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Originally Posted by Avondalist
There has been a lot of chatter that the rate at which the Fed is raising rates is insufficient to curb inflation.
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Interest rates only affect Monetary Inflation.
They do not affect Demand-pull Inflation.
Higher interest rates do not affect your insatiable Demand for everything in short Supply.
When Demand is high and Supply is fixed or decreasing, prices rise.
That is ECON 101.
Oil Demand in the US is constant or increasing. Oil Supply is reduced. The price of oil rises and in turn increases the price of gasoline.
Increasing the interest rate has no effect on oil Demand or Supply.
I highly recommend you enroll in a course immediately so that you have at least a modicum of understanding.
Quote:
Originally Posted by Avondalist
In the early 80s it was necessary to raise rates well above 10% to tame inflation.
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Wrong.
Beginning in 1968, your economy was ravished by Wage Inflation and to a lesser extent by Monetary Inflation.
Nixon levied a Wage & Price Freeze to curb Wage Inflation but Monetary Inflation continued to rise and then was exacerbated by Demand-pull Inflation.
The Federal Reserve began increasing interest rates in the 1970s during the Carter Administration.
While Demand-pull Inflation subsided naturally -- causing the ignorant to think there was a causal connection between Demand-pull Inflation and interest rates -- Monetary Inflation continued to rise.
It was necessary to raise interest rates further.
The prime rate reached 15.00% by October 1979.
Those not ignorant of history and economics understand why Carter was understandably livid since that was negatively impacting his election chances.
The prime rate reached 20.00% in April 1980 and peaked at 21.50% in December 1980.
The prime rate remained in double digits until dropping to 9.50% in June 1985.
Quote:
Originally Posted by Avondalist
Am I looking at this the wrong way?
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Yes, because you don't understand ECON 101.
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Originally Posted by Avondalist
Is it still necessary to raise rates X points above the inflation rate to tame inflation?
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For the umpteenth time for the hard of hearing and bone-headed: INTEREST RATES DO NOT AFFECT DEMAND-PULL INFLATION.
Get over it already.
Quote:
Originally Posted by Avondalist
Or can we do it with fewer rate hikes because the business cycle is more sensitive to stock market declines now than in the 70s?
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The stock market has nothing to do with the business cycle.
The stock market is independent of the economy.
The stock market is independent of economic performance.
The stock market has never caused a recession, nor could it ever cause a recession.
The stock market has crashed even when GDP was consistently 12+% per quarter.
The stock market has set weekly record-breaking highs even when GDP was negative quarter after quarter.
There is no relationship between stocks and economic performance.
Stocks could never impact the business cycle, because only 3% of US businesses can legally sell stocks and they only employ 538% of the work-force.
The business cycle is theoretical only and was never predicated on stocks or stock prices.
The theory of the business cycle is that all businesses -- whether they are the 3% that can legally sell stocks or not -- expand from Time Point A.
That expansion requires the outlay of Capital, whether that Capital is land, equipment, machinery, vehicles, labor, semi-finished goods, processed resources, or raw resources.
The outlay of Capital it financed by borrowing money whether from a bank or from investors.
At some point during the expansion, the business will cease to expand to review its performance.
It will shut-down, consolidate, sell-off or spin-off under-performing facilities, stores, warehouses etc etc etc. and then typically use the revenue gains to pay down debt.
Then we come full circle to Time Point A and do it all over again.
The flaw in that theory is markets.
Prior to the 1990s, all businesses had restricted geographical markets.
One reason the US economy expanded for 106 months in the 1990s is because US businesses had expanded markets to global markets and many businesses also expanded operations into global markets.
A US business now can halt domestic expansion but still have positive revenues through overseas operations which it can also continue to expand and then halt overseas expansions while expanding domestically.
That is likely the reason for the 120+ month expansion recently until STUPID-19.