Do high interest rates fix high inflation?
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The results have been grim for the lira, to say the least.
The episode finishes with a note that they've appointed a new finance minister who has said "the country has to return to a rational basis for its economic policy". So we'll see what changes are made - or whether this person lasts in this role for very long.
1. https://www.npr.org/transcripts/1180819327 [transcript]
Oh yep sorry I should have noted that as well - I just thought NPR's (slightly) deep(er) dive was also interesting & worth a read as a bit more of a case study where someone was VERY CONVINCED that low interest rates were the way out of inflation, and, uh, so far the evidence is not compelling that they were correct.
$200k in the 80s would be $600k buying power now. But it’s barely middle class.
Our society is entirely a wealth preservation scheme for people who cannot prove they did the work, they just have political documents of power.
So, in your list the only true cause of inflation remains.
What is inflation? It’s prices going up. Or quality of service going down while priced the same. What is “supply chain disruption”, now? It is: you should pay more for the same delivery service, or if you refuse - your delivery will be delayed. “It’s not inflation, it’s just supply chain disruption” - was a political slogan then. No need to repeat it now: inflation is officially here already.
Housing, the stock market, crypto.
Supply of goods and services could mostly keep up with any increased demand so you didn't see inflation so obviously there.
However that allows bank A to loan 100% of their money to bank B and 100% to bank C.
This is extremely problematic. And now with bank failures they are too scared to put it back in place.
Just this concept alone creates huge inflation.
Crypto is gambling to me, so let's ignore that for my post.
Housing is mostly about debt financing (the same is true for commercial real estate). It is always true that financing rates have a large impact on valuations. People mostly buy homes on the monthly payment (cars too). If rates rise, they monthly payments rise. Most people will elect to buy a cheaper home, or wait for prices to fall.
Economics doesn't allow us to conduct controlled experiments. We have to work with the messy data that we have. When the vast majority of some of the smartest economists in the world who currently live and who have lived, all agree on principle of supply and demand, I find it compelling. When money is removed from circulation, demand drops. This almost always results in a reduction in prices. Rejecting the law of supply and demand is really out there as a fringe argument.
It would be interesting to see whether a country that had little-to-no dependence on global trade — North Korea, say — would actually see its internal economy benefit from low interest rates during an inflationary crisis.
Nothing happens in a vacuum. Things can't be reduced so much. But the idea that lowering interest rates will bring down inflation is not mainstream for a reason.
Lowering the interest rate below zero means that QE becomes irrelevant and that the central bank should undo all of it. Afterwards the central bank should raise the minimum reserve requirements above 50% and tighten its money supply as much as feasible. As holders of bank balances want to avoid negative interest fees, they will choose to invest in certificate of deposit accounts. The original borrowers now have an incentive to refinance their debts with this source and repay the money creating loans they have gotten from their banks which ultimately reduces the circulating money supply. If lenders refuse to accept a -10% return and instead lend at the rate of inflation, then borrowers will know when to stop without the government or central bank telling them to restrain themselves.
Erdoğan has invoked religion multiple times to justify his insistence on low interest rates (Islamic finance prohibits interest). I don't know whether it's a genuine belief but it's his stated one.
The difference is, perhaps, that I haven't heard of a Western politician using such phrases directly when addressing the people - but that might just be because such politician would be considered a hypocrite. It works differently when religion is involved, too.
Islam prohibits Riba which roughly translates to usury or unjust gains. While today it's widely believed to mean all forms of interest, that wasn't always the case. Even Caliph Umar was of the opinion that the definition of riba was ambiguous.
The bulk of Islamic finance today involves structuring financing arrangements that are functionally equivalent to interest bearing loans but let everyone pretend otherwise.
Turkey, unfortunately, hasn’t gone as far as to abandon the natural rate hypothesis.
[0]: https://economicsfromthetopdown.com/2023/03/23/inflation-the...
You can once you have actually understood MMT. How is the price anchor managed under MMT theory? How does that work during a boom and thereby solves the problem you posit? What are the three system stabilisation mechanisms in MMT theory?
MMT suggests moving the stabilisation policy from the market for money to the market for labour and leaving the market to determine interest rates. That stops the current problems - price gouging, SME decimation, boom/bust in construction and increased mortgage rates.
MMT moves the stabilisation policy from the market for money to the market for labour. They are not doing that in Argentina and Zimbabwe. They are following IMF dogma.
Therefore they demonstrate the problems with neoliberalism.
(Venezuela used to be a big oil producer until 2016, at which point it declined, leading to an inflation blowup https://www.ceicdata.com/en/indicator/venezuela/crude-oil-pr... ; Maduro has been really bad for the country)
Money printing tries to paper over this but makes the problem worse, because the money they actually need is dollars, and only the US can print dollars.
https://infocielo.com/axel-kicillof/telefono-milei-axel-kici...
Here is a news article showing how the money printing machine is out of control in Argentina:
https://www.bloomberglinea.com/latinoamerica/argentina/deuda...
That's opposite of Ortodox dogma.
Downside is the devaluation of the Lira, but this also has an upside; Turkish exports become more competitive.
Turkish exports become more competitive
Also, the naïve view that currency deval is always beneficial to exports is simply untrue. It always complex and multifactor for each scenario and each country... and even each good. A better general rule: A modest, consistent devaluation of currency is good for your exports, as it allows enough time for your value add staged to find internally produced substitute inputs. If deval is very fast, few businesses can adapt fast enough. If deval is very slow, it is hard to notice the effect.
Can you explain how it can exceed the export gain?
Say there is some Turkish export product, to keep it simple let's say it's a car which needs some metal as an input, that has to be imported. If the Lira goes down, this means the metal becomes more expensive in terms of Lira's. So this has to be accounted for in the price of the exported cars. However, that accounted price increase is the same as the rise in import price. What is left is the added value within Turkey, which has become cheaper because of the Lira drop.
So even though export price drops are slower than the drop of the Lira, they still drop.
