These are all good points. To your point about monetary and fiscally induced inflation under Biden, I do not think raising interest rates to address price increases created by tariffs (or an adverse supply shock like an oil embargo) is an effective policy. I think it would be needlessly destructive and ineffective and might only appear c…
These are all good points. To your point about monetary and fiscally induced inflation under Biden, I do not think raising interest rates to address price increases created by tariffs (or an adverse supply shock like an oil embargo) is an effective policy. I think it would be needlessly destructive and ineffective and might only appear constructive in the long run due to the destruction it yielded. It is worse than giving antibiotics to someone who has a viral infection. If signs of monetary inflation resume, I would say raise rates but one is not going to drop the price of eggs or Chinese crap, by raising interesting rates.
I may not have been clear, interest rate rise is to tackle inflation prior caused - nothing to do with the effect of tariffs. (Tariffs have been around for centuries- about time they got the adverse publicity they deserve.)
Interest rates should have been raised much higher prior to Trump, but would have been recessionary and as I said Governments avoid doing what they should to correct the boom they caused by their reckless policies. The only way quickly to reduce price inflation is to raise interest rates to at least, or above, the inflation rate. That hurts, but is over quickly - the equivalent of tearing a Bandaid off quickly, or peeling it off slowly.
Whilst interest rates help with price inflation, the root cause it too much money and the Fed has to use other tools like selling its securities and destroying the money, for example, to take money out of the financial institutions.
Raising interest rates has two effects: first it makes borrowing for business and consumers more expensive, this reduces demand for credit and debt; second it encourages saving, less buying. Both then reduce consumption/demand. When demand falls, price falls as suppliers try to encourage people to buy. More expensive borrowing discourages businesses from misallocation of resources to serve an overheated consumer market.
Tariffs - and their buddies, non-tariffs - are BAD. The only winners are those businesses and market sectors protected by them - even that is short term as everyone is a consumer. They harm consumers, small businesses and workers throughout the economy and overall dampen economic progress.
I certainly don’t advocate them, but they do reduce consumer activity, and economic activity. The by-product may be to reduce price inflation, but the cost is increased unemployment. Unless… there is a devaluation in the currency which stimulates consumption of domestic produced goods - imports being more expensive with a weak $ - and boosts exports as USA goods become cheaper to the World.
Some opine the Trump Tariff escapade is actually designed to cause devaluation of the $. This would be much better for the US economy than higher import tariffs.
In short there are two antagonists at play here: Main Street and Wall Street. High $ value, money sloshing round the top of the economy, high consumer prices = higher profits = higher share values which please Wall Street at the expense of Main Street.
Trump’s tariffs threw a big spanner in the works to the displeasure of Wall Street - and if it’s bad for Wall Street, that’s a sure sign it will be good for Main Street. We’ll see.
Thanks, rereading my own comment, I was somewhat unclear myself. I was basically saying rate increases will do nothing to directly reverse inflation created by a supply shock or by tariff increases and agreeing with your point about interest rate increases addressing the Biden/Powell fiscal and monetary inflation. I also agree that rates should have been raised long ago, before Trump's first term.
The Fed and the US gov has been protecting the assets of Wall St over the needs of Main street for decades. It's so sad to see liberals freaking out over Trump attempting to do something for Main St for once.
"It is worse than giving antibiotics to someone who has a viral infection. " Actually, physicians seem much more willing to give antibiotics, at least to people struggling with respiratory viral infections. They learned during Covid that opportunistic bacterial infections pop up in those whose immune systems have taken a beating fighting the virus, and probably many old people in particular die from bacterial pneumonia than from common cold or mild influenzas.
And while overuse of antibiotics can lead to resistance (particularly if the course is not finished because they feel fine), this is mostly a hospital/ nursing home phenomenon. And most physicians I know who travel abroad take prophylactic antibiotics to avoid Montezuma's Revenge or other bacterial infections novel to their bodies.
Interesting to know - thanks! I was suggesting giving the antibiotics was ineffective but harmless (as opposed to raising rates which actually would do harm to interest rate sensitive parts of the economy while not reducing the cost of eggs -supply shock- or Chinese goods subject tariffs). It is good to know that antibiotics can be beneficial in some circumstances, and your explanation makes good sense.
