Can The Interest Rate Lever Control Inflation?

[CaptUSA]

I'm not sure I've seen this question answered here, yet.

First a brief economics lesson for the uninitiated. Economist, Irving Fisher developed a monetarist version Quantity Theory of Money which is readily used. I don't think it was meant to be a "precise" theory; it's meant to be simple but I think it generally holds. The calculation looks like this: M*V=P*T (Money supply X Velocity of money = Price level X volume of Transactions in the economy. What this shows is that when the money supply increases but the velocity stays low, you don't get price inflation. But if both money supply and velocity are high, price inflation is guaranteed. Austrians would argue that the reason you're not seeing the inflation in prices is because it's hitting certain sectors and not others. This time mainly the stock market. I believe both things are true. We know that the economists at the Fed are well versed in monetarist theory.

At any rate back to the question at hand...

I think we know the expected path the economy is going to take. With these trillions of new dollars printed, and the lockdowns to eventually fade (some places quicker than others), the velocity of money is going to pick up. So we're going to start seeing price inflation in the other sectors. And the government and Fed are salivating for that inflation. Who wouldn't want to pay off '20/'21 debt with cheaper '22 dollars? And it allows them to raise the interest rates to give them more levers in the future. So the question becomes, can they control the Velocity by adjusting the interest rate? Left unbridled, a "return to normal" is going to speed inflation (and if a new minimum wage law gets passed in the next 2 years, watch out!) They know an unbridled inflation rate would be distasteful to the American people, so they hope to raise it fast enough to give them their levers and debt service reductions, but slow enough to keep the people from dragging them through the street by their tongues. Preferably, the sweet spot is having the public just mad enough to ask for more increases in benefits due to the rising cost of living, but not mad enough to do that other thing.

So, do you think the interest rate rises will be enough for them to maintain that sweet spot? Or will it get away from them like it did in the 70's?

[TheTexan]

I don't think the amount of inflation has much to do at all with velocity of money. In theory yes but in practice I think velocity of money is relatively static. Most people/businesses already spend/invest money as soon as they get paid. The people who don't behave that way, don't make enough money to make a difference.

I think the amount of money in circulation is a much bigger impact. To date, the fed's activities have been mostly printing money directly into excess reserves, where they have largely stayed.

This pandemic was different in that the Fed's printing is actually going into the economy. This can be seen in the green line below:



https://fred.stlouisfed.org/graph/?g=BIky

Velocity of money, does however determine how long it takes for money printing to manifest itself as higher prices. If velocity is low, it will take longer to see the full consequences of money printing, and vice versa. But I don't think it directly contributes to the amount of inflation, in most non-pandemic cases.

[CaptUSA]

Velocity of money, I think, is mostly a measure of how long it takes for money printing to manifest itself as higher prices. If velocity is low, it will take longer to see the full consequences of money printing, and vice versa.

Right, we're talking about price inflation here. Not monetary inflation. I'm not sure I get your post??

And,

In theory yes but in practice I think velocity of money is relatively static. Most people/businesses already spend/invest money as soon as they get paid. The people who don't behave that way, don't make enough money to make a difference.

I'm not sure I'd call this relatively static:

https://fred.stlouisfed.org/series/M2V

[TheTexan]

Right, we're talking about price inflation here. Not monetary inflation. I'm not sure I get your post??

And,


I'm not sure I'd call this relatively static:

https://fred.stlouisfed.org/series/M2V

The point is, I think the media will use velocity of money as a cover for the real reason of inflation: printing money.

The little green bump in the image I posted above? That's money seeping out from the cracks of a Hoover Dam of Money Printing.

When inflation is allowed to rise, that little crack will burst open, and those "excess reserves" will pour out into the economy like the Niagara Falls.

I hope you have a rain coat.

[TheTexan]

I think the Fed has already lost control and they don't want to admit it. The "2% target" was a lie from the very beginning. They need interest rates near zero in order to keep the reserves. Anything higher, and it becomes impossible to unwind the balance sheet without incurring massive losses.

It will likely be an interesting next few years. Separate or die.

[CaptUSA]

The point is, I think the media will use velocity of money as a cover for the real reason of inflation: printing money.

The little green bump in the image I posted above? That's money seeping out from the cracks of a Hoover Dam of Money Printing.

When inflation is allowed to rise, that little crack will burst open, and those "excess reserves" will pour out into the economy like the Niagara Falls.

I hope you have a rain coat.

Ahh, I think I see what you're trying to say. Yes, the monetary inflation has already happened and it will be the eventual cause of the price inflation. They artificially raised M by printing and lowered V with lockdowns.

