11 Comments

In Canada, when the first Trudeau govt embarked on fighting inflation with interest rates after wage and price controls, I wrote to them and pointed out that they were trying to use gasoline to put out a fire.

It was my belief then and now that in addition to other unfair impacts, higher interest rates contributed to higher prices at every step of the supply chain as businesses experienced higher credit costs for manufacturing and shipping their products to retailers who also experienced higher credit costs while awaiting the market to clear their “shelves.” Those higher credit costs would find themselves a part of prices forcing another cascade of effects on labour costs and hours of work.

I could see that to reduce the credit charges, retailers will clear their shelves by lowering prices but that will have limits.

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So do you recommend zero interest rates in perpetuity?

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I do not believe in carving anything into a stone tablet. I recommend reading Price in a Mixed Economy by William "Bill" Krehm to first understand it. And then look at the role of interest rates in a complex economic system per Blatt and Steve Keen.

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Thanks for responding. Can you provide an example of when raising interest rates would be a good idea?

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I really cannot. Can you?

It is a complex issue but it creates a hardship for significant numbers of people. For example, why should people pay more for a mortgage from their relatively fixed (or even reducing) incomes when renewing it at a time that interest rates are being raised to fight inflation when the causes of inflation itself cannot be clearly identified.

A solution to a problem must have the same number of variables or factors as those which caused the problem. Inflation has been defined as an average general price increase across the board which is determined by an arbitrary set of measures called the CPI or Consumer Price Index. Thus the possible factors causing inflation are submerged. So then you look at "core" inflation but to what extent is that tracked through the complexity of the economy?

Take energy as another example. It is essentially free (sunlight) but the technology to access it is the factor whether it is bound up in fossil fuels or minerals or carried in copper wires -- you get the picture. The price of that technology is determined arbitrarily and affected arbitrarily by interest rates. It does show that supply and demand notions do not actually affect the price of goods and services which then casts that aspect of economics into doubt not to mention the disruption to any supposed equilibrium.

How do higher interest rates help access that free energy that we need to heat our homes and bring food to our markets? Why should using that technology suddenly cost more this week than last? What exact and ACTUAL problem as opposed to a theoretical one was allegedly caused by lower or zero interest rates and therefore what problem is being actually as opposed to theoretically solved by raising them?

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Good points, all, sir. You are indeed a wise man. I'll mull over your responses again to see if I fully understand them. My first thought is, Why even have interest rates? Why can't a bank just charge a flat rate for a loan, like buying anything? But I'm over my head in these deep waters.

Thanks, again, and I might get back with you with further questions, but I hate to pester you, too, so we'll see what the voice in my head tells me to do.

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Thanks! Your clearly written perspective on inflation is quite helpful. The various news channels either sensationalize inflation or revert to simplistic sophistry.

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Am a very big and vociferous supporter of MMT, but I'm not a macroeconomist, and need to understand MMT better so as to explain it to others, especially online.

Thus, in general, I ask, If MMT is descriptive and not prescriptive, isn't it severely limited? Like the plumber wading in waist-high water in your basement, would he just say, Yep, your basement's flooded, three feet deep, but his guess as to the cause is no better than anyone else's?

You admit that the hills are chockablock with solutions to higher inflation, but that MMTers are more or less guessing, too, because MMT can really only deal with preventing inflation, not eradicating it. That's like the plumber saying, Well, I told you to get all new plumbing; now it's too late; I'm not sure what to do. I'll try some things; maybe something will work.

Claudia Sahm said to "be wary of Larry (Summers)," but he's looking pretty good right now: He said that huge cash outlays are guaranteed to cause significant inflation. He was right.

As a layman, I'll probably always be at least slightly in the dark, and I have more questions and comments, but for now let me say that I really appreciated and learned from your latest submission, the best yet. I've read it twice, trying to glean all its insights, and saved it for future re-reading. And I have your book full of my yellow highlighted sections for perusal. Macroeconomics is complex, but essential: We've got to get out the perennial hole too many Americans suffer in, including, of course, children. This can't wait.

Thanks again!

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Not that I'm any sort of an expert, but is Summers right? Congress spent exorbitant amounts of money in 2008 to prop up the disastrous economy and the Fed began its massive QE program, all resulting in huge injections of money into the economy. Since then, we have only spent more money in Congress and the Fed has not cleared any significant amount of bonds from its balance sheet, giving into the stock market during the "Taper Tantrum." Further, the Fed has maintained near-zero rates for an insanely long time. Through all of this, inflation remained out of sigh and out of mind, no? That is, until COVID.

That seems to suggest, in my opinion, that our current inflation is not DIRECTLY a money supply issue but rather that pent up demand (demand-pull inflation) and supply chain issues/worker shortages/wage increases (cost-push inflation) are capitalizing on the larger money supply.

Yes, there is too much money chasing too few goods right now, but are the cash outlays really the cause of that? Or are the effects of the increased money supply only being felt because of the other issues?

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I can't answer authoritatively, of course, as a layman having taken one economic course in college in which I made a D, but from what I've read, heard, seen, and thought about, it does look, to me, as a supply problem, no doubt worsened by pent-up demand, as you said. If gas were plentiful, and if price-fixing, monopolistic OPEC didn't exist, prices should go down.

I agree with Herb Wiseman (above) that raising rates won't cure inflation. In fact, Dr. Kelton mentions prominent MMTers (Randy Wray et al.) that argue that high rates hurt everyone and fix nothing.

Now that we have 7 percent inflation, it's gonna be a dogfight to get that number down quickly. But some experts are saying that it will, say, by 2023, be tamed, a result of Covid largely disappearing and supply lines being fully functional again.

Be prepared to see many pushing panic buttons over our inflation rate, plus it gives us impatient Americans something to complain about, but, granted, higher prices do hurt the little guys a lot. Rich guys will grouse, but they won't miss any meals, just lose a million or two due to inflation.

It's a hard-knock world, and the rain falls on the just and the unjust.

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Superb as always. Huge challenge to end a pandemic; MMT offers the strategic framework we could devout our resources and make enormous progress, i.e. govt financed vaccine and logistics to get shots in arms, pretty sweet. The enormous constraint that endemically stymies shared advances remains us. Servant leadership would do us some good. Thank you Stephanie K for your leadership.

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