to get our current government booted out and replaced with a regressive, populist conservative government. Hooray. But I guess they deserve it?
        • tekla 3y ago
          > consumer blaming crap Is this how people refer to making poor decisions now?
          • FrustratedMonky 3y ago
            I think it is response to 2008 crash, where consumers were blamed for buying houses. "those stupid consumers, why did they buy houses with the home loans we gave them, it's their fault". Since 2008, this has become a more common refrain from the right, that consumers are to blame. https://www.youtube.com/watch?v=zp-Jw-5Kx8k https://www.youtube.com/watch?v=zp-Jw-5Kx8k https://www.cnbc.com/2014/02/24/5-years-later-rick-santelli-tea-party-rant-revisited.html https://www.cnbc.com/2014/02/24/5-years-later-rick-santelli-...
          • sigstoat 3y ago
            seems to be popular to believe that offering consumers a choice that might not be great for them is immoral and should be banned.
            • morkalork 3y ago
              Right, so, let's do things like abolish the FDA and bring back usury instead?
        • bombcar 3y ago
          The USA is rare in that the 30 fixed mortgage is standard and anyone who gets an adjustable or balloon mortgage is suspected of being up to something.
        • chollida1 3y ago
          > this is the kind of tone deaf, consumer blaming crap that is going to get our current government booted out and replaced with a regressive, populist conservative government. Hooray. But I guess they deserve it? But it’s also very true that they made the decisions that lead to this. I’m Canadian so I’m in a similar boat to your country. We’ve had a terrible government for thr past 10 years and they’ve made terrible spending decisions that have ruined Canada. I like your country, though, we’ll have to wait 3 more years to start to undo the damage the liberals have down to Canada so consider yourself lucky you aren’t from here:( Rates were at historical lows while a normal Historical rate was around 5%. If you planned your life around rates that were at levels never seen before then you did make a mistake and people should bear the brunt of that. That was outright gambling I’d you managed your life around rates not returning to historical norms. I feel that we should not treat people like helpless children and instead treat them like adults
    • pc86 3y ago
      > Are high interest rates lowering the cost of groceries, gas, or the cost of living in general? No. Limiting inflation doesn't necessarily mean causing deflation. > Are they blowing up everyone's mortgages one by one as they come up for renewal? Yes. This is the risk of getting an adjustable rate mortgage, which is a decision.
      • BitwiseFool 3y ago
        I feel extremely fortunate that I was able to get a sub 3% fixed rate mortgage. I still can't believe that a lender was willing to bet that a 3% mortgage would be profitable over the course of the next 30 years. If I were a lender I wouldn't be happy with issuing fixed rate mortgages.
        • nly 3y ago
          Don't worry, they made a profit on your mortgage. The interest rate risk would have been hedged away in the swap market.
        • frumper 3y ago
          The lender likely sold it off. There is a good chance a Freddie Mac or Fannie Mae owns the mortgage, otherwise it may have been sold to investors. It isn't a wholly free market decision to think your loan would be profitable over 30 years.
        • medvezhenok 3y ago
          A lot of those mortgages got sold off into MBS and then got bought out by the Federal Reserve. So if you had a 3% mortgage, chances are, the FED partially subsidized your mortgage at the expense of the American taxpayer (which is what a lot of people are rightfully angry about).
          • pc86 3y ago
            Who is angry about that (rightfully or otherwise)? I hear a lot of complaints about various aspects of the mortgage industry, and the fact that the fed partially subsidizes some mortgages some of the time is not one that I hear a lot.
    • UncleMeat 3y ago
      Gasoline is down -19.7% over the last year.
      • chrisco255 3y ago
        And it's what, 50% higher than 3 years ago? Anecdotal data points are useless.
        • UncleMeat 3y ago
          It isn't anecdotal data. This is the number from BLS.
          • chrisco255 3y ago
            Yes, it's anecdotal data. That is to say, it's a single, arbitrary cherry picked data point that one cannot draw meaningful conclusions from, since it's not statistically significant. Gas prices are very volatile, and anything short of a long trend analysis will tell you absolutely nothing. Gas is more than 25% higher than it was for all of 2018, 2019, and 2020. It is trending higher, in spite of the pull back from recent highs in the wake of the Ukraine war.
    • shakil 3y ago
      Here's a contrarian opinion: Inflation isn't all that bad, if you have a fixed rate loan (i.e. mortgage) that is larger than all your savings put together, and as long as you don't need to sell or refinance, you will come out ahead. Keep in mind inflation requires a wage/price spiral, which means your salaries are also increasing to keep pace with the rising prices, while the loan amount stays the same, so repaying it becomes easier.
      • iopq 3y ago
        Well, I have enough to buy a house, but it's in stocks. They have been beating the inflation recently, but that's because the high beta ones dropped like crazy during the rate hikes so I'm just making back my losses
  • adventured 3y ago
    The supposed big brains at the Fed get it wrong over and over and over and over and over again, and yet somehow people give them immense credit. All you have to do is reference Greenspan or Bernanke and what they were saying before the nasty economic events of their time. Those clowns were saying things were largely fine shortly before everything went to shit. They could hardly have been more wrong.
  • fuoqi 3y ago
    Raising rates is the best way to kick the can down the road in the current conditions. The problem is that the economy got really close to the end of the road (as far as we understand it). And no, the US is unlikely to follow the Japanification scenario. From the article: >And indeed, higher interest rates may work in the short term, for indirect reasons. If money gets tight enough over a cyclical period, then it could indeed cause a recession and a temporary drop in inflation. The private sector gets squeezed with higher interest expenses and tighter credit standards, and asset prices drop or stagnate. Fundamental solutions to this situation are incredibly painful and require strong political will accompanied by wide support in society. We do not see it today in the US. The best solution would be to completely eliminate fiscal deficits (either by raising taxes, or by cutting spending) and simultaneously hike rates. Already issued debt will not be affected by the higher rate, thus resolving the article's dilemma. But good luck selling this solution in today's political environment, especially considering that it will cause a huge recession and painful restructuring of the economy in the short-to-medium term.