Does this follow necessarily? If wage-earners have a fair degree of bargaining power or if wages are indexed, then the decrease in value of the lira will result in an increase in nominal wages. And in a condition of steady but substantial inflation, currency can be reduced to a medium of exchange rather than serving as a store of value - or in the case of contract negotiations, as an indication of the future value. Chances are, wage earners and others contracting for future delivery will just naturally take inflation into account when arranging the contract. Their payments might be in lira, but they way they set their prices is derived from the lira/euro exchange.
This is all basically what anti-inflation hawks mean when they say "we have to prevent inflation expectations hardening" etc. They want people to believe that a dollar today will have about the same value as a dollar next year.
So if you have a generally stable currency that depreciates and finds a new level, it might make the economy more competitive. If you have a currency that regularly varies, sometimes up, sometimes down, a depreciation might not mean much to its competitiveness (because an investor expects that the depreciation today has no relation to its value next year). And if you have a currency that is steadily declining, well, everyone has already accounted for that possibility so relative prices quickly adjust to return to the previous levels.
I never thought about tourism this way. Hat tip! WTO says:
Tourism is an export sector. It is a source of foreign exchange earnings; it grows a countryʻs national output; it is subject to the rigours of the international marketplace.
To clarify this phrase: Do you mean: Tourism, as a share of GDP, has _recently_ doubled? Google tells me: 2014: 4.7% -> 2019: 11% (LGTM)
Or do you mean something else? (I promise: I am not nitpicking.)
At some point it makes more sense for commodity producers to leave the oil or copper in the ground because the commodity in the ground is more valuable than what can be earned digging it up, converting it to cash and the losses of holding the cash relative to inflation and taxes.
When things reach that point nations typically have enforced capital controls, fixed exchange rates, and then will nationalize commodity producers and will attempt to implement some form of commodity price controls. Production drops to nothing and the end result is usually a concentration of wealth and power in a small percentage of well connected individuals who strip the country of wealth. This leads to entrenched strong men and oligarchs (Russia, Venezula, Zimbabwe).
The best part is that initially the middle class cheers inflation with rising property values and wages. As the inevitable enshittification and looting of the economy ensues it isn’t obvious that a choice was made and who is to blame. The misery is blamed on foreign powers, the political opposition, and the poor while power and wealth end up in the hands of a few.
Has it? Everyone in the West was smugly predicting hyperinflation for the Turks in spring of 2022, but it just hasn't materialized.
Do is "they" specifically?
Because as I remember it the Republicans wanted to sink a Democratic president, and so hampered/slowed the recovery. And let's forget the right-wing idea of "expansionary austerity":
* https://en.wikipedia.org/wiki/Expansionary_fiscal_contractio...
And the deficit hawks who said that the US had to cut debt or Bad Things would happen (which suddenly wasn't a problem went Trump got into office and tax cuts were desired):
There are plenty of us that rage against _both_ parties' negligence when it comes to balancing the budget. Socially liberal and fiscally conservative as us libertarian-ish types say. Lots of us hated Trump for cutting taxes and bullying the fed to lower rates while the economy was already booming.
At least Keynesian theory had a notion of slowing an economy that needed slowing, and boosting an economy that needed boosting, through a complementary mechanism.
The poisonous application on the other hand is to boost an economy at capacity, and use the inevitable crash to funnel wealth to… who knows where?
https://rollcall.com/2017/09/06/trump-sides-with-dems-as-deb...
It would be nice if we could get away from these big boom and big bust cycles. A bit of fiscal discipline could go a long way.
Instead, we are locked into a 2 party system filled with literal fossils. it's obvious to me when there is a tech related congressional hearing that both mainstream political parties are holding us back.
I guess that was good to have people from the cold war Era involved when Russia started pushing Ukraine around. Like a clock that's frozen in time is right twice a day...
Electoral reform is doable one state at a time, some states already use Rankes Choice voting.
It does tend to reduce polarization of the platforms and drive them to more moderate positions though.
If you want more parties you need a proportional representation system.
Obviously doesn’t work for the President, you need tanked choice, runoff, etc
but it does for Congress and senate.
https://en.m.wikipedia.org/wiki/American_Recovery_and_Reinve...
Edit: Want to add also, the rich got richer as monetary policy flowed into capital markets, while inflation increased hurting the poor the most in the last couple years.
This is especially true when the headline seems to confirm one’s beliefs about something. In fact, most of the USA’s problems if not the worlds are in a big part due to people having that level of engagement.
Yes, the planet got destroyed. But for a beautiful moment in time we created a lot of value for shareholders.
What does this even mean? The planet is not destroyed. US Carbon emissions actually went down over that decade. The environment generally is better in many ways than previous decades.
Acid rain is gone:
https://www.cbsnews.com/news/acid-rain-environment-earth-day...
Ozone hole is shrinking:
https://www.nasa.gov/esnt/2022/ozone-hole-continues-shrinkin...
In 1981 in LA there were 4 good air quality days for the whole year, 56 moderate days, and 159 stage 5 alert, Very Unhealthy or Hazardous Air Days.
In 2021 there were 41 Good days, 228 Moderate days, and only 1 Very Unhealthy or Hazardous Air Days.
Cool and normal! Nothing to see here, folks.
But of course, the planet is fine! The people are f'ed! The planet's not going anywhere, we are! https://www.youtube.com/watch?v=Kmo8sh77G6Y
The US per capita emissions are still only preceded by micronations and petrostates as far as I'm aware. In fact they're still double of those in the EU despite few countries like Poland relying heavily on fossil fuels. Chinese people have managed to surpass the europeans but even they emit about half as much as Americans and are slowing down.
>The environment generally is better in many ways than previous decades.
It feels a bit like replying to a fictitious argument about declining life expectancy by saying "but car & gun deaths are down!".
I care a bit less for more localized short term bound air quality but it's absolutely great that the ozone hole is shrinking and such. Humanity managed to get togheter and make changes that had great impact. I however feel like we managed to do this because the changes needed were comparatively small.
Now please do not under any circumstances use these victories as argumentation to push back against fixing different issues.
The decline in insect biomass in many places is horrifying and as far as I know still accelerating.
Our fossil fuel extraction is still growing. We'll see it decline when it starts getting harder to extract in a few years yes but I don't see that as reason to pat ourselves on the back. It's not a problem that fixes itself relatively quickly necessarily in the same way that stopping the use of CFK's was. Natural sequestration will remain very very slow. Taking it out of the carbon cycle in a good way is many times more difficult than releasing it. We could have given ourselves so so much more leeway by tackling the easier parts of this dependence but didn't and we still often don't.