These are all good points. To your point about monetary and fiscally induced inflation under Biden, I do not think raising interest rates to address price increases created by tariffs (or an adverse supply shock like an oil embargo) is an effective policy. I think it would be needlessly destructive and ineffective and might only appear constructive in the long run due to the destruction it yielded. It is worse than giving antibiotics to someone who has a viral infection. If signs of monetary inflation resume, I would say raise rates but one is not going to drop the price of eggs or Chinese crap, by raising interesting rates.
I may not have been clear, interest rate rise is to tackle inflation prior caused - nothing to do with the effect of tariffs. (Tariffs have been around for centuries- about time they got the adverse publicity they deserve.)
Interest rates should have been raised much higher prior to Trump, but would have been recessionary and as I said Governments avoid doing what they should to correct the boom they caused by their reckless policies. The only way quickly to reduce price inflation is to raise interest rates to at least, or above, the inflation rate. That hurts, but is over quickly - the equivalent of tearing a Bandaid off quickly, or peeling it off slowly.
Whilst interest rates help with price inflation, the root cause it too much money and the Fed has to use other tools like selling its securities and destroying the money, for example, to take money out of the financial institutions.
Raising interest rates has two effects: first it makes borrowing for business and consumers more expensive, this reduces demand for credit and debt; second it encourages saving, less buying. Both then reduce consumption/demand. When demand falls, price falls as suppliers try to encourage people to buy. More expensive borrowing discourages businesses from misallocation of resources to serve an overheated consumer market.
Tariffs - and their buddies, non-tariffs - are BAD. The only winners are those businesses and market sectors protected by them - even that is short term as everyone is a consumer. They harm consumers, small businesses and workers throughout the economy and overall dampen economic progress.
I certainly don’t advocate them, but they do reduce consumer activity, and economic activity. The by-product may be to reduce price inflation, but the cost is increased unemployment. Unless… there is a devaluation in the currency which stimulates consumption of domestic produced goods - imports being more expensive with a weak $ - and boosts exports as USA goods become cheaper to the World.
Some opine the Trump Tariff escapade is actually designed to cause devaluation of the $. This would be much better for the US economy than higher import tariffs.
In short there are two antagonists at play here: Main Street and Wall Street. High $ value, money sloshing round the top of the economy, high consumer prices = higher profits = higher share values which please Wall Street at the expense of Main Street.
Trump’s tariffs threw a big spanner in the works to the displeasure of Wall Street - and if it’s bad for Wall Street, that’s a sure sign it will be good for Main Street. We’ll see.
Thanks, rereading my own comment, I was somewhat unclear myself. I was basically saying rate increases will do nothing to directly reverse inflation created by a supply shock or by tariff increases and agreeing with your point about interest rate increases addressing the Biden/Powell fiscal and monetary inflation. I also agree that rates should have been raised long ago, before Trump's first term.
Thanks to you both, enjoyed reading a thoughtful conversation.
The Fed and the US gov has been protecting the assets of Wall St over the needs of Main street for decades. It's so sad to see liberals freaking out over Trump attempting to do something for Main St for once.
"It is worse than giving antibiotics to someone who has a viral infection. " Actually, physicians seem much more willing to give antibiotics, at least to people struggling with respiratory viral infections. They learned during Covid that opportunistic bacterial infections pop up in those whose immune systems have taken a beating fighting the virus, and probably many old people in particular die from bacterial pneumonia than from common cold or mild influenzas.
And while overuse of antibiotics can lead to resistance (particularly if the course is not finished because they feel fine), this is mostly a hospital/ nursing home phenomenon. And most physicians I know who travel abroad take prophylactic antibiotics to avoid Montezuma's Revenge or other bacterial infections novel to their bodies.
Interesting to know - thanks! I was suggesting giving the antibiotics was ineffective but harmless (as opposed to raising rates which actually would do harm to interest rate sensitive parts of the economy while not reducing the cost of eggs -supply shock- or Chinese goods subject tariffs). It is good to know that antibiotics can be beneficial in some circumstances, and your explanation makes good sense.