It is actually pretty simple: Inflation is caused by too many dollars chasing too few goods.
You can either create more goods—something the government cannot do. I guess the government could ease import restrictions and incentivize companies to be more productive. But these were not the reasons for supply shortages.
Second, the government can suck dollars out of the system. This is done through taxes and interest rates.
The Fed will have to keep raising rates until they are at or higher than the PPI which is the wholesale inflation rate. At this stage it looks like the two lines are going to cross at around 5-5.5%.
There are a lot of causes for this stuff. But the solutions are much, much simpler. And none of them are “pleasant.”
Or increase tariffs an promote domestic production.
“I guess the government could ease import restrictions and incentivize companies to be more productive.”
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You touch on an interesting point. There’s too much focus on the demand side.
It seems that there’s a lot more that could be done to incentivize more production and supply to help bring down inflation. But that doesn’t make the banksters as much money as lowering interest rates does.
Yes. It is complicated deep down but too many dollars chasing too few goods is the simple reason for this inflation. M1 and M2 easily indicate that the consumer coffers are flush with stimulus money leading to more money than good sense. On top of flush cash is shortage of goods and productivity and the panic mass migration motivated by loaf from home and the changing workforce led by various demographic factors.
The 70s were different but the effect was the same. It was not too many dollars chasing too few goods; it was energy costs imposed by retaliatory actions of the arabs. What I saw then that had to be crushed was a fever of greed and fear that suppliers would be left behind and miss out on higher prices. It was an upward death spiral. I was a new engineer in the oilfield then. We used inflation factors for our budget for wells that would be drilled only months after the estimates were done, the inflation corrected estimates were always too low and a line was added to our after action reports for inflation related cost increases.
We saw prices increase but not so much for daily goods as we do now. We did not see appliances double or food go up as it does now. They did in fact go up but not by shocking amounts such as eggs and butter are now. 8 bucks for a carton of 18 eggs when they were around $3 or less?
I have to consider that my impression of cost was motivated by my perception of normal as a much younger man. My view of costs was relative to not much and in the light of ever increasing income from promotion. That is a lot of what we are seeing in the youngsters now.
At the end of the day, considering it now, I’m not so sure that Volker’s tough tactic is all that, or even most of what, led us out of inflation but instead the crash in oil prices in ‘82 from oversupply both domestic and arab. The latter was orchestrated by Reagan to crush the Soviets but it also had the effect of beating inflation. It was devastating to the oilfield but good for the nation at the time. I laid down 18 rigs in just about two months in late ‘82, some before finishing the well. Oil and gas were a difficult business for just about two decades after that as one hammer or another continued to fall in regular succession.
Relatively cheap energy has an uplifting effect on Americans like in no other country.