Monday, May 8, 2017

Does raising rates cause inflation, sandbox edition

Monday Smackdown: "Neo-Fisherism" in Monetary Economics

Brad brings up Nick's objection to Neo-Fisherism, the idea that raising rates can cause inflation.n What does the sandbox say?

When borrowers and savers are exceeding the agreed variation between the two, the currency banker hits the borrowers with an unexpected interest charge to bring them into balance. These interest charges favor well positioned savers.  

Where is the inflation?

If the borrowers have good insider information, then they will recover earnings and place them on deposit, earning from their own investment, deflationary productivity growth. Deflationary because inventory necomes stable and price variation drops resulting in fewer currency losses.

If the borrowers mis-calculated, then other avers benefit at the borrowers failure to earn times result.  The effect is inflation. Inflationary because inventory has become unstable as a result of foul investment, and more currency losses occur.

In the pits, the pit boss will incur a small position in the savings and loans as it 'makes the market'. When the currency bankers future conditons are known by a few, that is insider information.

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