Also Canada/Australia (I'm guessing similar car-centric transportation is to blame) and Estonia (because of an oil-based power grid).
Yes and it is dropping dramatically - getting better not worse. I.e., the decade being berated for being bad for the planet was good for the planet.
https://www.statista.com/statistics/1049662/fossil-us-carbon...
The one where fossil fuel extraction increased year over year.
You're free to advocate for those roles, but don't conflate the circumstances with dysfunction. An active legislature and the Fed's existence are diametrically opposed to the federal government's principal design.
> To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;
regulate the value thereof literally describes a central bank.
However, the combination of gerrymandering, the electoral college, lobbyists, etc. mean that congress no longer reflects the will of the people in a meaningful way.
But don't the fed and congress serve the same master? Congress is 'broken' for a reason.
> The board of the fed saw congress's failure and figured "if this country can't execute fiscal policy well at least we can step in with expansionary monetary policy".
No. The idea of using monetary policy over fiscal policy has been in use for decades. It's simpler, quicker and politically easier.
> Came to kick them in the ass when covid rolled around
That's when we had the expansionary fiscal policy. Where's the praise for congress?
https://fred.stlouisfed.org/series/FGEXPND
> but it was also arguably responsible for one the best decades of economic growth in human history.
It was responsible for the biggest asset price increases ( stocks, housing prices, etc ) along with extreme wealth disparity, stagnant wages, low socio-economic advancement and the political chaos of obama-trump-biden.
Crazy to see someone praise a bunch of unaccountable international bankers for their monetary policy especially when the monetary policy causes the economic problems in the first place. And then put down elected politicians for their lack of fiscal policy and ignore their expansionary fiscal policy during covid. Comment reads like FED PR.
Part of that demand is cash to buy and cost of the goods. If debt costs more then people have less to spend on other things. Like for instance higher credit card rates or student loans. That impacts purchasing power.
Inelastic goods may not be fixed by higher interest rates, especially with other supply chain/geopolitical/environmental impacts and companies debt requirements.
Elastic goods or investments, higher interest rates for loans for larger purchases or business purchases/investments/inventory certainly are impacted by higher rates when debt is involved.
In the end if the higher interest rates affect mostly business/consumer elastic goods then yes interest rates bring down price inflation and affects demand eventually. The flip is if the interest rate increases start to affect the supply like margins or business survivability, then any reduction in demand will just offset with a reduction in supply.
If you have high interest rates and that leads to increased demand for currency then your imports will be cheaper and thus inflation lower.
However that stronger currency reduces demand for exported goods, so just like domestic policymakers high rates risk reduced demand which leads to recession.
The main problem with a low interest rate environment is that it allows failing companies to artificially stay afloat, using resources (workers, fuel, goods) better deployed elsewhere.
That seems empirically incorrect - debt monetisation is practically peformed using quantitative easing (where new money is issued to buy government debt) which is a policy instrument under the direct control of western Central Banks. If Central Banks cease quantitative easing, or engage in quantitative tightening (as all western Central Banks have done), then there's no reason for a fiscal deficit to be inherently inflationary, and therefore no reason for rising interest rates to cause inflation.
Note also that she’s not implying that therefore not raising the rates would reduce inflation. In fact she states clearly that this would lead to even more problems and picks on Erdogan for doing this.
Her argument seems to be that inflation is going to be persistent for the foreseeable future until something changes. E.g. commodities becoming cheaper due to external factors and/or debt to GDP ratio slowly getting inflated away as inflation persists and rates stay just below it.
Inflation is a mismatch of [desire/ability to purchase goods * purchasing power] and [volume of goods produced * cost to produce goods] that forces an adjustment in the price level. The options to fix high inflation, therefore, involve messing with one of those four variables.
High Interest rates can fix things to the extent that they are able to influence one of the above variables - usually by making things more expensive without changing the nominal price (via embedded interest expense). Taxes are another way to fix high inflation by reducing purchasing power / desire to buy things (without affecting nominal price level).
Technically, price controls can also "fix" measured inflation, with the unfortunate side effect of a goods shortage.
You have to always be careful and think about what you are measuring and what units of measure you are using when you talk about inflation.
What normally stops this from happening is that 1) higher prices from supplier X shift business to supplier Y (presuming a functioning competitive market) and 2) higher prices decrease demand. But suppliers have been free to increase prices, as much as they want, forever. That's why I have a hard time blaming profiteering for most of the price increases.
This is not at all true and is the direct product of a lack of anti-trust enforcement in the US. We have monopolies and near monopolies in many industries and open collusion between firms on pricing. Most of this would be impossible in a more competitive landscape or one where the Feds did anything other than attempt (and often fail) to squash the most egregious consolidations.
Otherwise shouldn't we expect the inflation to have started before covid?
I'd also encourage you to look at the financials reports from most companies. If your profits increase by 5% at the same time inflation increases by 8% then you're both (1) getting absolutely economically wrecked, and (2) reporting 'record profits.' As companies are motivated to frame their earnings as positively as possible, this can be misleading to people who take those reports at face value.
Not enough labor? Instead of paying more to attract talent, lobby the government to legalize child labor.
Whether inflation is stopped or not depends on the interplay between loans winding down and the systems' needs for interest payments.
All of the discussions around the US debt ceiling are largely about maintaining confidence that interest will be paid.
Prices would rise directly, lowering purchasing power.
I will add though, that academia has been taken over by Keynesians for decades, effectively establishing themselves as "standard economic theory" and not giving any funding to competing ideas.
So I have to admit I’m not sure I understand the distinction being made between banks extending credit to the govt or the private sector.