But they can't keep V lowered forever with that kind of increase in M. And yes, the media will blame the price inflation on "covid hangover" or some such nonsense. But I'm wondering if the Fed will be able to use interest rates to try to slow it down? And how high will those rates have to get to do that?? They've been keeping them artificially lowered for years now. If that dam bursts, and they can't contain the price inflation with interest rates, what other tools do they have?? That scenario is the death spiral and it could happen quickly. I think they'd have to pull another world-wide freeze of some sort and the nations of the world would have to accept whatever we do. Everything is tied into the reserve currency and we still have the bombs.

[oyarde]

Can inflation be controlled with interest ? Not sure but I know the economy itself cannot . Once interest rates rise a lot your housing market is going to slow to a stand still . That in itself is too large of a pc of the economy to not have ill effect on others. Low interest rates , cheap money is what has been driving that market.

[oyarde]

Once the avg 30 yr loan goes 4 to 8 or more and banks start requiring more money down your destined for 1970's .

[TheTexan]

The only solution I think, is to double down on the money printing

Need moar

[Krugminator2]

The Fed doesn't directly control interest rates. And interest rates don't control inflation. Expectations from people holding cash about future Fed policy is 90% of monetary policy and the biggest impact on how much inflation there will be. The other 10% is the current fluctuations in the growth of the money supply. Interest rates are just a byproduct of actual monetary policy.

When rates are ultra low near zero, that is an indication that the Federal Reserve is being too tight with monetary policy not too easy. If the Federal Reserve eased more rates would actually rise as inflation expectations rose. The opposite is also true. When rates are high like the 1970s money was too easy. Had money been tight rates would fall. Rising interest rates don't cause inflation to fall. Interest rate changes are just an effect of changes in expectations about inflation but have no impact on inflation.

A current example is Argentina. Overnight bank rates are 38%. Is money super tight there? Of course not. Inflation is insanely high. Monetary policy is too easy.

[Madison320]

Velocity of money, does however determine how long it takes for money printing to manifest itself as higher prices. If velocity is low, it will take longer to see the full consequences of money printing, and vice versa. But I don't think it directly contributes to the amount of inflation, in most non-pandemic cases.

I'm not really disagreeing with you but I wanted to make a point about velocity of money. Money velocity is meaningless, in my opinion, because it can't be controlled, it's a dependent variable, an effect, not a cause. Using the money velocity to predict price inflation is like watching for wet sidewalks to predict rain.

Printing currency always devalues the existing currency but it doesn't always show up right away and it doesn't hit all prices evenly. I read a book about a guy who's lived thru 3 hyperinflations (2 in argentina and 1 in chile), and he said cars and houses were dirt cheap because people were using all their money to buy food.

I don't why it's taken this long for the money printing to hit the grocery store, but it will eventually.

[Krugminator2]

I'm not really disagreeing with you but I wanted to make a point about velocity of money. Money velocity is meaningless, in my opinion, because it can't be controlled, it's a dependent variable, an effect, not a cause. Using the money velocity to predict price inflation is like watching for wet sidewalks to predict rain.

Printing currency always devalues the existing currency but it doesn't always show up right away and it doesn't hit all prices evenly. I read a book about a guy who's lived thru 3 hyperinflations (2 in argentina and 1 in chile), and he said cars and houses were dirt cheap because people were using all their money to buy food.

I don't why it's taken this long for the money printing to hit the grocery store, but it will eventually.

M2 growth and expectations for future M2 growth determine inflation.

Between 2009 and 2019, M2 money only grew at 5% annually. The economy grew at 2.5% annually over time, so the M2 growth rate minus economic growth roughly matched the inflation rate. So that explains the low inflation rate.

M2 grew at 26% since Covid hit last year and is projected to grow by double digits in 2021. Higher inflation is a certainty this time. Part of the reason it has been slow to show up is because people have been slow to anticipate inflation because there have been so many inflationistas the last 11 years. This time actually is different. And once the psychology changes people will start to bid up prices.

Growth in M2 doesn't have to match the inflation rate if people anticipate the Fed dramatically slowing the growth in M2 in the future. Expectations of monetary policy are far more influential than the current stance of money policy.

[Pauls' Revere]

I think they will raise treasury yields as they are starting to do. This will suck dollars back into the government to be held in treasuries. Either as 10 years or 30 year bonds and lock the money up to manage its distribution. Its printed but not "released" into the economy.

I vaugely remember them doing something similar back during the housing crisis of 07/08. The there was "Operation Twist."

[Madison320]

M2 growth and expectations for future M2 growth determine inflation.

Between 2009 and 2019, M2 money only grew at 5% annually. The economy grew at 2.5% annually over time, so the M2 growth rate minus economic growth roughly matched the inflation rate. So that explains the low inflation rate.

