Re: Interest Rates and inflation

["John O'Donnell" <jackodonnell@xxxxxxxx>]

schulte-baeuminghaus wrote:
>
> Interest-rate hikes bring about a downturn in investment and
> production. These in turn cause job losses - they increase
> unemployment.

Without resort to specific instances, I find nothing here
with which to disagree. However, there does arise the
problems of -- What interest rates are relevant? -- and --
What does one do to reduce those rates?

The typical response by economists, regardless of the
condition of the meaningful rats, is to berate the central
bank and demand a reduction in the interbank (fed funds)
rate which, as discussed in an earlier message, often has
little relevance to the meaningful rates that affect
individual and business purchase decisions. Examine the
issue more realistically and the solution may just be to
RAISE the interbank rate so that the value of the currency
is maintained or restored. This is because a reduction in
the interbank rate may contribute to inflation and / or
expectations of inflation such that the meaningful rates
actually increase while an increase in the ff rate will do
just opposite.

Reducing the ff rate is undoubtedly a cure for deflation but
it is hardly a cure under conditions of an inflating
currency. Can there really be a serious question that the
lowest sustainable interest rates in an economy can be
attained with a reliably stable currency value? And, the
only way to obtain a stable currency value is to tolerate a
minimal fluctuation of value around a base. That is one must
accept a little deflation to correct for a little inflation
and vice versa in order to obtain the feedback signals
needed to determine the actions to take.

> With a range of government expenditures inflexible except upwards in
> times of slowing growth, consumer demand tends to remain high or at
> least to fall less and less quickly than investment, industrial and
> other production, and employment.

The difficulty of rapidly changing effective fiscal policy
does not justify using ineffective monetary policy to
accomplish the desired end of stimulating an economy. The
undisputed (i.e. -- Undisputed, not simply denied; see
http://www.geocities.com/CapitolHill/1067/chap13r3.html )
fact that monetary policy can not reliably CAUSE desired
economic activity remains. The task becomes one of finding a
method to make the fiscal choices more responsive (You could
call the choices automatic stabilizers or some such.) ot the
foolishness of pretending the policy more easily implemented
will provide a cure.

> The result tends to be higher inflation and higher unemployment -
> stagflation as it came to be called.

Stagflation is not some surprise outcome; it is an
inevitable consequence of trying to accomplish an end
(Productive economic activity) with a policy (Loose money)
that causes an unknowable redistribution of purchasing power
that on such occasions results in a decline of the economic
activity one is trying to increase. Develop a fiscal policy
that can guarantee a distribution of purchasing power in the
direction of an increased propensity to consume (i.e. --
Apply Keynes proposition.) and the result will be what is
wanted.

<<SNIP>>
--
			-- jbod

		Tax Privilege, Not People
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