    • latency-guy2 3y ago
      There is no evidence that USA would have unraveled by the end of 2024, 2025, 2026, 2027, 2028, 2029, or 2030. At worst, we were tracking no worse than the average EU country currently is performing. So you need to clarify exactly what "got really close to the end of the road" means, because it sounds overly dramatic for no reason. The rest of your comment reads as imprecise.
  • wombatpm 3y ago
    When all you have is a hammer, everything looks like a nail.
  • deleted 3y ago
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  • imtringued 3y ago
    How dare they get away with!! Noooo. The economy can bear higher interest rates. Nothing bad has happened so far. I now think it is an acceptable choice but I still don't like the idea that the central bank is setting the interest rates. In my opinion the central bank should set a low rate but it shouldn't offer banks the ability to borrow at this rate and banks should be trying to get the highest rate possible through competition, not some subsidy by the central bank.
• freitzkriesler2 3y ago
  Yes, you make credit harder to get you reduce the amount of new money being injected into the economy reducing currency velocity and "taking" inflation. The problem is balancing credit access versus outright making credit expensive to acquire. Make it too expensive and you slow economic growth. At least that's what the Keynesians say with a "fractional" reserve system. The only problem with this system is it benefits asset owners over labourers.
  • bfdm 3y ago
    And what about all the "free money" being granted to those already holding a high balance? "Basic income for those with the most savings" has been one of my favourite framinga for interest rates.
    • hgomersall 3y ago
      The interest-price spiral nobody ever talks about.
      • imtringued 3y ago
        The amusing part is that depending on the economic model some do predict that there will be inflation in exact proportion to the interest rate. I am convinced that if you have a 100% free capital market with no coercion, then in theory the interest rate will just reflect capital scarcity and be a reward for possessing something many people want and that needs to be allocated to the highest bidder, but if it turns out that such a free market is a fantasy, then there is something to the interest causes inflation argument in real life simply because a responsible government that has the option to pay interest or not, could use the savings to pay off even more debt. The interest payments have to circulate once through the economy and this generates additional demand which can lead to inflation.
        • hgomersall 3y ago
          In truth, nobody has any idea how interest rates affect inflation. It's a combination of dogma, wishful thinking and a lack of options that lead to the central banks using monetary policy to try to reduce inflation. The central banks should never have been made "independent" let alone given the responsibility of controlling inflation. It's a political cop-out.
• andrewstuart 3y ago
  The surprising thing is the government makes no explicit effort to control prices. It does not ask or legislate for prices to not go up. What seems to be happening in Australia is companies are taking the chance to pump their prices. Presumably this results in high profits. I guess there would be stats that should if profits have been going up during this period of inflation.
  • treeman79 3y ago
    Read Basic Economics by Thomas Sowell. The only thing price controls do is cause shortages and long term price increases. If companies are able to raise prices for long periods and make large prophet, that means something is completely broken. Competition would bring in new people that offer the same goods or services at lower prices. Government regulations controls, etc stop that and interfere with natural markets. Russia had a long history of price controls, and it never worked well.
    • vkou 3y ago
      You can solve price gouging from the other end. Instead of capping prices at the point of sale, tax profits. Right now, prices are growing, mostly due to an increase in profit margins. If the market is failing us, because it can't optimize those profit margins down, it's the government's job to take and redistribute that surplus.
    • failuser 3y ago
      Do you also propose to stop interfering in the market by providing massive government subsidies to the farmers? True market economy tend to run away and blow, big players tend to consolidate and form monopolies, the thing we have not is a very complicated compromise between free market, regulations and unspoken traditions. Please stop pretending that these things are obvious and easy.
  • adventured 3y ago
    It's not surprising. Price controls very commonly fail in horrific fashion. Many of the basketcase economies of the last 50 years have infamously tried such. Governments are not remotely equipped to manage price controls effectively (including needing to rapidly + correctly adjust to changes), and none have ever successfully managed blanket price controls well (there isn't a single modern economic record of that occurring in non-war time). There are only niche instances of price controls being effective (narrowly targeted, often either temporary or offset).
• jqpabc123 3y ago
  Short answer --- yes. By shrinking the money supply --- by removing money from the financial system.
  • fuoqi 3y ago
    Please, read the article instead of commenting based solely on the title. The author specifically explores conditions when the answer is "no", namely: persistent fiscal deficits with high public debt levels.
    • nly 3y ago
      Ray Dalio talks about this succinctly. When you issue too much debt and don't have the income to pay it back (you're running a deficit) you either pay the borrowers back less money than they are due (default) or you pay them back the same amount of money but that money is worth less (you 'inflate the debt away').
      • fuoqi 3y ago
        Yes, it looks like we see his scenario of long-term debt cycles unfolding in real time.
    • mindslight 3y ago
      Meh. I'm thoroughly unimpressed by this article. It seems to follow a pattern of acknowledging effects of lowering rates, handwaving away the relevance of raising rates to reversing them, and then dropping a hyperbolic analogy to emotionally drive the point home. (gunshot wound! Kobayashi Maru! capital controls!) I know it's edgy to be contrarian, arguments for restarting the VC/bankster party are going to play real well with the VC/bankster crowd and their beneficiaries (eg Surveillance Valley). And the argument dovetails right in to the political chant that government spending is too high (that magically happens whenever the President is a Democrat). But it's just utterly disingenuous to ignore all of the monetary inflation through the 00's and 10's (both lending based and the deficit from the fraudulent Iraq war), and then point to the straw breaking the camel's back (Covid supply/demand shocks plus stimulus) as the cause. Main Street has certainly seen plenty of financial devastation on the way down as rates marched to zero, as Wall Street got handed a continual influx of cheap money. Now we're just supposed to accept that damage as inevitably permanent, and believe raising rates won't contain or even reverse the trends? I don't buy it. How about we just leave rates at the moderate [0] level that they are currently at for a decade+, so all that medium term debt can come due, and then see the results? Right now the markets are still betting that the current existence of interest rates is just a hiccup, and on an eventual return to the ZIRP party. When housing prices have an actual correction and the everything bubble starts deleveraging, then we can start to talk about how much is enough. [0] describing 5% interest as being "high" is basically broadcasting your limited perspective. Tell me you're still in your IPA phase without telling me you're in your IPA phase.
