This could be considered a good thing. The whole point of increasing interest rates is to lower business investment and consumer purchasing power, which is what we need to do to combat inflation (or magically fix all supply chain issues.)
It's a little short of full-on financialization of a cattle. So, perhaps closer to beef/dairy futures? What's missing is a bank classifying the cattle, selling them fractionally, and creating a hedging instrument.
If you own oil or soy futures, you can go get the product if you like (to everyone's inconvenience). This is not far off.
Why people there can't just store value in a hard currency, like USD? That's the typical approach in countries with shitty currencies. Even if it's illegal, I can't imagine enforcement being that great.
I don't think people should downvote you for disagreement, but I do disagree with your analysis. The US has a system where the Fed lets banks manage the money creation, and they control that by changing the interest rates to change the bank's incentives. In Zimbabwe, the government prints money directly (or at least they did under the Mugabe government, I am not up to date on their current affairs), which means that the central bank interest rate doesn't restrain their money supply growth.
That does have some relevance to the US because the federal government can borrow+spend way more than a small country with a bad credit score - but since the interest rates they borrow at are coupled to the Fed rate, rising rates should in theory slow that down.
The Fed is a creature of Congress, which is to say that Congress completely controls the Fed. All talk of the Fed's independence has no constitutional basis. The Fed was created by an act of Congress and can be restructured, abolished, or otherwise changed however Congress likes by subsequent acts of Congress. Indeed, in the history of US central banking, Congress has done so before. Therefore, the Fed's continued existence is predicated on not motivating a congressional majority plus the executive or alternatively a veto-proof congressional majority to change things. Practically and observably speaking, that means when Congress says "print" the Fed says "brrrrrrrrrrrrrrrrrrrrrrrrr." There is no operational limit on how much money Congress can spend. There are real limits though, in particular the productive capacity of the economic zone that does business in US dollars. If, for example, China were to withdraw from the dollar denominated global market, it would be a severe supply shock and result in massive inflation.
Furthermore, most money in the USA isn't even reserves, but rather bank deposits. Theoretically bank deposits are supposedly somehow constrained by reserves, but that hasn't really been true for well over a decade. Raising rates doesn't directly impair banks ability to originate as many new loans and corresponding deposits as they care to. Conceivably, higher rates could reduce the demand for loans from credit-worthy borrowers, or even reduce the pool of credit-worthy borrowers directly, but I'm not sure it doesn't end up being a wash after accounting for inflation.
Personally I suspect most of the effects that we do see are related to hysteresis rather than a fundamental transmission mechanism from interest rates. That is to say, the shocking effects we see from rate increases aren't due to a fundamental change, but rather a lag while market participants to catch up with the new rules of the game.
Another important factor is the prestige media using all of its persuasive powers to convince market participants that Fed actions will result in a downturn. There certainly is a large psychological component to economic activity.
Given Congresses inability to get almost anything done other than the absolute "must-do's" like NDAA and yearly appropriations and then 1-2 big ticket admin items, why do you think that Congress has the capacity, much less the will to control or even exert significant interest over the Fed?
I think that if the Fed stopped acting in the interests of Congress’s real principals, who are observably not the general electorate, then we would see exactly that. It’s instructive to observe the cases where Congress reliably acts promptly and more or less unanimously. Pare off the procedural stuff and other fluff of course.
As a conceptual body it has the authority. The meat bags currently running the show have no motivation. Of course they too are Americans and would deflate their value by changing the rules, which is the problem with thought ending populist chants and mantras like “no new taxes!”
The public is “data structure” illiterate. They’re educated with spoken traditions coupled to vague imagery of hierarchical power structures of history and the work place. I am not sure it’s intentional, more of a Duning-Kruger thing.
As usual any sustained shift in the appropriation of agency is up to the public. Science shows us how to build things, but no theory states “we must build rockets to nowhere.” But “keep your hands off muh capitalism click clack” gets in the way of sincere discussion of fully automated logistics.
Protectionism of spoken tradition in human memory is not going away anytime soon. It’s innate to our biology.
Zimbabwe's economy is non-functional. Stats for inflation and interest rates aren't meaningful to anywhere else. There's no real applicable lessons other than to look at it and feel bad for Zimbabweans stuck in that situation.
Inflation is dumping rocket fuel on that fire. There's a reason that they're fighting inflation with disregard for other consequences: the resulting inequality of continued unchecked inflation is a legitimate threat to the stability of our social system.
It is still wild to me that this is the approach we are taking, things are getting too expensive so let's shrink the economy. That can't be the best solution. We are throwing the baby out with the bathwater.
Not shrink. Slow the growth of. Decelerate is different from stop.
The real problem isn't any particular position, velocity, nor even acceleration. Those can all be planned for. It's the 4th time-derivative, jerk, that messes us up.
That is a semantic debate on whether we cross an axis on a graph and we won't know whether that will happen until after the fact.
We are intervening to make the economy smaller than if we didn't intervene. I think that qualifies as "shrinking" even if the growth is what is shrinking and not the overall economy.
> We are intervening to make the economy smaller than if we didn't intervene.
Depends on what time scale we're thinking about. True in the short-term, but I think the long-term expectation is that growth will be more stable, and therefore greater, with this short-term intervention.
