Gas station without pumps

2018 September 25

Economics of inflation

Filed under: Uncategorized — gasstationwithoutpumps @ 08:37
Tags: ,

I’ve never understood why economists believe that lowering interest rates causes inflation. (Or why journalists report that they do, anyway.)

It seems to be predicated on the belief that low interest rates leads to companies borrowing more to expand, increasing employment, which leads to labor shortages, which leads to higher pay for workers, which raises the cost of goods. This seems like a rather indirect and roundabout effect, which does not bear much relationship to the current economy.

So far as I can see the price of goods is determined mainly by how monopolistic the market it, which is determined more by mergers and acquisitions than anything else. When interest rates are high, leveraged buyouts result in enormous debt burdens, which get translate to increased prices—the opposite of the low-interest leading to inflation prediction.

I think that problem is that prices today are more determined by the cost of capital and corporate profit taking than by the cost of labor, but the economic models reported on in the popular press are stuck in the 40s and 50s.

Perhaps someone who understands economics better than I do could show me how the models work, and back it up with recent data?


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