We’ve all heard the mantra: to fight inflation, raise interest rates. Lower rates, conversely, are supposed to stimulate the economy and can lead to inflation. It’s an economic fundamental, right? But what if this widely accepted wisdom is, at best, oversimplified, and at worst, fundamentally inverted?
A recent deep dive challenges this conventional narrative, suggesting that the true relationship between inflation and interest rates is far more nuanced, often counter-intuitive, and heavily dependent on the broader economic context.
This directly contradicts the popular notion that higher rates suppress inflation. It suggests a more complex dynamic at play, where interest rate movements might have followed inflation, or perhaps even exacerbated it, rather than solely controlling it.
This perspective posits that low rates, by fostering greater production and supply, might actually mitigate inflation, while high rates, by stifling supply growth, could potentially fuel it.
If the 1960-1980 period showed rates and inflation moving together, why have the last 20 years presented a different picture? We’ve seen periods where inflation sometimes rose despite low rates, and sometimes fell during rate hikes.
These factors fundamentally change how interest rate adjustments ripple through the economy. Interest rates are not operating in a vacuum; they are just one thread in a complex tapestry woven with debt, money supply, production capacity, and global supply chains. They are not the sole, or even dominant, driver of inflation.
Understanding these intricate dynamics is crucial for investors and anyone trying to make sense of today’s volatile economic climate. With expected increases in government spending and the potential for renewed quantitative easing, the old rules seem increasingly inadequate for predicting future outcomes.
The conventional wisdom may have served us in simpler times, but today’s economy – characterized by unprecedented debt and money supply – demands a more sophisticated understanding. It’s time to challenge ingrained beliefs and look beyond the surface.
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Watch the full insightful video from Heresy Financial for further insights and information on this critical topic.
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