• HDThoreaun 3y ago
  This is an incredibly complicated question, so I'm glad the author put in the work to really try to flesh out the details. In the end I'd say the US's broken legislative system has forced the fed to make some really tough decisions. The decade following the great recession should have been a time of expansionary fiscal policy. Instead of congress investing in our future they argued and accomplished nothing. The board of the fed saw congress's failure and figured "if this country can't execute fiscal policy well at least we can step in with expansionary monetary policy". Came to kick them in the ass when covid rolled around, but it was also arguably responsible for one the best decades of economic growth in human history.
  • deleted 3y ago
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  • throw0101b 3y ago
    > The decade following the great recession should have been a time of expansionary fiscal policy. Instead of congress investing in our future they argued and accomplished nothing. Do is "they" specifically? Because as I remember it the Republicans wanted to sink a Democratic president, and so hampered/slowed the recovery. And let's forget the right-wing idea of "expansionary austerity": * https://en.wikipedia.org/wiki/Expansionary_fiscal_contraction https://en.wikipedia.org/wiki/Expansionary_fiscal_contractio... And the deficit hawks who said that the US had to cut debt or Bad Things would happen (which suddenly wasn't a problem went Trump got into office and tax cuts were desired): * https://en.wikipedia.org/wiki/Deficit_hawk https://en.wikipedia.org/wiki/Deficit_hawk
    • TexanFeller 3y ago
      > which suddenly wasn't a problem went Trump got into office and tax cuts were desired There are plenty of us that rage against _both_ parties' negligence when it comes to balancing the budget. Socially liberal and fiscally conservative as us libertarian-ish types say. Lots of us hated Trump for cutting taxes and bullying the fed to lower rates while the economy was already booming.
• standardUser 3y ago
  The conventional perspective is that as money supply increases, so does demand for goods and services. But we were suffering acute supply chain shortages that would have increased prices even if demand was static. This doesn't seem to be talked about very much.
  • treeman79 3y ago
    Well the government screwing up the supply chain is certainly a big factor. The same level of spending that governments did the same thing as printing huge amount of money. Something that still not really slowing down.
    • losteric 3y ago
      I presume you are blaming the American federal government? Why? "The supply chain" is a global emergent phenomena across a variety of capitalist nations. Personally, I would blame corporate greed that took advantage of short-term supply-demand misalignment transitioning through COVID and now persisting high prices/restricted supply to pad their profits. Capitalism and all. Perhaps the US government could do more to limit this profiteering or break monopolies, but we are doing a reasonable job supporting re-shoring key industries.
      • agentgumshoe 3y ago
        There's also the incredibly cheap debt those corporate interests used to make large purchases, to then extract profits for as long as possible while the debt could be forgotten about
  • drexlspivey 3y ago
    This is trivially proven false. The money supply has been rapidly increasing for decades and there was no inflation https://fred.stlouisfed.org/series/M2SL https://fred.stlouisfed.org/series/M2SL
    • medvezhenok 3y ago
• yasman 3y ago
  How much of inflation can be attributed to rent seeking and profit maximisation? Economic theory suggests competition facilitates optimal pricing in the market. Given our landscape of mega-corps this factor is only going to become larger. In fact higher interest rates might even accelerate it by making it harder for startup’s and small businesses to compete.
• readthenotes1 3y ago
  I tend to ignore screeds about inflation that don't incorporate people's expectations as a source of inflation.
• betaby 3y ago
  Many Russian (or ex-USSR in general) economists would firmly answer 'No'. But again, USA economy is not post-USSR countries economy. In fact I was surprised when Canada announced that they are rising rates to combat inflation. But then again, is Canadian economy behaves like USA? I think the answer again 'No'.
• medvezhenok 3y ago
  We can answer this intuitively. Inflation is a mismatch of [desire/ability to purchase goods * purchasing power] and [volume of goods produced * cost to produce goods] that forces an adjustment in the price level. The options to fix high inflation, therefore, involve messing with one of those four variables. High Interest rates can fix things to the extent that they are able to influence one of the above variables - usually by making things more expensive without changing the nominal price (via embedded interest expense). Taxes are another way to fix high inflation by reducing purchasing power / desire to buy things (without affecting nominal price level). Technically, price controls can also "fix" measured inflation, with the unfortunate side effect of a goods shortage. You have to always be careful and think about what you are measuring and what units of measure you are using when you talk about inflation.
  • pohl 3y ago
    I'm surprised that desire/ability to raise prices doesn't get a representation in that formula. The consumer isn't the only party with agency, after all.
    • AnimalMuppet 3y ago
      No, but that just puts you on a normal supply/demand curve. If suppliers discover that they can raise prices and make more money that way, then they will, with or without inflation. What normally stops this from happening is that 1) higher prices from supplier X shift business to supplier Y (presuming a functioning competitive market) and 2) higher prices decrease demand. But suppliers have been free to increase prices, as much as they want, forever. That's why I have a hard time blaming profiteering for most of the price increases.
