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That is idiotic to me. Let's solve the problem of things being unaffordable by making them even more unaffordable. Like hitting the patient in the head with a hammer to knock him out so he quits moving and the broken arm can begin to heal.
If diminished demand due to higher prices is what stops inflation, then there's no need to do anything at all. Do nothing and inflation itself will produce the same effect.
Man if only it were that simple you'd find econ. degrees in Cracker Jacks boxes.
Across the economy as a whole increasing interest rates, over the course of months - sometimes a year or more, slow the rate of price increases to levels that kick off the next business cycle.
Outside oddball circumstances and very short run exceptions increasing interest rates drive prices down by squelching demand.
An example at last report and for the first time in many months The Philly Fed's. Prices Paid Index showed more producers faced flat or decreasing input prices than increasing prices. Increased interest rates slowing demand over the course of months caused that.
"Price increases" are not inflation. Inflation is an increase in the money supply, as King John IV posted above. An increase in the money supply raises prices, but price increases for other reasons are not inflation.
With respect all of that is wrong.
We have recent year's long examples of large money supply increases not causing any appreciable inflation. Conversely we can also find quarter after quarter when prices increased as money supply decreased.
Further, and irrespective of money supply or even in decreasing money supply environments, a price increase of any included CPI item contributes to inflation.
I don't know if the city data economists have it figured out or not but we can clearly see the "experts" do not.
The Fed does not control interest rates for consumers, they control the money supply and the interest rates they charge to banks.
To reduce inflation, the Fed can increase the Fed Funds Rate (FFR) - the FFR is what the Fed charges banks to borrow money - this is the Fed policy interest rate that you hear reported going up or down. To reduce inflation with the FFR, the interest rate will be increased which will cause banks to raise their interest rates to customers which will slow the economy and reduce inflation.
Another option for the Fed is to conduct open Market Operations (OMO) to buy securities, this will reduce the money supply/tighten the money available which will cause increased interest rates and reduce prices (reduce inflation).
Both of these actions take time - reducing inflation too fast will cause a recession - those are worse than inflation. Inflation is already half of what it was last year.
What I was referring to is the decision to take the Fed funds rate to 0 in 2009 and keep it there until 2017. Everything was frozen in late '08/'09, so the Fed effectively said "We'll lend you the money to lend to the economy [businesses] for free." Why would losing a 3-5% margin for almost a decade, when it was meant to stimulate borrowing, make sense?
But the businesses weren't borrowing. They weren't growing their businesses (it took Obama's entire first term to get private investment back to pre-recession levels). And I'd suggest that those who did took a look at the finances and said "Hmmm, buy this piece of equipment and finance at 0% and increase output 20%, or hire 10 new employees to get the same output." And with near 0% interest, buying equipment was less expensive.
Unfortunately, while mortgage rates aren't directly tied to the Fed, there's certainly some correlation. And the Fed-adjacent entities started buying ALL the mortgages, at the historically unheard of rates below 4%. We also quickly shifted from mortgages being (basically) a 5 or 6 year instrument to a 10+ year instrument.
And the top 3 quartiles only took a 2 year break from income in the recession - and they're the homebuyers. They're the ones who WERE (at that time) used to paying 6-9% for their mortgages.
That's how we got ourself to the cusp of a wholesale dilemma. They couldn't have waited until Covid hit and then jack the rates up immediately, it needed to have already been done. a slow rise from 2015 to 2020 from 4 to 7% would have had minimal effect on house prices (a big component of spending).
It's when we agreed to spend $2T on Covid in April '20, including giving the 80% of folks whose job chugged along and 100% of retirees w/no loss of income checks from $600 to $3K to and spend into the economy. And then, by June when we knew what Covid was and how to manage it, and by September hadn't spent but $1.5T and Mnuchin wanted to claw that back we probably would have been OK. But then we had to spend that money, plus a whole nother $1.5-2T unnecessarily and we got to the very basic definition of inflation:
All they really have to do is restart student loan payments. It would solve inflation inside of 4 weeks.
probably a full 6 months, but this would go a good ways towards fixing the problem. It would at least fix the issue of people forgetting about a monthly obligation they agreed-to and spending that cash on a consumable instead.
Then the fed needs to keep reducing the money supply.
People tend to buy on credit. If you have to pay a Mafia loan shark 100% interest by the end of the week or he would break your kneecaps, would you buy a TV or iPhone on credit? No. That is an example of expensive money. You have to pay with your kneecaps.
