Is there an economic principle for erdo ? an to cut interest rates against high inflation?

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Source: Li Jianqiu’s world (ID: Li jianqiudeshijie)

On August 18, local time, the monetary policy committee led by the governor of the Central Bank of Türkiye lowered the benchmark interest rate to 13%. This is the first interest rate cut by the Central Bank of Türkiye this year. Since December last year, the benchmark interest rate has been maintained at 14%.

In July, Türkiye’s CPI increased by 79.6% year-on-year, the highest level in 24 years.

It is not in line with basic economic common sense to cut interest rates even when the CPI is as high as 79.6%. Erdo ? an has been criticized for this.

But looking back, if erdo ? an’s actions are unwise, what about the United States?

In September 2021, 17 Nobel Laureates in economics signed a letter to support Biden’s “reconstruction and better” package.

This plan is nothing more than spending money. Considering that the inflation in September 2021 has reached 5.4%, far exceeding the 2% standard set by the Federal Reserve, there is no doubt that inflation will worsen with the increase of government expenditure. You can say that erdo ? an has no economic knowledge, but you can not say that 17 Nobel laureates have no economic knowledge.

Let’s see what these big guys say:

The US economy seems ready for a strong recovery, partly due to the active intervention of the government in the past year and a half, including President Biden’s US rescue plan. However, more needs to be done to reverse years of underinvestment in public goods and address the country’s long-term needs, including achieving sustainable and inclusive growth and promoting our clean energy transformation.

The success of the 21st century will require priority investment in our country’s “hard” infrastructure on the basis of the bipartisan infrastructure agreement passed by the Senate. The president’s “rebuild better” agenda adopts a broader concept of infrastructure and makes important investments in human capital, nursing economy, research and development, public education, etc., which will reduce the cost of families.

Although we all have different views on the details of various economic policies, we believe that key components of this broader agenda are crucial, including tax reform, to make our tax system more equitable and to enable our system to raise the necessary additional funds to promote the necessary public investment and achieve our collective goals. Since this agenda invests in long-term economic capacity and will improve the ability of more Americans to participate in economic production, it will ease the long-term inflationary pressure.

At the same time, there is also a “debunking the five big inflation myths”, as follows:

At present, the labor market is basically strong, but inflation is still an urgent economic problem.

The cause of inflation escalation has caused heated debate, but some theories have been paid more and more attention, but there is no data basis. The EPI study clarifies the causes of inflation and how policymakers can best control inflation. Next, we will debunk the five biggest inflation myths.

Myth 1: Workers’ wage growth drives inflation. Although the growth of nominal wages is faster than the recent past, it has lagged far behind inflation, which means that labor costs have been suppressing rather than amplifying the pressure of inflation.

Myth 2: enterprise profits do not promote inflation. In fact, between the second quarter of 2020 and the end of 2021, more corporate profit margins contributed to more than half of the price growth in the non-financial corporate sector. This is not normal. From 1979 to 2019, profits contributed only about 11% to price growth. Ignoring the role of profit makes the analysis of inflation much weaker.

Myth 3: federal relief and recovery measures have overheated the economy and contributed to inflation. The evidence of the past 40 years strongly shows that with the decline of unemployment rate and economic warming, the profit rate should be reduced and the share of enterprise income used for labor remuneration should be increased. However, so far, the completely opposite pattern has emerged in the economic recovery — which makes people have great doubts about the inflation expectations based solely on the theory of macroeconomic overheating. In short, the labor market is strong, but it is not overheated.

Myth 4: abolishing import tariffs will be the main tool to fight inflation. Tariffs have been implemented long before inflation began to rise in early 2021, and the elimination of tariffs is unlikely to significantly curb inflation. Moreover, the elimination of tariffs will not be without cost. The elimination of tariffs may lead to unemployment, closure of factories, cancellation of planned investment, and further destabilization of the domestic manufacturing base, which will increase domestic dependence on unstable import supply chains.

Myth 5: investment in child and elderly care will accelerate inflation. In fact, investment in child and elderly care can help curb inflationary pressures. By subsidizing families’ use of care for children and the elderly, and by providing direct investment to providers, such investment can promote the future supply of labor, enabling parents or children of working age who want to find paid work to do so, while ensuring that their family members are receiving care.

Although the US Federal Reserve has raised interest rates and reduced its balance sheet, at the same time, the US government’s fiscal stimulus policy has reduced the effect of this interest rate increase.

And Biden’s bill is not just this one, but a bunch of bills. The inflation reduction bill is 750 billion yuan, the chip bill is 250 billion yuan, the competition bill is 300 billion yuan, the Ukraine bill is 14 billion yuan, the infrastructure bill is 120 billion yuan, the ship building bill is 2 trillion yuan over five years, and the relief and rescue bill is 1900 billion yuan.

Looking back at erdo ? an’s actions, we can actually use economic theory to explain:

For example, several Nobel laureates said, “since this agenda invests in long-term economic capacity and will improve the ability of more Americans to participate in economic production, it will ease the long-term inflationary pressure.”

There are actually two solutions to inflation: the first is to increase supply and the second is to reduce demand.

The traditional approach is to reduce demand through a series of monetary policies.

By increasing the money supply to force enterprises to produce and expand supply after investment and production, prices can be stabilized.

Let’s take a look at how inflation was solved in history:

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We can see that it will take a long time to solve the problem after every sharp inflation.

In particular, the current inflation rate of eight or nine points, as long as it reaches this point, will be solved in ten years.

Moreover, you can see that after this intense inflation, after the interest rate increase, the inflation returns to the original point and rises in a more intense manner, leading to a problem that has not been solved well.

There are many political operations in this, mainly because the economy will not be too good after the interest rate is raised and the table is reduced. In order to make the figures look better, politicians have to relax the interest rate, resulting in the suppressed inflation rising again.

Everything today is actually quite similar to that in the 1970s.

As for erdo ? an’s and the United States’ proposal to “increase spending and reduce inflation”, it is contrary to economic theory and has not been successful so far.

But it’s all right to have a try.

Let’s talk about reality later.

Some time ago, we media hyped that the Fed officials were “worried about the lag of monetary policy and excessive tightening”. In fact, the Fed officials often discussed such issues. There are two reasons why the Fed slowed down its interest rate increase:

First, overall inflation has been declining month on month for three consecutive months.

Second, the growth of non-agricultural employment returned to 150000 / month, and the unemployment rate returned to the equilibrium level of the Federal Reserve.

If these two conditions are not met, we will not stop raising interest rates. The question is only the rate of interest rate increase.

I need to talk about the hot spots in the future market.

As you can see, this summer is very, very hot.

When it was hot in Sichuan, power was cut off.

It should be noted that “global warming” does not mean only the hot summer climate, but also the global climate anomaly.

Summer is very hot, and winter may be very cold.

Therefore, no one can say whether this winter will be an unusually cold winter.

If it is really cold, then heating, not only natural gas and coal, may become a hot spot in the market.

At present, the market seems to have started, but it is still early in winter, and there will be speculation.

I hope you all know.

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