      • bugglebeetle 3y ago
        > But suppliers have been free to increase prices, as much as they want, forever. This is not at all true and is the direct product of a lack of anti-trust enforcement in the US. We have monopolies and near monopolies in many industries and open collusion between firms on pricing. Most of this would be impossible in a more competitive landscape or one where the Feds did anything other than attempt (and often fail) to squash the most egregious consolidations.
• CDT-MLT 3y ago
  People in America buy things they do not need. Take for instance the obesity crisis here. Americans buy more food because they don’t go by “serving size.” Hence more money is spent to buy that food. They don’t think about do I really need that food? Am I eating because I am hungry or because it’s good? Do they stop? The high interest rates are supposed to act as a “punishment “ I think. But as you see debt keep climbing as does the weight of Americans because of no self control.
• trog 3y ago
  NPR's Planet Money Indicator podcast just did an episode[1] of this topic as it relates to Turkey, where the big cheese decided that in fact, no, high interest rates don't fix inflation, and that it was low interest rates that fixed inflation. The results have been grim for the lira, to say the least. The episode finishes with a note that they've appointed a new finance minister who has said "the country has to return to a rational basis for its economic policy". So we'll see what changes are made - or whether this person lasts in this role for very long. 1. https://www.npr.org/transcripts/1180819327 https://www.npr.org/transcripts/1180819327 [transcript]
  • oliwarner 3y ago
    A lack of confidence can destroy a smaller currency on Forex markets. It's hard to study internal economic mechanisms in isolation when the world is constantly messing with your relative values.
  • drdec 3y ago
    Turkey's situation was discussed in the article, I highly recommend reading it.
    • trog 3y ago
      > Turkey's situation was discussed in the article, I highly recommend reading it. Oh yep sorry I should have noted that as well - I just thought NPR's (slightly) deep(er) dive was also interesting & worth a read as a bit more of a case study where someone was VERY CONVINCED that low interest rates were the way out of inflation, and, uh, so far the evidence is not compelling that they were correct.
      • smashem 3y ago
        Low interest environments exist because liquidity is growing in the financial system. As that liquidity escapes into the consumer system, which it always does, it causes inflation.
        • 3y ago
• WalterBright 3y ago
  What fixes high inflation is stop digging the hole (where digging is printing & spending more helicopter money).
  • tmn 3y ago
    This is true. The problem is inflation is desired/needed to enable/sustain the debt based leverage that allows our modern world to tick. So the game becomes create at least a little bit of inflation and try to not let it boil out of control.
    • WalterBright 3y ago
      > that allows our modern world to tick Private debt is backed by collateral and is not inflationary. Government debt, however, has no collateral and so is inflationary. This debt does not make the world tick.
      • somewhereoutth 3y ago
        Not true. Private debt (i.e. banks loans) are created out of thin air, indeed this is the primary mechanism for inflating the money supply. They may be backed by collateral, but that is not a limiting factor.
        • WalterBright 3y ago
          They are backed by collateral, which limits the growth in the money supply to the value of goods and services in the economy. And, when the loan is paid back, the money is destroyed. Hence, no inflation. Now, when the government issues debt, there is no collateral, and hence no constraint on the debt. When the debt notes are paid, they are paid by simply issuing more debt. Hence, inflation.
          • somewhereoutth 3y ago
            Plenty of loans, likely the vast majority, are not backed by collateral. Loans are created based on supposed ability to pay (from future income streams), not from swapping the value of an asset for cash. Banks issuing debt is exactly how the supply of money grows. Central banks influence this process by setting the rate at which banks can borrow from them and various regulations and market operations, QE etc. If someone has told you that inflation is caused only by government excess spending it is because they are pushing the agenda that government is 'bad'.
• sitkack 3y ago
  It does if you force everyone in to abject poverty for long enough. Interview with Larry Summers, Former Secretary of the Treasury | The Problem with Jon Stewart https://www.youtube.com/watch?v=tU3rGFyN5uQ https://www.youtube.com/watch?v=tU3rGFyN5uQ
  • Aunche 3y ago
    Jon Stewart's journalistic integrity used to better on his comedy show, where he didn't talk over guests. I find it funny that he thinks it's perfectly fine to squeeze as much profit out of your customers as possible if you're providing a non-essential service like he does. However, if you're an egg producer and go through the trouble of protecting your hens from bird flu, you shouldn't be allowed to profit from the increased demand for your eggs when your competitor's hens die out. That's a great way encourage people to pursue exclusively non-essential lines of work.
    • sitkack 3y ago
      I can't even. So much wrong with this. Not even wrong.
• User23 3y ago
  Not directly. High interest rates are actually directly inflationary because they increase the public sector’s deficit and every penny of that deficit is someone in the private sector’s income. However the larger economy is a complex dynamic system. In order for an interest rate reduce price inflation or induce price deflation, it would have to reduce the ratio of money-looking-to-buy:goods-services-looking-to-sell. While higher interest rates might indeed reduce the number of potential buyers and the amounts they are willing to pay, those higher interest rates will also increase the cost of production for any producer or service provider that employs any sort of debt financing and thus probably reduce that side of the ratio too. My guess is that overall it's a wash, modulo animal spirits or whatever you want to call the human element of the markets. Incidentally, hysteresis is hugely important, and often confounding for figuring out these kinds of effects.
• almost_usual 3y ago
  Read this yesterday, great write up as expected from Lyn.
• shakil 3y ago
  The article goes into quite a lot of depth about all the sources of inflation and how to fix it without actually mentioning the predominant cause of the latest inflation: Corporate Profits [1] In Capitalism, we scorn at "price controls", and then go through a tortuous and roundabout mechanism by raising interest rates, so that the increased cost of borrowing causes corporations to cut expenditure which then pushes higher unemployment, reducing purchasing power and consequently reduces demand, all in the hopes that reduced demand would then cause prices to drop. But if the price increase wasn't triggered by higher purchasing power, then this whole rigmarole is meaningless, inflation remains "sticky" 1. https://archive.is/tzeHy https://archive.is/tzeHy
• TexanFeller 3y ago
  I wonder if we are in a different situation now than in the 70s/80s when the Fed last fought rampant inflation because of globalization. Like maybe before raising rates more directly affected costs because American companies had a large proportion of their customers in America. Now if the Fed raises our rates Apple can still sell tons of phones in countries that didn't raise rates and whose consumers didn't lose that buying power.