When interest rates are really low, people become shop-a-holics. When too many people are trying to buy the same amount of stuff, prices go up. The way to end that is to raise interest rates so lots of people who cannot afford to pay cash for their stuff stop spending.
The idea is, you only have to have high interest rates temporarily. Eventually, supply will match consumer demand again, and you can reduce interest rates to reasonably low levels.
Last edited by Igor Blevin; 01-24-2023 at 03:16 PM..
That is idiotic to me. Let's solve the problem of things being unaffordable by making them even more unaffordable. Like hitting the patient in the head with a hammer to knock him out so he quits moving and the broken arm can begin to heal.
If diminished demand due to higher prices is what stops inflation, then there's no need to do anything at all. Do nothing and inflation itself will produce the same effect.
If you do nothing when inflation is soaring because it costs nothing to borrow, then you will get HYPERINFLATION.
If I lend you money for free -- pay me back any time with no interest -- your going to spend that money.
Do that for an entire nation, and you are going to get high inflation that will get higher and higher. There is no stopping it from getting higher and higher from there, as long as money is free to use, and you don't have to pay anything on it to use it.
So if, as you say just "do nothing", then you will get hyperinflation like Weimar Germany.
By raising interest rates, you hurt the spending power of a lot of people, who stop spending. That causes prices to level off. Someday in the future when pay raises balance out the new higher prices, things kind of go back to normal.
We have recent year's long examples of large money supply increases not causing any appreciable inflation. Conversely we can also find quarter after quarter when prices increased as money supply decreased.
Further, and irrespective of money supply or even in decreasing money supply environments, a price increase of any included CPI item contributes to inflation.
maybe it's the punctuation (years-long...meaning more than 1 year?) or how you said it, but I'm not sure I get it.
The CARES Act was effectively passed to REPLACE what was the expected loss in GDP...and that's what it did. And we had about 1/4 of it left over, unused and could have clawed that back from any money supply calculation.
And despite injecting about 5% of GDP into the economy in April '20, inflation didn't budge. Even as it became clearer - to business at least - that Covid could be managed, inflation remained below 2%. Even the euphoria of Biden winning and even more stimmy money (a Trump mistake in Dec '20) couldn't get people chasing goods with their dollars.
But then even as it was clear that GDP was going to fully recover by end of March '21 (yes, in just 1 year), somebody decided they needed THEIR payoff too. And before the checks could even start arriving, inflation took off.
The Fed has done very little tightening, which was started in 2019. We were trying to drain a pool with a shot glass.
What seems to go unmentioned is that inflation today "going down" or decreasing each month is - that "inflation is only 6%" HIGHER from LAST YEAR'S prices, which were 8% higher. That means we're about 15% above 2020, when the Fed's target inflation would only have us at 3-4% above.
But the question is people should ask why is inflation so high and getting worse every year.
I could see the first or second year of covid with the lockdowns but not now with every thing is open and there has been no lockdowns for long time.
Inflation is hard to control once you let it get our of control. Rising inflation is hard to stop. It doesn't just stop on its own.
Inflation came because of 0% Fed lending rates which means consumers were paying low interest for homes, cars, phones, TVs, and other stuff. Inflation got much worse because the government printed $6 trillion dollars and gave it to people to spend on homes, cars, phones, TVs, and other stuff.
So why doesn't inflation just stop on a dime?
Some inflation stops cold when the spending stops, but not all. Once prices have leaped up a bunch like they did 2020 to 2022, many workers demand higher pay. Many people won't tolerate working for pay at the higher prices, the way they would before inflation.
Workers strike. Workers quit. Workers drag their feet on the job and produce less. At some point, employers are forced to pay workers more money. To pay for it, companies raise their prices. That is inflation. But now the workers are earning more money than they used to. They can now afford to buy stuff again, when they struggled before to pay for the inflated prices. Workers with more money cause more inflation.
So even as prices try to stabilize with higher interest rates, workers getting pay raises continues to push up inflation. The answer to that is to cause a recession so business activity slows down enough that there are layoffs and pay freezes.
So you have the initial surge of inflation from low interest rates and printed money. Now, you have the second round of inflation from employees getting pay raises.
As you can see, inflation is going down. It was almost 10%. It is now 7%. Inflation is going down. Interest rates have to stay high until inflation gets down to where you want it. Of course, as inflation goes down, the high interest rates go to medium, and will eventually get back to low.
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