M2 grew at 26% since Covid hit last year and is projected to grow by double digits in 2021. Higher inflation is a certainty this time. Part of the reason it has been slow to show up is because people have been slow to anticipate inflation because there have been so many inflationistas the last 11 years. This time actually is different. And once the psychology changes people will start to bid up prices.

Growth in M2 doesn't have to match the inflation rate if people anticipate the Fed dramatically slowing the growth in M2 in the future. Expectations of monetary policy are far more influential than the current stance of money policy.

I would argue that if the monetary base (M0) secretly doubled, prices would double over time, despite the fact that nobody knew about it.

But yeah, psychology is a big factor, especially in the short run.

[Snowball]

I think they will raise treasury yields as they are starting to do. This will suck dollars back into the government to be held in treasuries. Either as 10 years or 30 year bonds and lock the money up to manage its distribution. Its printed but not "released" into the economy.

I vaugely remember them doing something similar back during the housing crisis of 07/08. The there was "Operation Twist."

Your expectation regarding T-Bill yields is right, but the money is not printed. To be printed by the U.S. Treasury is only necessary
when they want to increase money velocity on Main Street, which, of course, rises inflation. The Fed itself does not print.

All that is printed is released.
All that is released is not (yet) printed, but may be in the future. It also may never be printed, but rather stay in non-dollar assets.
All that is funded is not necessarily printed, nor released.

Emphasis on Yield Curve Control is coming. This will assure the gradation of "pretty" yield curves on public debt,
so as to encourage serious debt investment, but not encourage temporary, short-term debt purchases becoming too profitable.

The system exists in order to create the illusion of a benevolent and necessary oligarchy, and a new, "sharing" feudalism.
This feudalism does not share real assets, but rather merely responds to political pressure by distributing just enough to
the serfs to keep them participating in the "economy" (being a term maniulated to conceal the true conspiracy).

The primary illusions involve the perception that debt produces public weal, and that debt instruments are not mechanisms
of political tyranny. Of course, both are lies. It is all lies piled upon lies; the study of liberal economics is an exercise in mental
subjugation and carefully concealed Satanism.

[Pauls' Revere]

Your expectation regarding T-Bill yields is right, but the money is not printed. To be printed by the U.S. Treasury is only necessary
when they want to increase money velocity on Main Street, which, of course, rises inflation. The Fed itself does not print.

All that is printed is released.
All that is released is not (yet) printed, but may be in the future. It also may never be printed, but rather stay in non-dollar assets.
All that is funded is not necessarily printed, nor released.

Emphasis on Yield Curve Control is coming. This will assure the gradation of "pretty" yield curves on public debt,
so as to encourage serious debt investment, but not encourage temporary, short-term debt purchases becoming too profitable.

The system exists in order to create the illusion of a benevolent and necessary oligarchy, and a new, "sharing" feudalism.
This feudalism does not share real assets, but rather merely responds to political pressure by distributing just enough to
the serfs to keep them participating in the "economy" (being a term maniulated to conceal the true conspiracy).

The primary illusions involve the perception that debt produces public weal, and that debt instruments are not mechanisms
of political tyranny. Of course, both are lies. It is all lies piled upon lies; the study of liberal economics is an exercise in mental
subjugation and carefully concealed Satanism.

Thanks for adding reputation to this user. May you be lucky enough to receive the same Reputation back in turn.

[ClaytonB]

I'm not sure I've seen this question answered here, yet.

Short answer: The Fed can only increase inflation. They can also cause a deflationary collapse, as they did in the Great Depression. But they cannot arbitrarily raise/lower the overall prices of things in the market, even though they desperately wish they could. As a rule, once new money is printed, there is no realistic way to "un-print" it.

First a brief economics lesson for the uninitiated. Economist, Irving Fisher developed a monetarist version Quantity Theory of Money which is readily used. I don't think it was meant to be a "precise" theory; it's meant to be simple but I think it generally holds. The calculation looks like this: M*V=P*T (Money supply X Velocity of money = Price level X volume of Transactions in the economy. What this shows is that when the money supply increases but the velocity stays low, you don't get price inflation. But if both money supply and velocity are high, price inflation is guaranteed.

The velocity theory of money is based on the "circulation" model of the economy. Which is nonsense (Keynesianism in disguise).

Austrians would argue that the reason you're not seeing the inflation in prices is because it's hitting certain sectors and not others. This time mainly the stock market. I believe both things are true. We know that the economists at the Fed are well versed in monetarist theory.

We are "not seeing" inflation because the Fed is actively concealing inflation (with the help of Wall Street). They don't even track core CPI factors of food and energy anymore, which are primary budget items for any household. It's easy not to see the house burning down around you by closing your eyes and putting your hands over them.

