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'Stop spending so much if you want lower rates'

⊰ 2022-07-05 by ShaunO ⊱

Of course that's what needs to happen, and will happen - it's just unsaid.

Inflation presently is generally accepted (not universally though) to be a supply side, or external factor, problem. The argument runs that disruptions up and down the supply chain are responsible for increased costs. It's reasonable to assume that very high fuel costs within the supply chain, higher HR costs in supply chains (due to various absences/disruptions from covid and other things), and some good old fashion 'gouging' support this 'supply side inflation' theory.

Raising interest rates is not designed to address this problem directly (in fact you can argue it exacerbates it due to higher finance costs to the supply chain). Rather it's designed to "take a very big hammer and whack demand on the head with it". How it does this requires no magic - it ramps up borrowing costs across the entire economy and those increases come directly out of yours and my pockets. Ergo we have less money, we spend less, we create less demand which decreases the demand/supply ratio.

Nifty trick huh? It's all, theoretically, about that ratio - of demand against supply. If you can't do anything about supply, then reducing demand will, all else being equal, reduce that ratio. The effect should be to slowly reduce inflation, doing so from the demand side. Of course the government and RBA omit to say the unfortunate side effects of this will include a recession, increased unemployment, a major asset price correction, and a few other things I haven't thought of..

I suspect in trying to 'shut the gate after the horse has bolted' (inflation) they will (government+RBA), as usual, over-correct, and we're probably 'looking down the barrel of' a bout of 'proper stagflation', lasting maybe 2-5 years..

buggered if I know 😛

Stop spending so much if you want lower rates


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