Comment by TaurenHunter
7 days ago
Perhaps, we are mixing 2 things:
1) Economic/Monetary Inflation, which is an increase in the money supply in an economy driven by government or central bank ("print money").
2) Price Inflation, which is an increase in the general price level of goods and services that people typically notice at the groceries or gas and usually derives from monetary inflation, but can also be due to the new tariffs.
Is the Fed going to do the same confusion and use 2 to justify higher rates for longer?
I think they shouldn't unless they're being disingenuous and politically motivated (push just enough to make the entire Trump mandate an unending crisis until Democrats get back in power).
According to monetarist theory these two things are one and the same.
The main source of "money printing" is banks making loans. And this is what the Fed targets when it raises interest rates.
I'm not quite sure whether tariffs really do lead to inflation. It depends on how consumers and companies respond to higher prices of imported goods and to the general sense of uncertainty.
> The main source of "money printing" is banks making loan
Sounds like a similar mechanism as the UK. I'm not aware if the system is exactly the same or not.
It was apparently so poorly understood in the UK that the bank of England wrote a paper (Money creation the Modern Economy https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...) in 2014 to clarify where new money comes from. There's a good summary here https://positivemoney.org/uk-global/archive/proof-that-banks....
It's not something I was aware of until recently, but I was surprised that it was not more under the control of the government and central bank (in the UK, anyway, if it turns out it's different in the US).
>Sounds like a similar mechanism as the UK. I'm not aware if the system is exactly the same or not.
Yes, this mechanism is called fractional reserve banking. It's in use basically everywhere.
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>I'm not quite sure whether tariffs really do lead to inflation. It depends on how consumers and companies respond to higher prices of imported goods and to the general sense of uncertainty.
They won't absorb the new costs. That has not happened in the history of capitalism as far as I am aware. Higher costs will inevitably equate to higher prices without an offset somewhere.
Investors don't like unpredictability, which Trump has already shown to be very unpredictable in regards to tariffs (the whole on again off again stance changes for example).
Higher prices also lead to less buying activity. History has proven this out too.
>They won't absorb the new costs.
If you mean that importers will not absorb costs then I agree. They will pass on most of the costs, if not immediately (to avoid sticker shock) then over a period of time.
But the question is what happens to demand for imported goods and demand for everything else. At constant money supply, prices of some goods going up could put pressure on the price of other goods and services, although this seems less likely as the tariffs are so extremely broad.
A lot depends on how people respond. Will they reduce saving to pay higher prices? Will they take out loans to maintain living standards (creating new money in the process)? Or will they cut back on spending causing a recession?
And what will companies do? Will projects be put on hold because the return on investment is too unpredictable? What happens to the dollar? Will Trump cut other taxes to offset his tax hikes on imports? What about the massive budget deficit?
I think this is all highly uncertain.
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> I think they shouldn't unless they're being disingenuous and politically motivated (push just enough to make the entire Trump mandate an unending crisis until Democrats get back in power).
They've been saying since the Biden administration they are going to keep raising rates. If the Trump regime's choices drive us into an unending crisis, bailing him out with rate cuts would be the politically motivated choice. Continuing to raise rates is just sticking to principles.
Not true. The Fed did lower rates leading up to the election, seemingly to postpone a crisis until Democrats got elected (which didn't happen).
https://www.reuters.com/markets/us/federal-reserve-expected-...
That’s a speculative article that was wrong. I was also somewhat misremembering JPow saying he wouldn’t cut rates after the inauguration as him saying he was going to raise them. Rates changed a small amount in September, then they did two big cuts after the election. Not really evidence of political bias in any case.
The article does not say that....
The gist is that Republicans are going to blame the Fed of playing politics when I terest rates are lowered, and blame Biden for when interest rates rose. Rates go up, Bidens fault, rates go down - politics. That is the republican talking point. The article ascribes no direct motive but says the reduction in rates is due to the fed claiming victory on inflation. Which, was wel down and approaching target when the fed started cutting rates.
It is ironic that an article that says (paraphrasing) "here is what the political talking point would be", be used as __evidence__ for that talking point.