Why interest rate increases don’t cure inflation.

A step in the wrong direction does more than fail to get you to your destination. It takes you farther from your destination.

Smallpox: Evil spirits aren’t what cause smallpox. Any efforts to prevent and cure smallpox via exorcism would have been wasted.

Worse, they would have led us down the wrong path, taking time, effort, and money from finding and addressing the actual cause, a virus. Worse than doing nothing, a false belief does real harm.

Before vaccination was invented, doctors gave smallpox victims “supportive care, ” mainly of fluids to prevent dehydration. The patient was isolated until all scabs had fallen off to prevent disease transmission.

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Alzheimer’s: Scientists have been working to understand the root causes of dementia and Alzheimer’s disease for decades now.

One of the leading theories suggests that Alzheimer’s disease is caused by the abnormal accumulation of two proteins called amyloid beta and tau in the brain, resulting in plaques and tangles.

Despite the huge amount of research that’s happened to date, there’s not been much success in treating and preventing Alzheimer’s disease.

This has led many experts in the field to wonder whether there’s something else we should look at to understand and cure Alzheimer’s disease.

A recent article in New Scientist Magazine highlights an alternative theory: that damage to mitochondria (the energy-producing structures within cells) could actually be the cause of Alzheimer’s.

The focus on ridding the brain of amyloid didn’t work, but actually may have hindered efforts to find the real cause of Alzheimer’s.

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Inflation: Inflation is a general increase in prices. Bing AI says: Inflation is caused by two main factors: demand-pull and cost-push. Demand-pull inflation occurs when demand from consumers pulls prices up.

Cost-push inflation occurs when supply costs force prices higher. Inflation can also occur when prices rise due to increases in production costs, such as raw materials and wages.

“Demand-pull” and “cost-push” are classic descriptions of inflation’s causes. They can be found in many economics textbooks. There are two problems with these supposed causes:

They don’t explain what has happened. They only describe what is. But, inflation is a dynamic process. Something changes to cause inflation. An economy moves from normal pricing to inflation.

1. 1. Re. Demand pull: What causes a sudden, general increase in consumer demand? Anything? Do you know any examples of sudden increases in the consumer demand for a wide range of products and services?
   2. Re. cost-push. This supposed explanation is a tuatology: In essence it says, prices increases because prices increase. It does not explain what has caused the inflation in supply costs. It merely passes the blame downstream.

Inflation is caused by shortages of crucial goods and services, usually oil, food, and/or labor.

Oil shortages do not come about because of sudden increases in the demand for oil. They are caused by sudden reductions in supply, which may be due to decisions by oil suppliers like OPEC (Organization of the Petroleum Exporting Countries), Canada, and the U.S. itself.

Food shortages do not come about because of sudden increases in the demand for food. Food shortages can be caused by weather, crop disease, and/or government decisions.

Today’s inflation is caused by COVID-related and human-caused shortages, not by sudden increases in demand.

COVID reduced the world’s ability to drill, refine, and ship oil, which affected the prices of nearly every product and service on the planet. COVID impacted the supply of food and labor. COVID isn’t finished with us. The aftereffects still can be felt.

Oil drilling and refining still are down, partly because of COVID and partly because of OPEC and the Russa/Ukraine war. Food shortages result from oil shortages, weather anomalies, COVID-related labor and supply-chain shortages.

There is no evidence that inflations are caused by interest rates being too low.

The graph demonstrates the Fed’s failed attempts to fight inflation (red line) by raising interest rates (blue line). In the 23 year period, from 1967 through 1990, the Fed raised interest rates to extraordinarily high levels, but inflation also kept rising to high levels, only to fall before or during recessions.

Similarly, in the 12-year period, from 2008 to 2020, interest rates were kept  extraordinarily low, while inflation remained low.

Twenty three years of high interest rates did not cure inflation and eight years of low interest rates did not cause inflation.

So what caused inflation and what cured inflation?

Oil prices (green line) respond to supply and demand. When oil is scarce, prices rise. When oil is plentiful, prices fall.

The graph demonstrates that inflation responds to oil scarcity, because oil availability affects the pricing of most other products and services.

Historically, the primary cause of inflation has been scarcities of oil, which have led to high product and service prices.

Today’s inflation has also been caused by COVID scarcities, not only scarcities of oil but of food, computer chips, supply chain availabilities, construction materials, labor, etc. COVID affected everything.

There are those who take the Libertarian view that federal deficit spending causes inflation. History does not support this belief

Changes in federal deficit spending (purple line) bear little relationship to inflation (red line). Increases in federal deficit spending do not correspond to high inflation, nor do decreases in deficit spending correspond to low inflation.

SUMMARY
The prevention and cure for a disease requires the prevention and cure for the cause of the disease.

Evil spirits and lack of fluids did not cause smallpox, so fighting evil spirits/dehydration did not prevent or cure smallpox.

If damage to mitochondria, not the accumulation of amyloids in the brain, proves to be the cause of Alzheimer’s, curing amyloids will not prevent/cure Alzheimers, but preventing/curing damage to mitochondria will.

Low interest rates do not and have not caused inflation, so raising interest rates will not prevent/cure inflation.

Inflation is caused by shortages, most often shortages of oil or food. Today’s inflation is caused by multiple, COVID-related shortages, and curing those shortages is the only way to cure inflation.

Our Monetarily Sovereign federal government, having the infinite ability to create dollars, should fund efforts to increase availabilities of oil, food, computer chips, construction materials, and labor.

Decreasing in taxes on businesses and employees would be a good place to begin.

For example, the FICA tax, which serves no purpose, raises the price of goods and services, and discourages employment. Eliminating FICA would be a good, easy first step toward reducing inflation.

Rodger Malcolm Mitchell
Monetary Sovereignty

Twitter: @rodgermitchell Search #monetarysovereignty
Facebook: Rodger Malcolm Mitchell

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The Sole Purpose of Government Is to Improve and Protect the Lives of the People.

MONETARY SOVEREIGNTY