Interest Rate Hikes Will Not Save Us from Inflation

WEB OF DEBT BLOG

Rather than making money harder to get, the U.S. government needs to focus on the other side of the demand vs. supply equation.

In prescribing cures for inflation, economists rely on the diagnosis of Nobel laureate Milton Friedman: inflation is always and everywhere a monetary phenomenon—too much money chasing too few goods. But that equation has three variables: too much money (“demand”) chasing (the “velocity” of spending) too few goods (“supply”). And “orthodox” economists, from Lawrence Summers to the Federal Reserve, seem to be focusing only on the “demand” variable.

The Fed’s prescription is to suppress demand (borrowing and spending)by raising interest rates. Summers, a former U.S. Treasury Secretary who presided over the massive post-2008 bank bailouts, is proposing to reduce demand byraising taxesorraising unemployment rates, reducing disposable income and thus people’s ability to spend. But those rather brutal solutions miss the real problem,

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