> I think that qualifies as "shrinking"
Yes, and no. Yes, in that oh-so-important technical, relative sense. No, in that it's not the best choice of words.
Literally nothing can be planned for. Compare the Fed dot plots at any given meeting since 2008 with actual rates a year, or three years hence. Look at the BoE and BoJ flail wildly around right now, absolutely shocked by the consequences of their own actions less than a year ago.
These people have arguably a worse predictive ability than the canonical South Park Chicken ritual.
Central Banking is the only industry I know of in which you can be catastrophically wrong, always, and retain job security. Great gig, if you can swing it.
It's the only way we know of to stop greed/fomo running rampant. Folks need to be put in a time-out to cool off and force them to reprioritize. We like to think of the market as this calculated and rational entity. It's far from that, in fact it's closer to the opposite of that. The other option is to do price control, but that won't fly in capitalism.
There are other levers that can be pulled. Taxes are one example that could be much more targeted at the specific sources of the "greed/fomo running rampant". We instead chose to take it out on everyone.
I'd put taxation in the same bucket as price control because for this to be effective the taxes would need to be on the rich (in effect to drain liquidity) and that's as likely as price control.
I don't disagree with the unlikely nature of new taxes on the rich. That was basically my original point. It is wild that we decided that we would rather go into a recession than tax the rich and I don't understand why there is seemingly no public pushback against this.
There's historic precedence that increasing rates controls inflation. Yes, it's a very blunt and crude instrument. However, when you know this tool works, trying another tool is too risky to experiment with (in case it fails).
Inflation does have the risk of getting out of hand and being even harder to control. The risk analysis is that whatever pain increasing the rates would cause it pales in comparison to having hyperinflation.
As far as the lack of a pushback: My guess is a combination of apathy and the fact that it doesn't affect the average person quite as much as inflation.
I wouldn't say its the only way we know, rather its the only politically feasible move. Increasing taxes on the wealthy would arguably be a more effective way to take money out of the economy and wouldn't hurt non-wealthy people as bad, but good luck getting that through congress.
The only party that can act right now is the Fed, and the only move the Fed has in increasing interest rates.
The problem is that there's no proven good way to increase taxes on the wealthy. There's two flawed approaches: (1) increase income taxes, which doesn't tax the people who control the majority of the country's wealth, and (2) wealth taxes, which no country has ever figured out how to implement effectively.
> to do price control, but that won't fly in capitalism
Price control doesn't fly in any economic system. Putting a legal floor or ceiling on the price anything doesn't affect what it actually costs to produce it.
That depends on how authoritarian the regime is... However, I was talking about putting a price control over the level/amount of profit. If you look at the financial reports of late you'd see record profits during record inflation.
Asset deflation is a good thing for wage earners. Inflation is the worst possible thing for anyone who works for their money, as it means the wealth of the people who own assets (think 8-9 figure business portfolios, not a single residence) is skyrocketing away from the middle class in both relative and absolute terms.
Another option for lowering inflation is increasing productivity to allow the same amount of money to chase more goods and services, thus resulting in lower prices.
This isn’t 1980, raising interest rates doesn’t fix supply chain issues. This isn’t inflation it’s a real supply shortage. By the fed doesn’t seem to know how to help with that so, let’s just tank everything. Killing demand to get workers back to lower wages and unemployment up seems to be that real goal.
There is a supply shortage in some areas... and there is price inflation as well. That's actually what you'd expect with a supply shortage that isn't very evenly distributed anyway, but when you add dramatic expansion of the money supply in a period of very low interest rates on top of that, you'd certainly expect to see dramatic price inflation to match, as we have. The idea that a supply shortage is causing all of this seems insane.
The "expansion in the money supply" has been going on for 15 years. The supply issues started 2.5 years ago. The inflation started about 2 years ago. So only one of those factors is correlated with serious inflation.
The explicit goal of expanding the money supply in 2009 was to drive inflation in order to combat deflation. It didn't work. We ended up with a decade+ long period of low/no inflation.
Even today, the USD is growing stronger relative to other currencies. So in spite of this continued money supply expansion, Americans are experiencing inflation the least of anyone in the developed world.
That big spike is literally just a change in the definition of M1/M2 money supply. Specifically, in May 2020, the Fed began including certain liquid investment accounts. So you can't compare pre-May 2020 figures with post-May 2020 figures because they are measuring different things and they aren't going to go back and retroactively fix the figures.
While he's wrong to say it "doubled," it has risen ~40% since 2020, and the graph he linked is M2 -- the spike in that graph is not due to definition change -- that's actual money supply expansion. You're thinking of the change to the definition of M1, which did cause a really huge spike that was misleading if you didn't understand the change. The converted figures that do adjust the definition in both periods do show this particular spike (as do graphs using only the pre-May 2020 definition).
The money supply has expanded as much since the monetary policy shifts of 2020 as it did between 2011 and those shifts, and inflation is a lagging indicator. You can't use "oh, we've expanded the money supply before and it hasn't caused inflation" to dismiss the idea that expanding the money supply at several times the speed is going to have a much more dramatic inflationary effect.
