this post was submitted on 24 Aug 2023
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Raising interest rates to fight inflation works by reducing demand. Jobs get lost so people have less money. So they spend less, so prices drop to be more competitive.
Only poorer people obviously. Rich people are less affected, but still pay more in interest. The increased number of unemployed people means competition for jobs is higher so workers are cheaper to pay, increasing profits again.
High inflation is bad for everyone, but particularly so for the poorer, too. However, measures to fight it should be spread across society. Instead blunt tools like interest rate rises disproportionately affect the poor. They should be combined with higher taxes on business and high earners and high net worth individuals. Worldwide we only really do the first. I wonder who decides?
In addition, I could definitely go for enforcement and expansion of price gouging and profiteering laws.
I would like to see enforcement and expansion of profiteering guillotines.
I like the cut of your jib
It mostly works by forcing companies to pay back their loans rather than keeping them indefinitely, which pulls excess money out of the economy instead of it circulating continuously. When interest rates were near zero and the reserve requirement was dropped for banks, a shitload of this lending was done multiple times, so they're hoping to effectively claw that back
Especially because, as far as I can see, inflation isn't being caused by demand for necessaries. And, these days, an increasing number of people are pretty much only able to afford the basics necessities (if even that) did to talk terms pay cuts as a result of inflation.
You didn't even mention the funniest part. We know that raising the fed rates can hurt the poor by reducing their access to money, but we don't actually have any compelling evidence that it reduces inflation. It's literally the modern equivalent of the ancient Romans or Greeks sacrificing an animal for a bountiful harvest.