  • RhodesianHunter 3y ago
    If you read the article, it actually compares in detail the current situation to the '70s
• thefourthchime 3y ago
  Just my opinion, but macroeconomics seems to be good for understanding what's happened, but not so great for predicting what's going to happen. Take the Federal Reserve's policy on interest rates. Lower rates are supposed to get the economy going and increase inflation. But after the 2008 financial crisis, the Fed cut rates almost to zero, and the big inflation everyone expected just didn't happen. This makes me think about the idea of a "liquidity trap," where people would rather keep their money than invest it, even when interest rates are super low. This wasn't just a U.S. thing either. The same happened in Japan in the 90s and in Europe after 2008. Even with rock-bottom rates, inflation stayed low. I know it's not popular wisdom, but maybe we don't know what the fuck is actually going on. And we should just accept that.
  • RhodesianHunter 3y ago
    Or maybe the people who study these things do know what's going on, but politics makes it impossible to do what's needed.
    • thefourthchime 3y ago
      I think you’re implying that people can predict the future and I’m pretty sure you’re wrong about that
      • RhodesianHunter 3y ago
        Educated people in most scientific fields can look at data and predict the likely outcome. Economics is undoubtedly harder, because people are very non-deterministic. However, economists frequently advocate for what we can see would have been a more appropriate path, had we not been hamstrung by ridiculous political tribal warfare led by people who do not understand the underlying economics.
• throttlebody 3y ago
  Don't forget that the west exported a lot of ots inflation to the east as it moved manufacturing there
  • breckenedge 3y ago
    And once we started cutting back on those imports (or threatening to), all of a sudden inflation returned home. Inflation was my guess as to what would happen when Trump come into office, I just didn’t expect a continued period of low interest rates due to political meddling.
• cvccvroomvroom 3y ago
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  • 111111IIIIIII 3y ago
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  • mucle6 3y ago
    disclaimer: other people would likely call me an invisible hand traditionalist I'm curious how corporate profits could be regulated? Its unclear to me how we could distinguish increased profits from increased value creation vs increased profits from increased corporate greed
    • ramraj07 3y ago
      More antitrust regulation - have to increase competition. Of course this won’t happen immediately. If I were the president I’d have direly warned the deployment of the defense production act to commandeer basic supply companies and curb their profits. Just a warning would have set them straight.
      • IG_Semmelweiss 3y ago
        what exactly would you change when you say increase antitrust ?
        • stubybubs 3y ago
          Probably actually _do_ what most people think of antitrust, which probably means undoing the Bork-influenced "immediate consumer welfare only" interpretation of the law. Cory Doctorow has a lot to say about this in Chokepoint Capitalism. That book mainly talks about the big tech aspect of it, but it explains things like chickenization, which is total vertical and horizontal integration of a business, and how it's basically oligopolies all around in the US. It's easy to essentially collude without directly contacting your competitors if there are only 3 companies in a particular industry. You raise prices, and the other two raise in sync, because consumers have no other place to go.
• kypro 3y ago
  What a great article. This idea that high interest rates coupled with high levels of public debt are likely to exacerbate inflationary pressures is one I've heard before and one I tend to agree with. My overall view is that we're now in a situation where there is no longer any good options. Not that this needs to be said it's worth remembering that to reduce debt/GDP a nation must grow its GDP component relative to the growth of its debt. Typically this can be done my limiting the growth of public spending relative to the growth of the economy, but today I think there's reason to suspect we can't do that. The issue is that in recent years trend economic growth even with the expansion of public debt has been anemic in developed economies. People like to just attribute the growth in public spending to stupid politicians, but the reason every developed country has been doing the same thing isn't simply because all politicians have suddenly became fiscally irresponsible, but that the trend rate of growth in developed nations has dropped significantly. To prevent stagnation (and in some cases out-right deflation) central banks have become ultra accommodative and governments have spent more money. Despite this increase in public spending it's only just about allowed developed countries maintain a slightly positive inflation rate (around 1-2%). But this trend can not longer continue now we have higher rates, and at the same time governments also can't afford to spend less. To spend less would lower trend economic growth and this only makes it harder for us to service our debt since we can no longer grow GDP relative to the debt level. Worst yet would be a scenario where this drop in public spending doesn't just cause stagnant growth, but deflation or recession since in both scenarios the real cost of servicing public debt will increase relative to GDP. So given demographics and slower trend growth this decade the government probably both has to both increase debt levels to keeping the economy growing while reducing debt levels relative to growth to be confident in its continued ability to service its debt. In my opinion this is probably an unworkable situation. While I agree with Lyn that we're going to see waves of stagnation and deflation, followed by growth and inflation the only realistic way this ends is with developed nations defaulting on their debt or hyper-inflating it away (assuming they have that option). This of course assumes that public debt growth is in fact needed to prevent economic from stagnating. If you believe things have changed since the pandemic and we can now grow GDP without increasing debt levels then perhaps we'll be fine, but I suspect the trends in place prior to the pandemic are only likely to accelerate in the coming years. In my opinion if you want to remain relatively unaffected by what's coming it will become increasingly important to reduce your personal debt levels and avoid saving large sums of money in sovereign currencies.
• AtlasBarfed 3y ago
  You want to fix inflation? Break up all the cartels, duopolies and monopolies that are everywhere in America. Actual market competition is the only thing that really drives down prices.
