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There are two things in tension though. One high interest rate puts the brakes on lending, which contracts the money supply. On the other hand, interest rates
by throwawaymaths 3y ago
There are two things in tension though. One high interest rate puts the brakes on lending, which contracts the money supply. On the other hand, interest rates in general necessitate creation of money to satisfy interest rates-proportional to the rate. in order to "save the economy", because bank failures and defaults are "bad". If you increase rates, the existing system might not have the money to pay off the interest because we've increased rates.
Whether inflation is stopped or not depends on the interplay between loans winding down and the systems' needs for interest payments.
- xupybd 3y agoWe must let banks fail.
- mdorazio 3y agoAs the article points out, in this case the bank is the central bank and letting it fail means collapsing the US economy (eventually).
- throwawaymaths 3y agoIt wouldn't be the central bank: the central banks (are the only banks that) cannot fail due to the inability to pay out interest.
- sokoloff 3y agoThis is a very strong premise, but not an absolute truth. All of the discussions around the US debt ceiling are largely about maintaining confidence that interest will be paid.
- throwawaymaths 3y agoThe fed can always QE to pay the debt. Debt ceiling is mostly about other contractual payment obligations by the government. Remember, the government != the fed