The Fed has finally raised its benchmark interest rate in order to fight (price) inflation.
If this strategy makes sense, it’s reasonable to ask: Are low interest rates the cause of currency debasement?
To accept this idea, one must accept that low rates caused the increases in the price of gas, groceries, cars, drugs and college tuition. The boom in commodity prices such as gold, palladium, wheat, sugar and oil would also be attributed to low interest rates. Yet when one looks at the history of interest rates and prices, there is no long-term correlation between the two. Even if there was, it wouldn’t prove causation as other variables, like the money supply, would have to be factored in the equation.
Hyperinflation and currency collapse are historically the result of increases to the money supply. Venezuela has an interest rate at 57.99%. Turkey’s rate is 14% and Brazil is at 11.75%. They’ve been struggling with high inflation or hyperinflation for quite some time.
Then there’s Zimbabwe, which provides a great opportunity for everyone to learn about inflation:
Zimbabwe’s annual inflation rate peaked in November 2008, reaching 89.7 sextillion (10^21) percent.
The country currently has an interest rate of 60%. Over a decade after their central bank destroyed its currency, they continue to have sky-high interest rates to fight price increases, apparently learning nothing from past mistakes.
It’s worse when you read comments from their central bank. Bloomberg quoted Reserve Bank of Zimbabwe Governor John Mangudya, just last month, who said:
If we see inflation going up in February and in March, brace up for very high interest rates… There is a trade off between inflation and high interest rates, all central banks are tightening monetary policies so that we can get out of high inflation.
Is it hilarious or just plain sad that comments from the head of Zimbabwe’s central bank are indistinguishable from comments from Fed Chair Powell; or does Zimbabwe take its cue from the Fed? Powell raised interest rates today, citing a similar reason, saying:
The economy is very strong, and against the backdrop of an extremely tight labor market and high inflation, the Committee anticipates that ongoing increases in the target range for the federal funds rate will be appropriate.
CNBC also ignores the problem with inflationism as public policy, noting that the Fed’s:
…main tool to battle inflation is interest rates.
It’s inexcusable that when it comes to fighting currency debasement, the quick fix is to make debt more expensive, paying little attention to the money creation mechanism.
Imagine, living in Zimbabwe, seeing a money supply chart that looks like this then learning the central bank will raise rates to fight inflation:
Yet here we are. Of course, rates matter. They influence prices, but countless factors influence prices. Ultimately, when the cost of living perpetually increases year over year and then one day a currency collapses, there is only one factor to blame, and it’s not interest rates. The cost of living is up in America because the Federal Reserve created nearly $5 trillion in the last two years while M2 increased by nearly $7 trillion in the same amount of time. There really is no mystery to inflation; there are only stories that central bankers tell.