- QE/ QT (buying / selling bonds) with
- Yield (Curve) Control ("FOMC goes into the market and buys or sells bonds until the rate hits their target" - the BOJ does this) with
- the FED interest rate (the rate which banks have to pay to borrow money from the FED)
Just check the bond yield of various US govt bonds (e.g. here: https://finance.yahoo.com/quote/%5EFVX), they vary all the time and are not necessarily close to the FED rate
The Fed Funds rate is the rate which banks will lend to each other overnight on the Fedwire. This is the rate the Fed targets in monetary policy. This target rate is achieved by the Fed conducting open market operations and doing repos or reverse repos with primary dealers. Open market operations are literally the Fed going into the market and literally entering repurchase agreements for Treasury securities. I understand that they are really buying and selling money, not the securities.
The problem is balancing credit access versus outright making credit expensive to acquire.
Make it too expensive and you slow economic growth.
At least that's what the Keynesians say with a "fractional" reserve system. The only problem with this system is it benefits asset owners over labourers.
"Basic income for those with the most savings" has been one of my favourite framinga for interest rates.
I mean yeah there are a few banks out there with 4.5% on savings accounts so you can use those.
There's plenty of ways for even the poorest to get direct exposure to 5% interest rates.
Not enough people have that for it too matter. The rich getting richer doesn't cause any real inflation but the masses getting a couple of checks does. It's all a numbers game.
Contrary to what common wisdom would lead you to believe, rich people don't usually hold a high balance. In fact, rich people are often highly indebted and hoard wealth through other means. They're good at using debt to accrue wealth, and reducing having to repay debts (just see our government).
Rich people are like this guy: https://www.youtube.com/watch?v=r0HX4a5P8eE
We're a nation of bail outs and tax breaks for people in debt (ie bailouts for the rich!).
I question this idea because it makes no sense to me.
1. because those rich people who currently hold stocks will switch to interest bearing accounts the moment it makes sense, so looking at what they do today isn't enough.
2. because for rich people to buy overpriced stocks off poor people, those people would have to own stocks in the first place.
3. There is significant evidence that major companies are net lenders and therefore their owners are also indirect net lenders.
4. Rich people have more of everything, including money.
There is not much data about it but there is data about cash holding and it shows a simple relationship of rich people having more cash, duh.
https://www.bundesbank.de/resource/blob/854038/6a6978bac2e4d... Page 19
5. Poor people's most valuable asset is their own healthy body and mind which is a highly illiquid asset. If you ignore this asset it will look like poor people keep the vast vast majority of their wealth as money, which is true but also misleading because having a job is a much greater source of income for them which is not worth giving up for a few percent of interest. Of course I am assuming excessive interest rates here, high enough to cause widespread unemployment, but the rich do want them and they don't care if people end up unemployed.
No, I'm saying that who you think is rich and poor isn't so black and white.
Think about it for a moment. If you could borrow something, and then never pay back what you borrowed, you'd in fact end up gaining wealth...
In other words, I'm saying that the rich more often use debt as leverage to acquire assets, and then work to pay back less in real terms what they owe (essentially nudging their borrowing a fraction closer to stealing), than they acquire wealth by scrimping and saving/lending. Sure they might lend once they have acquired wealth, but they don't initially acquire their wealth that way (it's way too slow).
Governments do this anytime they choose to inflate their debts away. Instead of paying back in real terms what they owe, they bail themselves out with printed money reducing their debt burden. But the principle also happens in the stock market with derivatives (such as with a gamma squeeze for one example), and with mortgages and renting amongst other things.
Additionally, if you work to look... tax schemes are debt favored. This is particularly true when it comes to corporate taxes, as debt financing is tax deductible, but dividend payments are not: https://www.imf.org/external/pubs/ft/sdn/2011/sdn1111.pdf
And lest not mention how interest rates where near 0% for over a decade. Who do you think that benefits? People with lots of debt - and the greater the debt the greater the benefit.
It does not ask or legislate for prices to not go up.
What seems to be happening in Australia is companies are taking the chance to pump their prices. Presumably this results in high profits.
I guess there would be stats that should if profits have been going up during this period of inflation.
If companies are able to raise prices for long periods and make large prophet, that means something is completely broken.
Competition would bring in new people that offer the same goods or services at lower prices. Government regulations controls, etc stop that and interfere with natural markets.
Russia had a long history of price controls, and it never worked well.
Right now, prices are growing, mostly due to an increase in profit margins. If the market is failing us, because it can't optimize those profit margins down, it's the government's job to take and redistribute that surplus.
That's called a monopsony: https://www.investopedia.com/terms/m/monopsony.asp
"A single buyer dominates a monopsonized market while an individual seller controls a monopolized market."
That's true in some markets, but not all.
Also: generic shortages. Generics are a low-margin business with maybe 6 suppliers workdwide. If one facility goes off-line for this or that reason there's going to be a shortage, and slack capacity is punished by the market. Right now the cisplatin shortage is in the news, and again the market is no help.
Your comment is correct except this sentence. In reality, if the US implemented price controls, it would simply reduce the negotiating power of European countries. Prices in the US would go down, and prices elsewhere would increase. The pharmaceutical profits would decrease on net, but there would still be plenty of incentive for R&D (much of which is already derisked by the massive amounts of public money spent on it with zero expectation of return).
I don't know why people rail against Pharma when healthcare like hospitals have huge returns on investment in comparison.
https://www.morningstar.com/etfs/arcx/xph/performance
look how much pharma index trails healthcare
When we discuss price controls, we tend to be talking about situations where the supply of goods is provided by the private sector. Then price controls often lead to supply shortfalls and black markets. It's easy to understand if we make labor to be the good with a price ceiling. Many american companies would love programmers at $20/hr, but they can't find any. Imagine that the government caps said salaries at $20: We'd see fewer people going into the field vs something easier, or that just was allowed to pay more. The companies that still get $200+ worth of value for programmers would still want to pay more, but without the supply, they'd try to skirt regulations by becoming more competitive in indirect ways. Maybe your benefit package would include a mansion, and an expensive company car, and a live-in staff. Keeping prices down when demand vastly exceeds supply is very hard.
There is such thing as excessively high prices though, via monopolies and regulations that force waste. I think that's a bigger reason for the US' healthcare pricing problems than the magic of government healthcare. What socialized medicine does is make sure that even the poorest can afford it, which can be seen as a valid objective onto itself.
Edit/correction: actually, the USDA doesn't operate price floors anymore. "Eventually, the USDA decided it had had enough, ending the price support program in 2014."[1]
Futures are not a good answer for my use case as a dairy consumer.
