If, like in my last post, the fed raising the discount rate doesn’t effect prices like the monetarists told us, what is going to happen this go around?
Let me be clear. I do not know for certain that the interest rate/inflation relationship holds as the monetarists told us. If it does, how do we explain this graph?
Enough recap.
Well, I think it’s going to get very, very ugly. It’s my contention that productivity and new product categories may be responsible for falling prices in the 1980’s. If this is so, we are in trouble. Some things that might happen include:
1. Some of the tools central banks think they have to rein inflation in with won’t work the way they think it will. They raise rates, and prices for housing, automobile and other big ticket items falls. This is accompanied by a 2009 style crunch as people get upside down on all their debts. Everyone is borke (broke.) Demand collapses
When the demand collapses, prices fall. Fewer dollars chasing goods. Inflation is over, but you live in a cabin like my great-grandfather in this picture.
2. They raise rates, inflation doesn’t respond as expected. Demand collapses for the reasons given above. BUT, because of our non-existent manufacturing sector, geo-political horse-s*$t, the haul-o-coff, California trucking regulations, and other co-morbidities cause shortages of all kinds of products and services. Now what dollars we have are chasing fewer goods, the shelves are empty. In this case price-fixing will be attempted, but it never works. If you want that last loaf of bread, you are gonna have to pay more. Prices do not come down. It’s not inflation now, it’s demand driven, but your buying power is still down.
3. No one tries to raise rates because if they do they can’t service their gubermint debts. IF they stop printing money, we just might make it. But they can’t stop printing. They promised too many gibs.
A few years ago on some of my live streams I predicted deflation. I was wrong because I couldn’t foresee the lengths our managers were willing to go to in order to prevent it.
I’m more unsure of exactly what is going to happen than I have ever been, but one thing is for sure, it won’t be fun.