Thursday, June 16, 2022
Economic Mayhem Thursday: Fighting inflation with interest rates
Yesterday, the Federal Reserve Bank announced a 3/4 point increase in the interest rate. It's the biggest single hike since 1994, and is going to jolt the economy in a number of ways.
Basically, inflation is fueled by consumer (and government) spending, so they are trying to reduce spending on things people buy with credit: real estate, cars, boats, etc. Importantly, those sectors are the same ones that have played a role in driving inflation.
That's bad news if you want to buy a house or a car on credit, but not so bad if you can buy in cash. Unfortunately, most people don't have the means to do that, which means that this inflation-fighting measure disproportionately affects people of lesser means. For rich people with cash on hand, it might be a boon.
There aren't a lot of great other options, though. To fight inflation, you can try to reduce spending by:
1) Raising interest rates
2) Raising taxes
3) Reducing government spending, particularly on entitlements (social security, etc) and the military
4) Impose price controls.
The last option never ends well. There is little political will to raise taxes, and not many politicians are going to promote cutting social security benefits and defense spending (though that's a pretty good idea).
Which leaves interest rates. Of course, that decision lies in the hands of an entity outside the three branches of government (the Fed), but they know what they have to do... and they did it.
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I grew up with a grandfather who turned red when corporations reported huge profits. After surviving the depression he began writing about the cyclical economic damage this caused. He had retired from his career in engineering at the Westinghouse Corp. He became an important voice in the national conversation to contain America's huge economic swings. He was joined by corporate leaders and progressive Republicans like himself. Excess profits and the fat cats who received them were the culprits.
Mark, your great grandfather was probably right. About that time, Ike warned us not to lower taxes on corporations below 80%. The reasoning was that when profits are not so attractive, investments in workers and equipment go up and products get cheaper. Today the cost of products we buy includes the massive payments to those who do not add value. It may be time to dig up Bompa's papers.
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Mark, your great grandfather was probably right. About that time, Ike warned us not to lower taxes on corporations below 80%. The reasoning was that when profits are not so attractive, investments in workers and equipment go up and products get cheaper. Today the cost of products we buy includes the massive payments to those who do not add value. It may be time to dig up Bompa's papers.
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