Every economist knows you can curb inflation most easily by raising interest rates, but there are some hidden costs. Of course, nothing is ever simple.
To raise interest costs, go to www.usdebtclock.org , and you’ll see our national debt is over $29 trillion and speeding toward $30 trillion. Then, pick up your iPhone and ask Siri what is 1% of $30 trillion, and she’ll tell you it is $300 billion. In other words, a 1% interest rate increase in carrying our national debt would add $300 billion in our annual interest expense, which is already $420 billion a year. That’s a 71% increase!
Just imagine politicians coming on television to announce a new $300 billion spending program that rewards wealthy families and pension funds . . . but produces nothing. Good Luck on that!
Most analysts, myself included, argue it is time for the Fed to raise interest rates, but how much? How much is too much? Too little?
If they raised rates 1% or 100 basis points now, our annual interest expense would not increase $300 billion immediately, because it takes years for existing bonds to mature and rollover to the higher rates, but the increase would come, albeit not immediately.
A better alternative to the debt is to “inflate it away” but inflation hurts low income people the most. Another alternative would be surgical intrusions into the economy to eliminate under-produced goods or supply-chain problems. Smacking of socialism, that would be tricky politically. A big tax increase would also curb inflation, by pushing the economy into recession, and who wants that. Decreasing the growth rate in money supply would also help, which is easier for the Fed to do alone – so just do it already!
The point is we should diversify the attack on inflation with several alternatives. For example, a package including a smaller increase in interest rates, minor intrusions into the economy, a small increase in taxes, a small decrease in the money supply growth rate, etc.
The point is that – depending too much on interest rate increases is a foolish mistake! There is no one silver bullet!