You're acting like your family has to buy milk by the tankerful or flour by the palletful.
More examples from daily life: The electricity market, board lots vs. odd lots in stock trading, fractional shares, restaurant supply stores.
If that's not price fixing the other way, I don't know what it is.
Like the comment next to mine says, it is likely to ensure stability.
The problem is with smaller countries, where your local milk will be more expensive (and you less taxed) but your neigbor countries' subsidized milk will still be cheaper, and you'd buy that and in the process, destroy your local milk industry.
Reserve bank doesn't want to talk about its roll in credit/ monetary expansion during the pandemic, gov doesn't want to talk about its policies to do the same and not wanting to address inflation through taxation or fiscal policy, business wants to pretend its not self interested and profit seeking, consumers don't want to admit that they might actually have to make some price-elastic decisions or change behaviours based on how much things cost, and everyone wants to pretend that we weren't responsible for fucking up housing over the last 20 years of policy or that there will be real repercussions from the boomers aging out.
So instead we get economic discussion that looks more like the multiple spider-man pointing meme.
Look at the signs:
- increased immigration during a housing crisis.
- pay rises for the masses to push them into higher tax brackets.
- slow gradual rate rises below inflation levels to avoid crashing the markets and to allow debtors to exit their positions without triggering a recession.
They want inflation. In a high inflation environment the entities that win have income generating assets (in this case tax payers) and high levels of debt. The debt essentially gets inflated away.
They are too scared to do anything and risk losing the next election, despite the fact that they literally just won one, and they are too uncoordinated to do anything useful. It's easier to literally sit there and do nothing and put all the blame on the RBA and hope that it magically fixes itself somehow.
The debt has to get paid somehow in order for the government to meet its ongoing financial obligations.
When I say ongoing obligations I am referring to welfare and Medicare.
EDIT:
Australian debt to GDP:
https://tradingeconomics.com/australia/government-debt-to-gd....
For a US perspective see below:
https://uscmarshallweb.s3-us-west-2.amazonaws.com/assets/upl...
Yeah, this worked very well for every country/government that tried this.
Price controls are always either a no-op (if supply meets demand below the mandated price), or lead to shortages.
For the good and simple reason that, if there's 100 units of X and people want 120 units, you have to have some algorithm to decide who doesn't get as much X as they want. With no price controls, businesses see X is selling quickly and raise the price (hopefully before the inventory hits zero all along the supply chain). Long-term, the high price encourages suppliers to produce more; the price provides a feedback signal that says "make more of this."
With price controls, that doesn't happen. The product simply sells out because there's not enough to go around, and the 20 unlucky people who don't get their X are whoever happens to walk into the store when the shelves are empty, or are at the back of the line when a shipment comes in.
Outside of those extremes, it depends on the population of the country/union and how widely the currency is used.
I saw an NPR piece mentioned by trog, but that does not change my viewpoint. The NPR piece appears to not focus on currency usage %, which is why I think it isn’t all that relevant.
"The supply chain" is a global emergent phenomena across a variety of capitalist nations. Personally, I would blame corporate greed that took advantage of short-term supply-demand misalignment transitioning through COVID and now persisting high prices/restricted supply to pad their profits. Capitalism and all.
Perhaps the US government could do more to limit this profiteering or break monopolies, but we are doing a reasonable job supporting re-shoring key industries.
Basically, it comes down to who actually gets the money generated by an increase in M2. If it's people with a low propensity to consume / buy things (i.e. the rich), then extra M2 is not inflationary (caveat: not inflationary for goods. It's inflationary for stocks/real estate/etc instead, since that is what rich people "consume").
If it's people with a high propensity to consume (i.e. the average citizens), then it is.
Capitalism!
It only makes sense to refer to what you described as a phenomenon you want to pursue if you want to run a successful business, but can never be used to describe the economy as a whole.
See also Japan:
Let's say that this inflation is caused by supply constraint (not enough input). The container is starting to dry up. So what do you do? You have two options: you can either increase the input (fix the supply constraint) or reduce the output (reduce demand) to match the low input. The second option is the one the Fed has chosen as the first is beyond their purview and likely too complex and poorly understood to be immediately fixed at all.
Are high interest rates lowering the cost of groceries, gas, or the cost of living in general? No. Are they blowing up everyone's mortgages one by one as they come up for renewal? Yes. Why am I, an individual, being punished for other's mistakes and mismanagement?
"If you planned on permanently low rates, then that sounds like you have mismanaged your mortgage decisions" this is the kind of tone deaf, consumer blaming crap that is going to get our current government booted out and replaced with a regressive, populist conservative government. Hooray. But I guess they deserve it?
Is this how people refer to making poor decisions now?
Since 2008, this has become a more common refrain from the right, that consumers are to blame.
https://www.youtube.com/watch?v=zp-Jw-5Kx8k https://www.cnbc.com/2014/02/24/5-years-later-rick-santelli-...
But it’s also very true that they made the decisions that lead to this.
I’m Canadian so I’m in a similar boat to your country.
We’ve had a terrible government for thr past 10 years and they’ve made terrible spending decisions that have ruined Canada. I like your country, though, we’ll have to wait 3 more years to start to undo the damage the liberals have down to Canada so consider yourself lucky you aren’t from here:(
Rates were at historical lows while a normal Historical rate was around 5%.
If you planned your life around rates that were at levels never seen before then you did make a mistake and people should bear the brunt of that.
That was outright gambling I’d you managed your life around rates not returning to historical norms.
I feel that we should not treat people like helpless children and instead treat them like adults
Limiting inflation doesn't necessarily mean causing deflation.
> Are they blowing up everyone's mortgages one by one as they come up for renewal? Yes.
This is the risk of getting an adjustable rate mortgage, which is a decision.
In many jurisdictions, adjustable rate mortgages are all that are typically available with reasonable rates.
e.g. if I check mortgage rates in Canada, I see 5-year fixed for 4.94%, 5-year variable for 5.79% and 25-year fixed for 9.75%.
If you want to restrict your commentary to the US, you should make that clear in your post, e.g. "This is the risk of getting an adjustable rate mortgage in the US, which is a decision."
