Higher interest rates increase inflation

[luiz]

This presupposes that lending is the preferred form of investment. While that is often true, purchasing rather than loaning is more normal. Institutions prefer the safety of loaning. Individuals prefer the growth of equity.

J

Depends on how high the rates are. In Brazil during the late 90's the real interest rate was consistently above 20% per year. Very few investments have that sort of returns, specially when interest rates are so high. So why risk lower returns or even losses on equity when you can lend to the government at 20%+? You can double your capital in under 4 years.

 

[Hygro]

Part of the instructions were omitted.

Step one: Go to the antique bookstore

THEN check an economics textbook.

I lol'd irl

 

[Harv]

My comment about the US housing market a few years ago was:

Housing prices are going down because mortgage rates are going down; and mortgage rates are going down because housing prices are going down. Housing prices will stop going down when mortgage rates stop going down; and mortgage rates will stop going down when housing prices stop going down.

It quacks like circular logic, but I am trying to describe a self-feeding cycle. There was no incentive to go out and get a mortgage and buy a house because if I wait a few more months, then the mortgage rate will be even better - and so will the price.

Taking a leap of faith back then seemed to be like trying to catch a falling knife.

 

[Timsup2nothin]

I lol'd irl

Thanks for telling. My New Year resolution was to make someone laugh every day. Now I can take the rest of the day off and just be a jerk.

 

[Harv]

Thanks for telling. My New Year resolution was to make someone laugh every day. Now I can take the rest of the day off and just be a jerk.

You can take tomorrow off, too.

 

[Timsup2nothin]

You can take tomorrow off, too.

Laughs are perishables of limited shelf life, so tomorrow is a new day! But good to know I get double credit now and then!

 

[El_Machinae]

Yes, but the return from investment for an entrepreneur is generally higher than the return on deposits.

So, someone interested in making the most from their money, and very few even rich people aren't, is going to be interested in leveraging even more from their money.

You're conflating 'the rich' with entrepreneurs. Entrepreneurs want low interest rates.

While the wealthy can be entrepreneurial, there's no guarantee or even need to be. After that, it mostly depends on whether your holdings are currently in cash or in stocks.

 

[Cutlass]

How so? Wouldn't the rich want higher rates? The OP is making the case that higher rates may be bad for inflation, which is the whole reason people would raise them to begin with.

What's going on is that the water is being muddied to the point where the typical person doesn't know what's going on or who to believe. This in turn results in a loss of credibility to the experts, and political yahoos having more of a say in what is, in essence, something the political yahoos ceded authority over specifically because the yahoos of the day were willing to admit that they were out of their dept. By taking the professionals out of the loop, and putting the (current batch) of yahoos in charge, they don't have to concern themselves with a central bank which will work for the good of the economy rather than the good of Wall St.

 

[onejayhawk]

Depends on how high the rates are. In Brazil during the late 90's the real interest rate was consistently above 20% per year. Very few investments have that sort of returns, specially when interest rates are so high. So why risk lower returns or even losses on equity when you can lend to the government at 20%+? You can double your capital in under 4 years.

Yes. At 20% you want to lend as much as you can. Of course you run the risk of the government paying you with devalued money. Sometimes its better to own an asset than to lend, no matter the promised return.

J

 

[Timsup2nothin]

Yes. At 20% you want to lend as much as you can. Of course you run the risk of the government paying you with devalued money. Sometimes its better to own an asset than to lend, no matter the promised return.

J

If you have money and don't lend it, it devalues. If you have money and do lend it, it still devalues but at least you have 20% more of it. That is clearly a win.

Now, if you use your money to buy something that you can later sell for the same purchasing power worth of the now devalued money, and the money devalued by more than 20%, then that is even more of a win...but that commodity may not be easy to identify...or maintain.

 

[Harv]

Now, I'm not certain how true it would be, and it would be contrary to conventional economic wisdom. However, it is something I wish to explore sincerely, namely, that increasing interest rates indirectly increase inflation.

How much inflation is caused by the expectation of inflation?

Right now, interest rates are low - and inflation is expected to be low. There was a time years ago, when interest rates were high and inflation was expected to be high, and there was a wage-price spiral.

Sometimes, however, I still think inflation is caused by genies.

 

[Cutlass]

How much inflation is caused by the expectation of inflation?

Right now, interest rates are low - and inflation is expected to be low. There was a time years ago, when interest rates were high and inflation was expected to be high, and there was a wage-price spiral.

Sometimes, however, I still think inflation is caused by genies.

Economists put a lot of time and effort into studying inflation. But to a large extent they're still guessing, and many are still going with their preconceived notions. As to inflation expectations, they seem to be real, but not simple. That is, the inflation expectations for next year, month, whatever tend to be based on the actual inflation for this year, month, whatever. The general public looks at what is actually happening, rather than what is forecast to happen. This is why an ongoing high inflation situation is hard to break: The public doesn't believe the central bankers, and continues to act as though inflation is present. And this can actually cause the inflation to happen.

 

[Timsup2nothin]

Economists put a lot of time and effort into studying inflation. But to a large extent they're still guessing, and many are still going with their preconceived notions. As to inflation expectations, they seem to be real, but not simple. That is, the inflation expectations for next year, month, whatever tend to be based on the actual inflation for this year, month, whatever. The general public looks at what is actually happening, rather than what is forecast to happen. This is why an ongoing high inflation situation is hard to break: The public doesn't believe the central bankers, and continues to act as though inflation is present. And this can actually cause the inflation to happen.

Basically, inflation is caused by inflation.

 

[Cutlass]

Basically, inflation is caused by inflation.

Under some circumstances, yes.

Or, to be more precise, the economy is the collected decisions of all the people within the economy. And if their decisions are to demand ever higher prices, then inflation occurs. Even central banks can have a hell of a hard time changing people's minds on such things. That's how the Brazilian currency called the real came about. It's an interesting story.