  • mjevans 3y ago
    Number one, HOUSING. The places where jobs exist have like half or less the housing they should. I see two ways out. Either build more houses, or let all the jobs that can be 100% work from home and allow people to buy in smaller towns.
• tootie 3y ago
  It's a facile question. The causes of inflation are varied and sundry. There's a billion discrete parameters that cause inflation and inflation is not a uniform phenomenon. Interest rate hikes are the simplest and most broadly useful tool. The Fed can't fix supply chains or make people be fair or raise minimum wage or create housing supply or stop wars.
• jongjong 3y ago
  I think the author hit the nail on the head when they said that increasing interest rates creates deflation in private sector but accelerates gov deficit... That would result in stronger gov influence over economy and lower efficiency. Gov essentially kills off private sector this way as it creates an uneven playing field for companies who receive direct gov money/contracts and those which don't.
• jaimex2 3y ago
  It's really a pointless discussion. All you need to know is printing money causes inflation. The damage is done and there's no painless way to undo it. This is the price for your covid measures. The bill is due. This is roughly what each country is up for: https://www.statista.com/statistics/1107572/covid-19-value-g20-stimulus-packages-share-gdp/ https://www.statista.com/statistics/1107572/covid-19-value-g...
  • zeroonetwothree 3y ago
    Indeed, we have to let the price level adjust to the new higher baseline given the increase in money supply. However, raising interest rates has decreased it modestly, about 5% in the past year. So that's something.
  • switch007 3y ago
    Has there been a politician with the guts to say this is the Covid bill? It’s so painfully obvious to me
• eek2121 3y ago
  There are studies, but the studies are flawed. It depends very much on the country/union. The US raising rates will absolutely slow/stop inflation in the US, and at least slow down worldwide inflation. North Korea? yeah, good luck… Outside of those extremes, it depends on the population of the country/union and how widely the currency is used. I saw an NPR piece mentioned by trog, but that does not change my viewpoint. The NPR piece appears to not focus on currency usage %, which is why I think it isn’t all that relevant.
• 8bitsrule 3y ago
  I don't see how 'hidden' inflation could be fixed by higher interest. A favorite example (a widespread tactic, don't mean to single out the industry) is keeping the price of groceries down by putting less product in a nearly identical package, with the 'new' weight nearly invisible ... or slowly substituting cheaper ingredients (hence quality) which the long-time customer is less unlikely to notice. I'd bet most of us could name names.
  • wcoenen 3y ago
    Price inflation via shrinking packages is not hidden. It is measured and represented in inflation indices like the CPI. https://www.bls.gov/opub/btn/volume-12/measuring-shrinkflation-and-its-impact-on-inflation.htm https://www.bls.gov/opub/btn/volume-12/measuring-shrinkflati...
  • switch007 3y ago
    > I'd bet most of us could name names. Yes, anlmost every product and every retailer here in the UK ! “New packaging, same great taste” ! Grapes used to be 500g. Now they vary between 400g and 500g Butter in smaller shops is 200g instead of 250g. Plus hundreds of other examples
• m3kw9 3y ago
  It’s a lever fed can pull, it’s not magic but to keep it simple they pull it
• tonymet 3y ago
  they do when they trigger unemployment
• JackFr 3y ago
  This post could be much clearer if the author was more clear about what the actual mechanics of what the Fed does. When they raise or lower rates, it’s not like they publish a number and that’s the new rate. Rather the Fed Open Market Committee goes into the market and buys or sells bonds until the rate hits their target. So I have to admit I’m not sure I understand the distinction being made between banks extending credit to the govt or the private sector.
  • dmichulke 3y ago
    That's not true, you're conflating - QE/ QT (buying / selling bonds) with - Yield (Curve) Control ("FOMC goes into the market and buys or sells bonds until the rate hits their target" - the BOJ does this) with - the FED interest rate (the rate which banks have to pay to borrow money from the FED) Just check the bond yield of various US govt bonds (e.g. here: https://finance.yahoo.com/quote/%5EFVX https://finance.yahoo.com/quote/%5EFVX), they vary all the time and are not necessarily close to the FED rate
    • JackFr 3y ago
      The discount rate is the rate at which banks pay when they go to the discount window to borrow money. This is simply set and posted by the Fed. Borrowing at the discount window is a backstop for banks and not a typical part of their operations and not the usual lever of monetary policy. The Fed Funds rate is the rate which banks will lend to each other overnight on the Fedwire. This is the rate the Fed targets in monetary policy. This target rate is achieved by the Fed conducting open market operations and doing repos or reverse repos with primary dealers. Open market operations are literally the Fed going into the market and literally entering repurchase agreements for Treasury securities. I understand that they are really buying and selling money, not the securities.
• baseline-shift 3y ago
  No! At least they can't have any effect on today's situation. The high inflation (it is coming down - it was 8%% - its down to 4%) was caused by worker shortages after the pandemic. Fewer able-bodied workers after covid commanded higher prices, just as the serfs who survived the Black Death in the middle ages commanded better working conditions subsequently. The shortages in goods as fewer factory workers could make them and fewer truckers could move them also raised prices. None of these causes for higher prices is impacted by higher interest rates.
  • Clubber 3y ago
    Also boomers retiring. It's gonna be a tight labor market for 10-20 years. Enjoy it you youngsters! https://populationeducation.org/resource/u-s-population-pyramid-infographic/ https://populationeducation.org/resource/u-s-population-pyra...
    • granshaw 3y ago
      Tight labor market* * except the tech market the majority of this audience participates in
      • bequanna 3y ago
        Jobs are still pretty easy to get if you have actual engineering and/or management skills. Not so much if you’re a recruiter, product manager or have “DEI” in your title.
• switch007 3y ago
  No but they’re going to make us poorer trying. As if in the UK we didn’t have enough issues, our mortgages are going up. It’s just feels like a cash grab, theft for greed’s sake
• lottin 3y ago
  Notice that she rarely cites any sources. This is because most of the stuff she writes is counter to standard economic theory. Some parts are heterodox economics, other parts are entirely made up.
