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If inflation had anything to do with price stability it wouldn't be used as an excuse to raise interest rates - an action which redistributes wealth and only lowers nominal inflation as a second or third order effect.
I can only remain speechless about the 2nd and 3rd order effects. Long and variable lags I agree. No effect? I beg to differ.
by Sargon on Sat Jun 18th, 2011 at 02:54:25 PM EST
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Why? Wealth redistribution - or more explicitly power redistribution - is the primary effect of an interest rare hike.

Explicitly, people who work have less to spend. Implicitly, they spend more time worrying about how little they have to spend.

Both limit their wealth and power.

But if you happen to own capital - specifically the kind of capital that can be invested in ways that are linked to interest rates - you suddenly find yourself richer without having to do jack.

I think what confuses people is that you can create the same effect by keeping interest rates too low, to inflate an asset or commodity bubble.

The first happened in the UK in the 1990s, where record interest rates created record house prices. The second happened almost everywhere in the 2000s.

The first seems counterintuitive. But because capital owners were making giant piles of money while workers were being made homeless, they had to do something with it, and speculation and "investment" were an obvious choice.

Meanwhile "inflation" is a convenient fiction. The definition varies according to the results you want.

If your aim is to increase spending and productive activity - which is the usual excuse - it makes no sense at all to kick people who are already paying more for basic essentials by also making them pay more for their housing.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Sat Jun 18th, 2011 at 04:57:38 PM EST
[ Parent ]
That's interesting. In your thinking, both high and low interest rates lead to the same distributional outcome. I guess this is because of an institutional failure?

But, barring social revolution, someone still has to run monetary policy. And yes, it's run to control inflation to a large degree. Try explaining to Germans that inflation is a 'convenient fiction'. They know better, as they should. (Do you see any correlation between the fact that inter-war Czechoslovakia was about the only country in Central and Eastern Europe capable to maintain democracy throughout the whole period, and that it was also an area that has escaped hyperinflation? Just asking.) There's some research showing that inflation aversion in nations is a function of existence of inflation crises in the past. If you aren't German, you can't understand what its monetary policy elite is thinking, just because you grew up in a different environment.

Finally, I don't disagree with the fact that interest rates have distributional consequences. A 'fictional' inflation, however, has them even worse, as poor and those on fixed incomes tend to have higher CPI than middle or upper part of the distribution. In inflation is low, the discrepancy gets much less.  

by Sargon on Sun Jun 19th, 2011 at 05:02:44 AM EST
[ Parent ]
Try explaining to Germans that inflation is a 'convenient fiction'. They know better, as they should.

Inflation and hyperinflation are two fundamentally different beasts, with only the most cursory of relationships.

(Do you see any correlation between the fact that inter-war Czechoslovakia was about the only country in Central and Eastern Europe capable to maintain democracy throughout the whole period, and that it was also an area that has escaped hyperinflation?

Obviously.

Hyperinflation happens when you have hard currency obligations that you are unable to meet, and attempt to meet them anyway. The fact that Czechoslovakia avoided hyperinflation (while being a small country that could not well tell foreign creditors to walk off a cliff) tells me that its economy was a lot less vulnerable to the loss of access to hard currency money markets.

As an aside, I think you display a somewhat rosy view of Czechoslovak governing practises in the Interbellum, but that is a slightly different subject.

Finally, I don't disagree with the fact that interest rates have distributional consequences. A 'fictional' inflation, however, has them even worse, as poor and those on fixed incomes tend to have higher CPI than middle or upper part of the distribution.

Nothing wrong with that you can't solve by indexing public transfers to median income.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jun 19th, 2011 at 05:47:54 AM EST
[ Parent ]
In your thinking, (TBG), both high and low interest rates lead to the same distributional outcome. I guess this is because of an institutional failure?

This is a rhetorical conflation, at best. The same distributional outcomes were achieved by two different pro-bankster policies. There is nothing at all incompatible with low inflation and stable asset prices, if that is the desired policy outcome. It wasn't.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Jun 19th, 2011 at 02:14:13 PM EST
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