Gas is more than 25% higher than it was for all of 2018, 2019, and 2020. It is trending higher, in spite of the pull back from recent highs in the wake of the Ukraine war.
All you have to do is reference Greenspan or Bernanke and what they were saying before the nasty economic events of their time. Those clowns were saying things were largely fine shortly before everything went to shit. They could hardly have been more wrong.
From the article:
>And indeed, higher interest rates may work in the short term, for indirect reasons. If money gets tight enough over a cyclical period, then it could indeed cause a recession and a temporary drop in inflation. The private sector gets squeezed with higher interest expenses and tighter credit standards, and asset prices drop or stagnate.
Fundamental solutions to this situation are incredibly painful and require strong political will accompanied by wide support in society. We do not see it today in the US.
The best solution would be to completely eliminate fiscal deficits (either by raising taxes, or by cutting spending) and simultaneously hike rates. Already issued debt will not be affected by the higher rate, thus resolving the article's dilemma. But good luck selling this solution in today's political environment, especially considering that it will cause a huge recession and painful restructuring of the economy in the short-to-medium term.
So you need to clarify exactly what "got really close to the end of the road" means, because it sounds overly dramatic for no reason.
The rest of your comment reads as imprecise.
The economy can bear higher interest rates. Nothing bad has happened so far. I now think it is an acceptable choice but I still don't like the idea that the central bank is setting the interest rates. In my opinion the central bank should set a low rate but it shouldn't offer banks the ability to borrow at this rate and banks should be trying to get the highest rate possible through competition, not some subsidy by the central bank.
What really takes money out of circulation in a targeted way is taxes. This could be a golden opportunity for Congress to tax negative externalities like:
Nonbiodegradeable plastic
Factory farms
Traffic Congestion
Pollution
Fossil fuels at point of
Extraction
Emission
But instead, Congress only knows how to cut taxes, and therefore the Fed steps up to raise interest rates.
In my opinion, it is the very raising of interest rates that causes the recessions and depressions we want to avoid. They can be far worse than any normal inflation, because in many pockets of the country, there isn’t enough money to di basic things.
For an extreme example, look at Sri Lanka. Then they have to take loans from the IMF/World Bank or from China.
The real solution is not to wait for these global hegemons to solve your problem (they won’t) and develop your own currency, to circulate in your own polity. THEN you have enough control for your OWN fiscal and monetary policy.
That is why we started intercoin.org — kind of an outlier in the world of crypto LOL, because instead of get-rich-quick ponzi schemes and coins backed by nothing, it is the extreme opposite.
Anyways, what do you offer that bitcoin doesn't and what do you don't offer that bitcoin does?
The one thing I don't get and could have been missing in the past... a lot of the corporations and private things, like farms operate on debt. Now maybe it's a bit reductionist, but if you're a farmer operating on debt, if interest rates go up you need to increase prices to cover operating expenses. And this get compounded all the way up to the end consumer as every step in the supply chain marks up by a fixed percent, and because everything is getting more expensive decided lets mark up by a larger percent. So higher interest rates really could be contributing to inflation. And it's just creating a cycle. And with the current levels of debt never seen before in history, it's unlike other periods.
If I was dictator for a decade I’d scrap the whole system and have piles of cash ready to throw at the problems as they pile up, mostly pulled from and staffed by the existing budgets and programs with a fix the problem, document it thoroughly, but be diligent or go to jail policy. Like PPP loans but with accountability and prison for fraudsters. Once the big fires are out and local teams are on top of their communities problems the real work rebuilding a sane, efficient, and equitable system could start.
maybe "sounds like" increasing minimum wages goes directly into consumer pockets. Increased costs due to interest rates do no go directly into consumers pockets. For example you look at the avg farmer, mortgage on the fields, loans on the equipment, and often lines of credit from suppliers for seeds, fertiliser and pesticides. All of a sudden the cost of all of those have increased directly related to interest, even if they raise the sale price of their crop or livestock, they won't make more income. And that money isn't going back into the system like wage increases.
And this compounds up the chain, the company moving the grain from the fields has loans on their trucks, so they raise costs. The middle men are marking it up by a percentage, so that compounds the costs. Than the distributors, and processors, also likely running on lines of credit, now with increased cost directly due to interest, but also marking up by a percentage, that's compounding. Every step that interest rates compounds with every markup and causes an increase all the way to the shelves.
Food and housing, are the two largest drivers of inflation, and also the cost is most directly effected by increasing interest rates. Building now costs more, and builders are also building less supply, because they build with lines of credit.
Everything is much more dependant on debt than ever before.
Interest rates increase
Cost of living increases
Wages increase
Minimum wage increases
Poverty line increases
Off of each line above are costs dependent on them that will react higher, with risk and premium margin, to account for them.
The fed is trying to get ahead of an inflationary spiral by causing just enough pain in markets to arrest price increases long enough to establish a semblance of price stability at which point they should hold to cement stability before gradually easing rates, if nothing else necessitates holds or hikes. excess profit taxes would’ve been a far less damaging tool to arrest inflation but American politicians are so thoroughly captured by the capital class that this was not even considered. Shame on Congress for this. It is important to note that EPT would not stop inflation, but would stop price gouging in its tracks so Congress could use fiscal policy to address pockets of inflation. Classic example of using the wrong tool. Once again the most vulnerable are suffering to prevent even a plateauing of profit to the capital class.
I also think it’s important to note that I’m arguing against my class interests in saying all this. I benefit greatly from policies like these and will continue to both profit off of these policies while advocating for their sunset.
Powell made it clear that the interest rates may have an effect on durable goods (cars) and asset prices (stocks/real estate). Cars and real estate seem to be complicated, lots of other factors playing into prices right now. But clearly for many asset classes, especially startups, the haircut from higher interest rates has landed.
But outside of that, the price of eggs, gas, coffee, basically no change (and none was suggested to ever occur!).
[1] Video and transcript: https://www.warren.senate.gov/newsroom/press-releases/at-hea...
Largely because those are inelastic goods, they are always purchased. While some may be able pull back, most cannot.
Higher interest rates for loans for larger purchases or business purchases/investments certainly are impacted by higher rates.
