I’ve been thinking about interest rates. It seems like I’m always thinking about them.
Inflation is high right now. The gubermints Consumer Price Index says inflation, the rate of increase in prices denominated in dollars over a given period of time, has increased 6.8% this year so far. Shadowstats.com uses the same method the gubermint used in 1980 to calculate the inflation rate at around 15%. The monetarists, dudes like Milton Friedman, Paul Volker, and Allan Greenspan have taught us all that when the Federal Reserve Bank raises interest rates it puts the brakes on inflation.
I’m not so sure. I believe that real inflation happens because an increased number of fiat dollars are being used to purchase goods and services. Sometimes prices go up because actual demand goes up. Plywood prices before a hurricane for example. That’s not inflation. Inflation is caused more dollars chasing the same goods.
If this is so, and it is, there are two ways to make inflation go down. 1. Decrease the money supply. Fewer dollars chase the goods.
2. Increase the amount of goods. Fewer dollars per good chased.
The money supply hasn’t dropped in my lifetime. But inflation went down during the Volker era. How did interest rates damp inflation? I’m not sure they did.
Today I saw this at Lewrockwell.com
Raising interest rates did not effect the M3 money supply. How did they make inflation go down?
I intuit that they did not. I’m starting to believe that inflation fell in the 1980’s not because of the Fed Discount Rate, but because of a productivity boom and an enormous number of new products that flooded into the American markets. Computing improved productivity. (It no longer does this.). Automation in manufacturing improved productivity. More productivity was for sale. This allowed prices to come down.
Additionally, Japanese automobiles, electronics, computers, and other entirely new products appeared on the market. Those dollars again had more products to chase, putting downward pressure on pricing.
I’m aware of the arguments about lowering costs of capital can lower prices. I’m also aware of arguments about currency being debt (which it is) and how increasing the cost of debt should decrease money supply and decrease prices. But look at the chart. Interest rates have gone up and down, the money supply has just grown exponentially.
I think it was the productivity boom of the 1980’s that killed the inflation of the Volker era.
If I’m right, wat means?