The Exactly Wrong Idea

Inflation is rampant and central banks are competing among themselves in raising interest rates to tame it. Monetarists will insist that inflation is caused by too much money chasing too few goods, and this is often the case. But right now it is only partly true.

With the post-covid correction behind us, consumer indulgence as an (implied) excuse for tightening is pretentious. The current price hikes are due not to booming demand but to collapsing supply triggered by geopolitics and the concurrent disintegration of world trade. Boosting production across the board is what we urgently need and this calls for express investment. High interest rates work against that.

So, do not expect central bankers’ latest folly to make things any better. Because a misguided cure -and one worse than the disease at that- is the exactly wrong idea.