The answer, directly from the Fed is, "No, our interest rate hikes will not change the price of gas at the pump or the cost of eggs."
As I mentioned, things like houses are complicated, clearly there has been a _bit_ of downward pressure, but there are a ton of supply side complications preventing a big change (building has slowed, people with low interest rates are holding etc).
However the larger economy is a complex dynamic system. In order for an interest rate reduce price inflation or induce price deflation, it would have to reduce the ratio of money-looking-to-buy:goods-services-looking-to-sell. While higher interest rates might indeed reduce the number of potential buyers and the amounts they are willing to pay, those higher interest rates will also increase the cost of production for any producer or service provider that employs any sort of debt financing and thus probably reduce that side of the ratio too. My guess is that overall it's a wash, modulo animal spirits or whatever you want to call the human element of the markets.
Incidentally, hysteresis is hugely important, and often confounding for figuring out these kinds of effects.
Interview with Larry Summers, Former Secretary of the Treasury | The Problem with Jon Stewart https://www.youtube.com/watch?v=tU3rGFyN5uQ
I find it funny that he thinks it's perfectly fine to squeeze as much profit out of your customers as possible if you're providing a non-essential service like he does. However, if you're an egg producer and go through the trouble of protecting your hens from bird flu, you shouldn't be allowed to profit from the increased demand for your eggs when your competitor's hens die out. That's a great way encourage people to pursue exclusively non-essential lines of work.
https://www.bls.gov/opub/btn/volume-12/measuring-shrinkflati...
Yes, anlmost every product and every retailer here in the UK !
“New packaging, same great taste” !
Grapes used to be 500g. Now they vary between 400g and 500g
Butter in smaller shops is 200g instead of 250g.
Plus hundreds of other examples
All you need to know is printing money causes inflation.
The damage is done and there's no painless way to undo it.
This is the price for your covid measures. The bill is due.
This is roughly what each country is up for: https://www.statista.com/statistics/1107572/covid-19-value-g...
Economic theory suggests competition facilitates optimal pricing in the market. Given our landscape of mega-corps this factor is only going to become larger. In fact higher interest rates might even accelerate it by making it harder for startup’s and small businesses to compete.
When you issue too much debt and don't have the income to pay it back (you're running a deficit) you either pay the borrowers back less money than they are due (default) or you pay them back the same amount of money but that money is worth less (you 'inflate the debt away').
I know it's edgy to be contrarian, arguments for restarting the VC/bankster party are going to play real well with the VC/bankster crowd and their beneficiaries (eg Surveillance Valley). And the argument dovetails right in to the political chant that government spending is too high (that magically happens whenever the President is a Democrat). But it's just utterly disingenuous to ignore all of the monetary inflation through the 00's and 10's (both lending based and the deficit from the fraudulent Iraq war), and then point to the straw breaking the camel's back (Covid supply/demand shocks plus stimulus) as the cause.
Main Street has certainly seen plenty of financial devastation on the way down as rates marched to zero, as Wall Street got handed a continual influx of cheap money. Now we're just supposed to accept that damage as inevitably permanent, and believe raising rates won't contain or even reverse the trends? I don't buy it. How about we just leave rates at the moderate [0] level that they are currently at for a decade+, so all that medium term debt can come due, and then see the results?
Right now the markets are still betting that the current existence of interest rates is just a hiccup, and on an eventual return to the ZIRP party. When housing prices have an actual correction and the everything bubble starts deleveraging, then we can start to talk about how much is enough.
[0] describing 5% interest as being "high" is basically broadcasting your limited perspective. Tell me you're still in your IPA phase without telling me you're in your IPA phase.
Now, when people make long term bets, like buying a house on investing in a business, and the expected inflation rate changes significantly, instead of their economic behavior being the key part of the success of the loan for both sides, it's the change in rates. We've seen banks in trouble not because 7% is too much, but because the borrowing decisions they made, expecting 2% inflation, proved to be major losers. Similar things happen in the real estate market: Ordinary borrowers are basically paying double, month-to-month, on the same house bought today than with a mortgage bought 2 years ago. So anyone that built new housing, doing the math to people buying the house for X price, is either seeing less demand, as only people that don't need a loan can afford it, or just a lower sale price, as the same salary can now pay less for a house. Either way, the builder loses on the bet, and houses either don't get built, or become less profitable.
So really, there's devastation either way when inflation or NGDP predictions are far off. And that's how the fed fails: Just not meeting targets in either direction.
But no, interest rates are not value neutral. That sounds like an invocation of efficient market fallacy. For one, interest rates form a lower bound on the amount of yield that is required for a business to be considered viable.
Long term; lies cannot master truth, colonization is over / will reverse.
In practical terms margins are permanently gone, so no more invention / exploration is made.
Either way we are peaking in complexity. Simplify your life or get wrecked.
Private debt is backed by collateral and is not inflationary. Government debt, however, has no collateral and so is inflationary. This debt does not make the world tick.
Now, when the government issues debt, there is no collateral, and hence no constraint on the debt. When the debt notes are paid, they are paid by simply issuing more debt. Hence, inflation.
Banks issuing debt is exactly how the supply of money grows. Central banks influence this process by setting the rate at which banks can borrow from them and various regulations and market operations, QE etc.
If someone has told you that inflation is caused only by government excess spending it is because they are pushing the agenda that government is 'bad'.
You're overlooking the fact that private debt gets paid back, which reduces the supply of money.
> If someone has told you that inflation is caused only by government excess spending it is because they are pushing the agenda that government is 'bad'.
Or read books like Friedman's "Monetary History of the United States".
Feel free to take a shot at explaining why the US has had zero net inflation from 1800 to 1914 and endemic inflation after 1914? What happened in 1914?
The US came off the gold standard in 1914 - so money did not have to be backed by gold (or silver or whatever) - it became fiat. Thereafter private banks were free to create as much money as they liked! (within 'reason') and so inflation (of the money supply) was born.
If the amount of money (modulo velocity) grows in line with the real size of the economy, then prices will remain stable. If the money supply outpaces the real economy, then prices will rise (what we commonly call inflation). If the money supply doesn't keep up, then prices will fall (deflation - this is considered bad because people stop spending). On the gold standard, the only way to grow the economy without causing deflation was to dig up ever more gold. Not really feasible in the modern age, hence fiat currency.