  • gdmt 3y ago
    Such as?
  • kqr2 3y ago
    Citations?
  • jameslk 3y ago
    Perhaps, but this comment seems like FUD being so unspecific. Unless you want to point out what parts you deem as "heterdox economics" or "entirely made up"
  • csomar 3y ago
    All her charts are sourced externally with the data source mentioned. Are you saying she falsified the charts?
  • floundy 3y ago
    She took the smarter approach of Wolf Richter selling a doom-tinted "alt econ" narrative, but has monetized it with a paid newsletter with stock picking advice. Very clever. I will add though, that academia has been taken over by Keynesians for decades, effectively establishing themselves as "standard economic theory" and not giving any funding to competing ideas.
• dombama 3y ago
  This is such a simple answer: NO. Not sure why we need to overcomplicate. The Fed's dual mandate is maximum employment and price stability. The best monetary policy lever to affect this is by adjusting the federal funds rate. This only has a limited effect on price stability. The basket of goods which makes up the Consumer Price Index includes many items which are inelastic. If prices of shelter, transportation and food go up, people still need to consume them to survive. These prices are influenced by many other geopolitical factors (war in Ukraine, housing policy, labor supply, etc) and thus interest rates only have a limited ability to "fix" inflation.
• bullen 3y ago
  In a highly leveraged/indebted economy and energy scarcity (both historical firsts) interest rates are violence = war. Long term; lies cannot master truth, colonization is over / will reverse. In practical terms margins are permanently gone, so no more invention / exploration is made. Either way we are peaking in complexity. Simplify your life or get wrecked.
• nr378 3y ago
  This essay seems to rely explicitly on the idea that Government deficits are always monetised, and that the Central Bank is forced to do this and has no say in the matter, which causes inflation. That seems empirically incorrect - debt monetisation is practically peformed using quantitative easing (where new money is issued to buy government debt) which is a policy instrument under the direct control of western Central Banks. If Central Banks cease quantitative easing, or engage in quantitative tightening (as all western Central Banks have done), then there's no reason for a fiscal deficit to be inherently inflationary, and therefore no reason for rising interest rates to cause inflation.
  • MadSudaca 3y ago
    How does it turn out in practice? I don't think the central banks are as independent as it's thought. At least not in most countries.
  • jgilias 3y ago
    I think her argument is that while QE on its own is not necessarily inflationary, as it increases base money supply but not necessarily broad money supply, fiscal deficits are inflationary due to them ending up directly as broad money. And… This does seem to be the case, I can’t think of any government spending that wouldn’t directly become broad money. Note also that she’s not implying that therefore not raising the rates would reduce inflation. In fact she states clearly that this would lead to even more problems and picks on Erdogan for doing this. Her argument seems to be that inflation is going to be persistent for the foreseeable future until something changes. E.g. commodities becoming cheaper due to external factors and/or debt to GDP ratio slowly getting inflated away as inflation persists and rates stay just below it.
• cco 3y ago
  What is interesting to me is that many here cling to complication. Straight from the horses mouth in front of Congress, Powell minced no words on whether The Fed's interest rate hikes would tackle CPI inflation for consumers[1]. Powell made it clear that the interest rates may have an effect on durable goods (cars) and asset prices (stocks/real estate). Cars and real estate seem to be complicated, lots of other factors playing into prices right now. But clearly for many asset classes, especially startups, the haircut from higher interest rates has landed. But outside of that, the price of eggs, gas, coffee, basically no change (and none was suggested to ever occur!). [1] Video and transcript: https://www.warren.senate.gov/newsroom/press-releases/at-hearing-senator-warren-calls-out-chair-powell-for-feds-interest-rate-increases-that-wont-address-key-drivers-of-inflation-and-risk-driving-economy-into-recession https://www.warren.senate.gov/newsroom/press-releases/at-hea...
  • drawkbox 3y ago
    > eggs, gas, coffee Largely because those are inelastic goods, they are always purchased. While some may be able pull back, most cannot. Higher interest rates for loans for larger purchases or business purchases/investments certainly are impacted by higher rates.
    • cco 3y ago
      Right...but the talk of this thread, and the article, is whether the Fed interest rate can be relevant to "consumer felt" inflation. Nobody over the last couple of years has been complaining that the cost per share of Twilio is too high, people have been complaining about their grocery bills, their heating bills etc. The answer, directly from the Fed is, "No, our interest rate hikes will not change the price of gas at the pump or the cost of eggs." As I mentioned, things like houses are complicated, clearly there has been a _bit_ of downward pressure, but there are a ton of supply side complications preventing a big change (building has slowed, people with low interest rates are holding etc).
• drawkbox 3y ago
  Everything comes back to supply/demand. Part of that demand is cash to buy and cost of the goods. If debt costs more then people have less to spend on other things. Like for instance higher credit card rates or student loans. That impacts purchasing power. Inelastic goods may not be fixed by higher interest rates, especially with other supply chain/geopolitical/environmental impacts and companies debt requirements. Elastic goods or investments, higher interest rates for loans for larger purchases or business purchases/investments/inventory certainly are impacted by higher rates when debt is involved. In the end if the higher interest rates affect mostly business/consumer elastic goods then yes interest rates bring down price inflation and affects demand eventually. The flip is if the interest rate increases start to affect the supply like margins or business survivability, then any reduction in demand will just offset with a reduction in supply.
  • ljlolel 3y ago
    Smart analysis
  • midasuni 3y ago
    One key thing missing out from many peoples understanding is the strength of currency. Perhaps less applicable to the US, but if your country has low interest rates demand for its currency reduces and then imports increase in price. If non elastic goods like fuel and food are imported, this drives inflation. If you have high interest rates and that leads to increased demand for currency then your imports will be cheaper and thus inflation lower. However that stronger currency reduces demand for exported goods, so just like domestic policymakers high rates risk reduced demand which leads to recession. The main problem with a low interest rate environment is that it allows failing companies to artificially stay afloat, using resources (workers, fuel, goods) better deployed elsewhere.
