QUESTION:
Mr Armstrong,
Thanks for your awesome website and the vast amount of information that you are putting out there.
Could you please clarify the relationship between interest rates and inflation. Why would rising interest rates cause an uptick in inflation? I understand that a strengthening economy puts upward pressure on both yields and inflation, but how (on the absence of economic growth and ignoring forex rate changes) can interest rate hikes directly affect inflation? Help!
Thank you,
JK
ANSWER: The idea that rising interest rates will reduce demand perhaps might apply if the ONLY borrower was the private sector. But the biggest borrower that a rise in rates has ZERO impact on is government. When Volcker raised rates to insane level in 1981 to stop inflation, he succeeded in sending the US national debt from $1 trillion to $8 by the end of the decade. About 70% of the entire debt is past interest.
Rate hikes today cause the government deficits to rise and thus the national debt will explode. I will be publishing a book very soon that takes the newspaper accounts before 1929 and after demonstrating that it has been socialism that has altered our thinking. Before 1929 rates rose and that was seen as bullish because people were still borrowing and the economy expanding. Rates declined in recession and depressions.
After 1929, rates rose and people said “OH GOVERNMENT WANTS TO STOP US FROM BUYING!” Sorry, but rates decline in Japan for 23 years and it stimulated nothing. Rates decline with the lack of borrowing (demand) and rise with expansion (demand).
