6 ms·
If not interest rates, what would you advise the Fed to use for controlling inflation? Please don’t say there’s no need to control inflation. That will wipe ou
by sheepscreek 3y ago
If not interest rates, what would you advise the Fed to use for controlling inflation?
Please don’t say there’s no need to control inflation. That will wipe out any savings anyone has. Your money will be worth We’ve seen its ill effects time and again.
Argentina has 211% inflation right now. It is a vibrant economy, crippled by inflation. People cannot save. Either spend all you have (it will be worth 1/4th in a year) or buy forex.
(I apologize if the following sounds a bit ranty):
We need to keep in our minds that a lot of economics is human psychology. Inflation is a mass psychology phenomenon. The stock markets work on psychology. Which is why we have these insane “valuations”. Why would anyone think NVIDIA is worth $1.5 Trillion dollars is beyond me. I’ll explain - 1) Traders gotta trade. 2) Investors have got to invest. When despite such high interest rates, people invest in the markets - that’s got to be greed - likely caused by a high inflation recency bias. Still operating as if their money will be worth much less next year.
Also it’s noteworthy that just before 2020, the valuations were 1/4 of what we have now. Has the productivity of the world suddenly increased manifold? No. It was fuelled by two things 1) Near 0 interest rates that forced safe investors to pull their money out of bonds and savings accounts 2) Collapse of office real estate. The second one is on-going, so my guess is a lot of the money in the markets is coming from ex-office real estate investors.
- sudosysgen 3y agoTaxes. Taxes are the other tool that can be used to control inflation, especially when most of the money supply is in the hands of relatively few and has questionable productivity. It's a shame however that taxation isn't used for monetary policy due to the political system just not being set up that way.
- tharmas 3y agoAgreed. Non-productive money making should be taxed more heavily than productive money making. By productive I mean non-speculative activity. Also, sales tax is harder on lower income people. Sales tax should be scrapped except on luxury items or things like cigarettes.
- hnfong 3y agoInterest rates are not the only way of controlling inflation. GP's post is just a rather convoluted way of saying the US needs to increase taxes. Not sure whether they actually intended this, but it seemed the only logical conclusion. Unless they really were advocating for a zero interest rate environment... to which I agree with your points.
- lamontcg 3y agoWe need more inflation than 2% though. The fact that 211% is too high doesn't mean that 2% isn't too low. And the low inflation expectations leads to low interest rates which reduces the cost of money which is creating our financial sector inflation/bubble.
- rsync 3y agoI am not your parent but… I believe the prevailing answer to your question (among people who think we shouldn’t use interest rates as our lever) is taxed - specifically, corporate taxes. I don’t have strong feelings about this one way or another, but I believe that is the answer you will be given.
- sheepscreek 3y agoActually, that’s not a bad answer. For that to work, US will need to kick all the lobbyists out of congress tax/budget meetings. Because as soon as they get a whiff of what’s coming, the anti-taxation machinery goes in full-swing. God bless Warren Buffett for having Berkshire pay taxes on things they didn’t have to. He’s set a great precedent, but others don’t want to follow him. On the other hand, we have the likes of Sam Bankman-Fried touting “effective altruism” then doing the opposite.
- object-a 3y agoThe United States is not Argentina. Argentina, unlike the United States, has to finance most of it's debt from external parties in foreign denominated currency. Argentina has a vibrant economy, but it's export revenues are almost entirely from agricultural products. Since ag prices are volatile, it's harder for Argentina to acquire the foreign currency it needs to pay debts. > Inflation is a mass psychology phenomenon Inflation is a supply and demand phenomenon. If inflation is caused by constraints/shocks to supply, then increasing production capacity is a better long term solution than raising interest rates. > we have these insane “valuations This is a completely different problem than goods inflation. Stock market valuations can spike at times when inflation is well under control, and may even crash if inflation is too high. There was a long period where we had near-0 interest rates, high valuations, and little-to-no inflation after the 2008 crash