    • beojan 3y ago
      It would only reduce demand for exported goods if those goods are priced in local currency and the exporter doesn't (or can't) reduce their prices.
  • 3y ago
• EGreg 3y ago
  Fed does this via monetary policy because the the Overton window in the USA doesn’t allow Congress to do what its job is: to raise taxes via fiscal policy. What really takes money out of circulation in a targeted way is taxes. This could be a golden opportunity for Congress to tax negative externalities like: Nonbiodegradeable plastic Factory farms Traffic Congestion Pollution Fossil fuels at point of Extraction Emission Whatever the market system can’t reduce by itself. That woukd be a much more sustainable system. In fact, I’d recommend giving out a UBI (“stimulus checks”) on a regular basis, paid for by these taxes. That avoids the “Yellow Vests” problem of the taxes falling disproportionately on the working class. But instead, Congress only knows how to cut taxes, and therefore the Fed steps up to raise interest rates. In my opinion, it is the very raising of interest rates that causes the recessions and depressions we want to avoid. They can be far worse than any normal inflation, because in many pockets of the country, there isn’t enough money to di basic things. For an extreme example, look at Sri Lanka. Then they have to take loans from the IMF/World Bank or from China. The real solution is not to wait for these global hegemons to solve your problem (they won’t) and develop your own currency, to circulate in your own polity. THEN you have enough control for your OWN fiscal and monetary policy. That is why we started intercoin.org — kind of an outlier in the world of crypto LOL, because instead of get-rich-quick ponzi schemes and coins backed by nothing, it is the extreme opposite.
  • swift532 3y ago
    I closed your website instantly as soon as it played a sound, it's pretty bad it does that. When I try to click on the whitepaper button, the click actually goes to the globe. I am sorry but it's very amateurish. Anyways, what do you offer that bitcoin doesn't and what do you don't offer that bitcoin does?
    • EGreg 3y ago
      The website doesn’t play a sound. What are you talking about?
• LatteLazy 3y ago
  Right now, inflation is caused by rising wages. So if you "fix" it, you stop wages rising. Given we have not had real wage growth for about 30 years, exactly because we always "fix" it, is that what people actually want? This is why we have seen all the benefits of economic growth accumulate with the top .1%, the landlords, capital owners etc over the same period FYI.
  • dingaling 3y ago
    Certainly in the UK, wages have lagged inflation since the 1970s and the gap is currently about three percentage points. So even if wages were causal there must be some other factor too.
• BlakeSimpson 3y ago
  It's fascinating how periods of high demand and scarcity can lead to inflation, while technological improvements and abundant resources contribute to disinflation.
• winddude 3y ago
  > For the private sector, many homeowners and corporations have longer-term fixed debt, and only some portion of it matures each quarter and gets refinanced at higher rates. As more private debt matures and gets refinanced at higher rates, this will continue to serve as a disinflationary and recessionary force on the economy, especially for sectors that are more sensitive to interest rates. The one thing I don't get and could have been missing in the past... a lot of the corporations and private things, like farms operate on debt. Now maybe it's a bit reductionist, but if you're a farmer operating on debt, if interest rates go up you need to increase prices to cover operating expenses. And this get compounded all the way up to the end consumer as every step in the supply chain marks up by a fixed percent, and because everything is getting more expensive decided lets mark up by a larger percent. So higher interest rates really could be contributing to inflation. And it's just creating a cycle. And with the current levels of debt never seen before in history, it's unlike other periods.
  • Red_Leaves_Flyy 3y ago
    This is very similar in thought to the messy knock on effects of adjusting the federal minimum wage or poverty level. Inflation has a significant effect on the poverty level, adding in a strong labor market and cost of living crisis is making the limits of current social programs ever more apparent. That junkie you pass everyday on your way to work since the pandemic “ended” is one human sacrifice for bad policy. If tomorrow minimum wage goes to a rational and dignified one, say, $25/hr, the federal poverty line will have to adjust. When the poverty line goes up their budgets reach goes down. Knock on effects could make quite the mess and cause a lot of needless suffering. If I was dictator for a decade I’d scrap the whole system and have piles of cash ready to throw at the problems as they pile up, mostly pulled from and staffed by the existing budgets and programs with a fix the problem, document it thoroughly, but be diligent or go to jail policy. Like PPP loans but with accountability and prison for fraudsters. Once the big fires are out and local teams are on top of their communities problems the real work rebuilding a sane, efficient, and equitable system could start.
    • winddude 3y ago
      > This is very similar in thought to the messy knock on effects of adjusting the federal minimum maybe "sounds like" increasing minimum wages goes directly into consumer pockets. Increased costs due to interest rates do no go directly into consumers pockets. For example you look at the avg farmer, mortgage on the fields, loans on the equipment, and often lines of credit from suppliers for seeds, fertiliser and pesticides. All of a sudden the cost of all of those have increased directly related to interest, even if they raise the sale price of their crop or livestock, they won't make more income. And that money isn't going back into the system like wage increases. And this compounds up the chain, the company moving the grain from the fields has loans on their trucks, so they raise costs. The middle men are marking it up by a percentage, so that compounds the costs. Than the distributors, and processors, also likely running on lines of credit, now with increased cost directly due to interest, but also marking up by a percentage, that's compounding. Every step that interest rates compounds with every markup and causes an increase all the way to the shelves. Food and housing, are the two largest drivers of inflation, and also the cost is most directly effected by increasing interest rates. Building now costs more, and builders are also building less supply, because they build with lines of credit. Everything is much more dependant on debt than ever before.