Question How does raising interest rates control inflation?

[Lab00Rat]

@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.

Yes, and no.

Resetting the game of financial life is a banking term called Rowing the Economy. It's pure bunk to inflict intentional stress to cause cyclic distress. It's a fact of our lives, yes; however, it's complete crap in practice because it's designed to proportionally favor banks or the wealthy at the expense of the working. Very few make the jump up in class, and most are knocked down in class. This cycle will unfortunately affect standard of living for 95% of everyone. Even if you have no debt with high reserve cash, the best situation, you will be affected. What the comfortable cash reserve level will be is unknown at this time, but the return to "normal" will not be any time soon.

Be mindful of your financial institution. Your large cash reserve is at the mercy of poor decisions from others. Savings are not saving these days as 20 years ago. Your savings are an "investment" in the bank holding your moneys. Being an investment, the bank can leverage your funds for their activities. It's not always good activities that have sound financial backing. Downturns like this one can ruin banks. Lehman Brothers was the 2008. Now, every institution can be a Lehman.

The financial tools to recover from a downturn were used and exhausted by the Fed. There will be no way to use the same tools to recover from this cycle. New tools will be needed, but likely will not be invented until way too late to help. I'm all for a really old tool that has worked well in the past. Lincoln and JFK both used it to end inflation and restore purchasing power of the dollar. Unfortunately, it's taboo to suggest as both were "removed" from office after implementing the program.

The removal of "unrealistic" demand is a function of inflation. Inflation is the direct response to demand and is proportional to cash availability. Even if you have a large pool of cash at hand and no debt, prices will continue to rise until the all cash reserve is reduced to production capacity. The devil in this detail is that the US doesn't produce very much. Therefore, the cost of goods will be balanced globally and not nationally. Western society is in for a really rough ride. Strong dollar is the best we can hope for because that will allow the US better purchase power in the global demand vs other weak currencies competing for the same products. This cycle downturn will be intensified by sovereign debt purchasing product that has no limit or reserve. Your pile of cash means nothing to the power of the printing press. There are a few ways to protect against this type of inflation, but it's a personal choice. I won't elaborate because I'm not an advisor.

(Un)fortunately, there has been a race to the bottom with printing for most currencies. We are not the only ones to print into inflation, and it's been steady for a decade. This apples to both purchase and sale of goods made in the US! You are competing on a global scale for products made here because another nation can buy what we produce if they are willing to spend more to acquire it. Gas and oil export are a good/easy trail to follow. Farm goods like pork is another to look into. Bottom line, ALL goods produce are open to global trade and you are buying at global demand prices. Again, a strong dollar helps keep these needed goods in the US because our purchase power is greater than a weaker currency. Cold prediction for demand of staple goods will have nations printing sovereign debt to buy food goods. Therefore, food prices will skyrocket as nation states buy at any cost to protect from starvation. Unfortunately, it's currency suicide for debt leveraged like this, but desperate times will have desperate measures.

If this becomes a depression, all bets are off. Use Japan as a case study for modern version of a decade in stagflation (following a depression). For a slightly older case study, look to Cuba and their coping mechanisms for financial hardship post collapse. I hope it's not as bad as either, but we live in a society where we are not the same. Your neighbor could be struggling like Cuba, and the major cities (or you) mirror Japan stagflation.

Just my opinions...

 

[Scooterfan]

If this becomes a depression, all bets are off

Hadn't really thought about this possibility. I understand this has a long way to go, and would agree a recession is a distinct possibility, but didn't factor in a depression. That would be new territory to almost all (USA) citizens.
It's sad this administration is leading us down this path, and I pray for a (huge) change in leadership (soon), but until then perhaps I'll raise some chickens and maybe a pig Blessings

 

[RangeMaggotBob]

TRYING not to get political, BUT- not saying who, because it's obvious- they're taking us right down the drain.

 

[Lab00Rat]

TRYING not to get political, BUT- not saying who, because it's obvious- they're taking us right down the drain.

Both parties are guilty of printing, but the Federal Reserve is the root of all evil we have had for the past 100 years. I square all the blame for those who are responsible for managing to money supply, but surrendered it to private central banks. The Federal Reserve got us into this mess by over printing our currency. Congress let them do it.