Wall Street is working hand-in-glove with the Fed to blow oceans of cash into paper assets/derivatives across a broad spectrum of asset classes. This is not your grandpa's paper-gold schemes, anymore, this is real-time, market-reactive injection of cash into specific assets, funneled through hedge funds, and redirected as market conditions change. We could call it "smart inflation" except that it's really doubly stupid inflation because Wall Street is working to actively overcome the market signals that would drive individual investors to seek shelter in inflation hedges. Instead, investors are remaining fully exposed to the hurricane of inflation that is just offshore.

I think we know the expected path the economy is going to take. With these trillions of new dollars printed, and the lockdowns to eventually fade (some places quicker than others), the velocity of money is going to pick up. So we're going to start seeing price inflation in the other sectors. And the government and Fed are salivating for that inflation. Who wouldn't want to pay off '20/'21 debt with cheaper '22 dollars?

This is not the primary reason that the government loves inflation. The vast majority of the US "debt" could be disowned by the US government overnight. Yes, it would be disruptive, but so was cutting the tie to gold in 1971, so was the Great Depression, and so will be this "Great Reset" which appears to be a stealth bankruptcy settlement on Western debt.

The government loves inflation because it can purchase real goods and services at the pre-inflation prices, while the serfs like us are stuck holding the bill... we only get the newly printed money after it has "trickled down" like piss from the central bankers' diseased urethras... and we're forced to buy the very same goods and services at post-inflation prices with our pre-inflation paychecks. That is why inflation is one of the most regressive taxes in existence. It literally taxes the poor to fund the (political or politically-connected) rich. Unlike with private entities, a maximally powerful public entity like the US government can just accumulate "debt" forever... it's just a number. Who's going to collect? How will they get past the aircraft carriers, subs, F-22s and nukes?

And it allows them to raise the interest rates to give them more levers in the future. So the question becomes, can they control the Velocity by adjusting the interest rate? Left unbridled, a "return to normal" is going to speed inflation (and if a new minimum wage law gets passed in the next 2 years, watch out!) They know an unbridled inflation rate would be distasteful to the American people, so they hope to raise it fast enough to give them their levers and debt service reductions, but slow enough to keep the people from dragging them through the street by their tongues. Preferably, the sweet spot is having the public just mad enough to ask for more increases in benefits due to the rising cost of living, but not mad enough to do that other thing.

"That other thing" cannot happen. A tiny handful of maniacs aside, the American people have been fully and completely domesticated. The ring has been driven through the nose. The much-fabled independent spirit of the American people does not exist any longer. We have achieved peak exasperation. As a culture, we have given up the ghost.

So, do you think the interest rate rises will be enough for them to maintain that sweet spot? Or will it get away from them like it did in the 70's?

I think that the level of manipulation of the market is much more fine-grained than your post would suggest. Using a combination of unlimited cash, and light-speed technological gadgetry, the market can be (and is) manipulated in ways that were not possible even just 10 years ago. Remember the TP shortage? These supply shocks that keep happening are a symptom of total communist control of the entire supply chain. They can say "free market" all day long, but the facts on the ground disprove the mouth sounds that the rulers keep making. The market is being manipulated along the entire supply chain, in real time, down to "local market" resolution, meaning, they're not just pulling "big levers" like the open market rate, they are pulling every lever in the entire market, down to buying up truckloads of toilet paper and stashing them in temporary storage warehouses. That's the level of absurdity that our pretend-capitalist-but-actually-communist economy has devolved to.

"All these are the beginning of sorrows."

[oyarde]

I think they will raise treasury yields as they are starting to do. This will suck dollars back into the government to be held in treasuries. Either as 10 years or 30 year bonds and lock the money up to manage its distribution. Its printed but not "released" into the economy.

I vaugely remember them doing something similar back during the housing crisis of 07/08. The there was "Operation Twist."

That ten yr at 1.6 is still a ridiculous loser . Figure 3 percent inflation .

[Pauls' Revere]

I think the Fed has already lost control and they don't want to admit it. The "2% target" was a lie from the very beginning. They need interest rates near zero in order to keep the reserves. Anything higher, and it becomes impossible to unwind the balance sheet without incurring massive losses.

It will likely be an interesting next few years. Separate or die.

Possibly a massive bond purchase from the IMF?

[TheTexan]

Possibly a massive bond purchase from the IMF?

Maybe. It's times like this I wish Zippy were here, he would tell us why there is no reason to worry

[oyarde]

I think the Fed has already lost control and they don't want to admit it. The "2% target" was a lie from the very beginning. They need interest rates near zero in order to keep the reserves. Anything higher, and it becomes impossible to unwind the balance sheet without incurring massive losses.

It will likely be an interesting next few years. Separate or die.

I think they have lost it .