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When interest rate goes down, inflation goes up. When interest rate goes up, inflation goes down. That's what is taught in economics.
But with economics, sometimes the impossible becomes possible and the last few years have shown the interest/inflation relationship may needs to be reexamined.
Going forward, interest rate is going up; now what happens if inflation goes up with it? Has it ever happened before? And for argument sake, what will an economy looks like in such an environment?
it is not always the case . many times interest rates go down and inflation is low or even negative . rates go down because the economy is sick many times
Well, bond prices will fall. So, you want to convert your bonds to cash the day before this happens. Replace them with new higher interest bonds.
Your cash will decline in purchasing power so you should spend on durable goods as fast as possible.
Stocks will go up or down, depending.
Gold may go up or not.
Ammo might be a good “investment”.
Stocking up on Campbell’s soup might be wise.
Second, the two aren't really linked liked that. You can have high interest rates and high inflation. You can have low interest rates and low inflation. Monetary policy isn't the end all be all decider of inflation.
We've had historically low inflation and near zero interest rates combined with massive goverment spending. The opposite was true in the 70's as an example. So obviously it isn't as simple as high or low rates.
The economy is way more complicated than that.
As for what is happening right now, very unlikely we see inflation creep up very much. We actually have a demand problem in this country. Not enough demand, companies are sitting on cash with nothing to invest in and we are seeing the bottom 60% or so of the population getting squeezed with 30 years of stagnating wages. Consolidation, outsourcing and automation is only gong to increase, further placing pressure on wages for all but the most irreplaceable professions.
Well, bond prices will fall. So, you want to convert your bonds to cash the day before this happens. Replace them with new higher interest bonds.
Your cash will decline in purchasing power so you should spend on durable goods as fast as possible.
Stocks will go up or down, depending.
Gold may go up or not.
Ammo might be a good “investment”.
Stocking up on Campbell’s soup might be wise.
actually bonds like rising short term rates . it keeps a lid on inflation . bonds hate inflation .
it is not until the perception that inflation is rising kicks up that bonds will fall .
in the last 50 years every time the fed raised short term rates 1% or more in a year bonds went up in value . there was one exception in 1994 , then rates rose and bonds fell that year
.......... Consolidation, outsourcing and automation is only gong to increase, further placing pressure on wages for all but the most irreplaceable professions.
Our economy is actually getting very sick.
I would certainly agree that consolidation, outsourcing, automation, and other factors have and will continue to alter our economy. It is not true that wages are pressured for all but the "most irreplaceable professions". There are now 60 million Americans living in households with greater than 6 figure incomes. That number continues to increase and salaries for a great many are increasing faster than inflation. Employers are struggling to fill positions which is slowly increasing salaries. Unemployment for college level jobs has been under 3% for a great many years. What has changed and continues to change is the bottom of the "middle class". Those without skills or education are often not doing well. Those left behind in rural or other dying areas are often not doing well. The message should be strong. It is necessary to have skills and education and sometimes it might also be necessary to move where the jobs are. Without those actions, the economy can indeed seem sick.
Higher interest rates reduce inflation because they incentivize people to save now and consume later, decreasing the money supply in circulation. Since we can change interest rates much more quickly than we can change the inflation rate, the effect is likely to be causal interest -> inflation. However there is some lag in the effect.
Right now inflation is low despite low interest rates because, I believe, the labor force participation rate has not yet recovered from the recession. This means that whenever the economy improves, unemployed people are induced to get a job, rather than employed people being induced a get a raise. Since wages are not rising, prices cannot rise. So the weird situation we are in now is largely because we are still correcting for the recession.
For the inverse to happen, with high inflation and high interest rates, we would need to correct for low interest rates that caused high inflation, and then raise interest rates to slow down the inflation. Because of the lag in effect, you would have a short period of high interest rates and high inflation. As others have said, this already occurred in the late 70s and early 80s.
Since inflation is still low, and the Federal Reserve has a clearer eye towards proactively raising rates to prevent inflation, I don't think we will wait too long to raise rates as we did in the 70s.
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