Prisoners of Dogma

The current inflation gives us insight into our inability to use common sense and logic to solve problems. We know inflation results from too much money chasing too few goods. You can end inflation by severely restricting the money supply. The Federal Reserve stopped the inflationary spiral of the 1970-80s by tightening to the point where interest rates were higher than the rate of inflation. Rates went above 18% while inflation was t 14%. The result was a deep recession with unemployment above 10%. 

Today it would take interest rates above the current 7 1/2% inflation rate. This move would mean mortgage rates about triple g from where they were at the beginning of the year. The resulting recession would probably end rapid inflation but at a horrible price. Anyone with variable rate loans or an adjustable-rate mortgage (ARM) would be in a dark place. 

If we only slowly raise interest rates, it adds to costs and feeds rather than stopping inflation. Interest rates are a blunt and cruel instrument.

The other path is to increase supply. The most visible commodity affecting almost all our endeavors is energy. Today most of our energy comes from fossil fuels. Every time we fill up at the pump or open our heating bill, we are made painfully aware of inflation.

Expectations drive inflation. If we feel prices will be higher in the future, we buy now and buy more in anticipation. This perception adds to demand. Inflation’s upward march is most visible in the price of gasoline. If the price is still rising at the pump, we know prices are still going up. For this reason, it is essential to stop the upward march of oil and natural gas prices.

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