Other banks are and were limited by their reserve requirement. Bank lending has always been limited by the reserve requirement. The reason is because if the bank lends out too much money, there'll be a run on the bank and it will collapse.
> On the gold standard, the only way to grow the economy without causing deflation was to dig up ever more gold.
That's not how it works. The collateral for the loans is the backing. Doesn't need to be gold.
> Not really feasible in the modern age, hence fiat currency.
That's not why the Fed was created. It was created to finance government spending.
"The fractional reserve banking process creates money that is inserted into the economy. When you deposit that $2,000, your bank might lend 90% of it to other customers, along with 90% from five other customers' accounts. This creates enough capital to finance $9,000 in loans."
https://www.investopedia.com/ask/answers/09/gold-standard.as...
"The gold standard is a monetary system where a country's currency or paper money has a value directly linked to gold. With the gold standard, countries agreed to convert paper money into a fixed amount of gold."
I was talking about how fiat came to be, not the Fed
Inflation was my guess as to what would happen when Trump come into office, I just didn’t expect a continued period of low interest rates due to political meddling.
This idea that high interest rates coupled with high levels of public debt are likely to exacerbate inflationary pressures is one I've heard before and one I tend to agree with.
My overall view is that we're now in a situation where there is no longer any good options. Not that this needs to be said it's worth remembering that to reduce debt/GDP a nation must grow its GDP component relative to the growth of its debt. Typically this can be done my limiting the growth of public spending relative to the growth of the economy, but today I think there's reason to suspect we can't do that.
The issue is that in recent years trend economic growth even with the expansion of public debt has been anemic in developed economies. People like to just attribute the growth in public spending to stupid politicians, but the reason every developed country has been doing the same thing isn't simply because all politicians have suddenly became fiscally irresponsible, but that the trend rate of growth in developed nations has dropped significantly.
To prevent stagnation (and in some cases out-right deflation) central banks have become ultra accommodative and governments have spent more money. Despite this increase in public spending it's only just about allowed developed countries maintain a slightly positive inflation rate (around 1-2%).
But this trend can not longer continue now we have higher rates, and at the same time governments also can't afford to spend less. To spend less would lower trend economic growth and this only makes it harder for us to service our debt since we can no longer grow GDP relative to the debt level.
Worst yet would be a scenario where this drop in public spending doesn't just cause stagnant growth, but deflation or recession since in both scenarios the real cost of servicing public debt will increase relative to GDP.
So given demographics and slower trend growth this decade the government probably both has to both increase debt levels to keeping the economy growing while reducing debt levels relative to growth to be confident in its continued ability to service its debt. In my opinion this is probably an unworkable situation.
While I agree with Lyn that we're going to see waves of stagnation and deflation, followed by growth and inflation the only realistic way this ends is with developed nations defaulting on their debt or hyper-inflating it away (assuming they have that option).
This of course assumes that public debt growth is in fact needed to prevent economic from stagnating. If you believe things have changed since the pandemic and we can now grow GDP without increasing debt levels then perhaps we'll be fine, but I suspect the trends in place prior to the pandemic are only likely to accelerate in the coming years.
In my opinion if you want to remain relatively unaffected by what's coming it will become increasingly important to reduce your personal debt levels and avoid saving large sums of money in sovereign currencies.
1) The US could easily lower its debt load significantly, probably without over-impacting GDP. It's just that doing so would be unpopular with certain groups. [1] is a great high-level summary of where the budget goes. Does defense spending really need to be that high? No. Should we really be contributing to runaway college tuition inflation by issuing federal student loans? I don't think so. Could we not massively reduce healthcare costs by revamping the US medical system into something sensible? Etc.
2) If you think high-inflation times are coming, it's actually advantageous to load up on long-term debt and assets in the local currency. For example, if you think we're destined for high inflation and interest rates, locking in a fat mortgage early on is a great thing to do since your interest payment load will shrink relative to your income when inflation kicks in.
3) It's important to think of this scenario in game theory terms instead of singly-player terms. As the article points out, most of the developed countries are all in the same boat now so it's hard to predict how it will play out. It's a bit of an "If everyone looks bad, no one looks bad" situation. The question is whose economy will shit the bed first and how will the other economies on the verge of the same respond?
And the answer to this is pretty clear when looking at demographics trends.
The United States is in a much more favorable demographic position than most, in part due to our comparatively liberal immigration policies.
In Capitalism, we scorn at "price controls", and then go through a tortuous and roundabout mechanism by raising interest rates, so that the increased cost of borrowing causes corporations to cut expenditure which then pushes higher unemployment, reducing purchasing power and consequently reduces demand, all in the hopes that reduced demand would then cause prices to drop. But if the price increase wasn't triggered by higher purchasing power, then this whole rigmarole is meaningless, inflation remains "sticky"
At least they can't have any effect on today's situation. The high inflation (it is coming down - it was 8%% - its down to 4%) was caused by worker shortages after the pandemic.
Fewer able-bodied workers after covid commanded higher prices, just as the serfs who survived the Black Death in the middle ages commanded better working conditions subsequently. The shortages in goods as fewer factory workers could make them and fewer truckers could move them also raised prices.
None of these causes for higher prices is impacted by higher interest rates.
https://populationeducation.org/resource/u-s-population-pyra...
* except the tech market the majority of this audience participates in
Not so much if you’re a recruiter, product manager or have “DEI” in your title.
But after the 2008 financial crisis, the Fed cut rates almost to zero, and the big inflation everyone expected just didn't happen. This makes me think about the idea of a "liquidity trap," where people would rather keep their money than invest it, even when interest rates are super low.
This wasn't just a U.S. thing either. The same happened in Japan in the 90s and in Europe after 2008. Even with rock-bottom rates, inflation stayed low.
I know it's not popular wisdom, but maybe we don't know what the fuck is actually going on. And we should just accept that.
Economics is undoubtedly harder, because people are very non-deterministic.
However, economists frequently advocate for what we can see would have been a more appropriate path, had we not been hamstrung by ridiculous political tribal warfare led by people who do not understand the underlying economics.