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Question How does raising interest rates control inflation?

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Neal

Staff member
RVF Administrator
Joined
Jul 27, 2019
Messages
11,480
Location
Midlothian, VA
RV Year
2017
RV Make
Newmar
RV Model
Ventana 4037
RV Length
40' 10"
Chassis
Freightliner XCR
Engine
Cummins 400 HP
TOW/TOAD
2017 Chevy Colorado
Fulltimer
No
I saw a headline this morning that the fed needs to rapidly and aggressively raise interest rates - now! I don't get it. This seems like it would kill the economy and stop people from buying. Is this intentional to stop consumers from purchasing? How does raising interest rates help matters other than banks/credit cards or people lending money to make more money?
 
Yes. The idea is to put a damper on demand and slow the economy.
 
Neal, you hit the nail one the head. That's the concept anyway. Remember the Carter administration days...prime lending rate hit 19%. The problems is, this action often leads to a recession (albeit intentional). Nothing like higher interest rates to curtail the real estate market and high priced items (RV's ???). Insiders believe the internals are much worse than disclosed and we are one click away from a corrective recession. A new administration could turn this around quickly I believe (IMHO), but we are probably out of time. But hey, what do I know 😉 What I see as a greater problem is that "Globalization" efforts to date have "hog tied" us to some externals we have little control over. Now that could get ugly. I say, fill 'er up, hit the road, and enjoy GOD's Creation. Blessings

 
Money is cheap, so the velocity of money in the economy is speeding up resulting in inflation. There was no restraint to borrowing from the Fed to expand the economy; however, the expansion has surpassed supply. When production cannot keep up with the money supply, inflation happens. Too many dollars chasing too few goods.
Raising interest rates is one step to recover dollars and slow the velocity of money. Unfortunately, we have a bigger issue in the supply chain that prevents the available dollars from being spent and soaked out of the economy.
Regan implemented a supply side economy in the 80s to reduce inflation. Ramp up all production and reduce taxes, fees, and regulations on the supply side to speed up good. This resulted in the reduction in the velocity of money with the increased interest rates - really high until the inflation was controlled.

We do not have Regan, and we have no supply side support.
The economy is in for a really rough ride because you are correct. Raising the interest rates will slow the economy, but there is no supply to absorb the extra dollars in circulation. The cost of goods will increase and not deflate after the velocity is reduced. Your retirement just got smacked.
 
Print and hand out more money someone said. Uh oh, there is too much money. Now we have to slow the train we pushed over the hill. It is often better to let the economy work and stop trying to fix stuff, which results in other stuff that later has to be fixed. Humans. I will never understand them!
 
Money is cheap, so the velocity of money in the economy is speeding up resulting in inflation. There was no restraint to borrowing from the Fed to expand the economy; however, the expansion has surpassed supply. When production cannot keep up with the money supply, inflation happens. Too many dollars chasing too few goods.
Raising interest rates is one step to recover dollars and slow the velocity of money. Unfortunately, we have a bigger issue in the supply chain that prevents the available dollars from being spent and soaked out of the economy.
Regan implemented a supply side economy in the 80s to reduce inflation. Ramp up all production and reduce taxes, fees, and regulations on the supply side to speed up good. This resulted in the reduction in the velocity of money with the increased interest rates - really high until the inflation was controlled.

We do not have Regan, and we have no supply side support.
The economy is in for a really rough ride because you are correct. Raising the interest rates will slow the economy, but there is no supply to absorb the extra dollars in circulation. The cost of goods will increase and not deflate after the velocity is reduced. Your retirement just got smacked.
This is the correct explanation. You understand how this works 100%.
They increase the interest rate to slow down the money circulation to cool down demand.
 
This is the correct explanation. You understand how this works 100%.
They increase the interest rate to slow down the money circulation to cool down demand.
Quick question if you don't mind, @Pablo, but what's wrong with high demand? That seems to me like a good thing. No?
 
Quick question if you don't mind, @Pablo, but what's wrong with high demand? That seems to me like a good thing. No?
Nothing is wrong with high demand, but you have to be able to satisfy the market.
Read the first paragraph of the original post
"When production cannot keep up with the money supply, inflation happens. Too many dollars chasing too few goods"
 
I'll state the obvious that I don't think any company that can't keep up with the demand wants this problem solved by the government taking away their demand. Companies obviously would prefer to grow, hire, and produce, to meet demands instead of the opposite, layoff employees when demand disappears.

It's going to be interesting to watch Newmar this year. They raised their prices to the point it's laughable and then this happens. We'll see how this year plays out.
 
@Neal

The point is we need poverty in order to have wealth, but we don't need a large pool of poverty.

We have to reset the game of financial life so that some players start over, others hold steady, and a few jump up to the next level.

Runaway pricing on everyday items causes the weak to fail, but also causes those that are normally steady to fail.

The slowing of the market is how new failure is introduced quickly to protect the masses.

Business and individuals strapped with high debt and low cash reserves will suffer, while those with little debt and high reserves will flourish.

Take out the unrealistic demand, and we return the "normal" life for a few more years.

Rinse and repeat.
 

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