Everyone Else Admits We Were Right About Inflation
Sep 11, 2023
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Economists Steven Mann and John Michael Colón discuss the spread of their inflation theory, the influence of large corporations like Walmart, the impact of interest rates on banks and consumers, the correlation between debt and inflation, and the control of neoclassical economists in the field of economics.
Interest rate hikes do not lower inflation, and there is no inverse relationship between interest rates and prices.
The belief that interest rate hikes effectively combat inflation is not supported by evidence, as the resolution of the 1970s crisis was attributed to multiple factors, not just interest rate adjustments.
The lack of a significant relationship between interest rates and prices suggests that interest rate adjustments alone have limited control over inflation, highlighting the need for a more nuanced understanding of inflation dynamics.
Deep dives
Interest rate hikes and their impact on inflation
According to Tim Demutzio, interest rate hikes do not lower inflation as mainstream theories suggest. He argues that there is no inverse relationship between interest rates and prices. In fact, the evidence shows that interest rate increases are accompanied by price increases. Demutzio suggests that raising the cost of finance could actually raise business costs, leading companies to raise their prices in response. He also questions the effectiveness of interest rate adjustments in controlling prices, highlighting the lack of correlation between interest rates and the general price level. The idea that interest rate hikes reduce inflation is based on a fallacy and does not align with empirical evidence.
The role of interest rates in the 1970s inflation crisis
The belief that interest rate hikes effectively combat inflation is often justified with the claim that they successfully addressed the inflation crisis of the 1970s. However, Demutzio challenges this notion by pointing out that there is no evidentiary support for an inverse relationship between interest rates and prices. He contends that the global events and complex factors of that era, including the oil shock and political movements, contributed to the economic outcomes, making it difficult to attribute the resolution of the crisis solely to interest rate adjustments. Demutzio argues that the 1970s crisis was a result of multiple intertwined factors, and the claim that increasing interest rates curbed inflation is oversimplified.
The limitations of interest rates in controlling prices
Demutzio underscores the lack of a significant relationship between interest rates and prices, suggesting that interest rate adjustments alone have limited capability in controlling inflation or deflation. Instead, he proposes that the correlation between rising interest rates and rising prices may be more indicative of reactive panic measures taken by central banks rather than a causative relationship. Demutzio's analysis challenges prevailing beliefs that interest rate hikes directly impact the general price level, emphasizing the complexity of economic forces and the need for a more nuanced understanding of inflation dynamics.
The changing landscape of financial liquidity and its influence on inflation
Demutzio highlights the changing dynamics of financial liquidity and funding sources, which further complicate the relationship between interest rates and prices. Modern businesses have access to various liquidity sources beyond traditional loans, including capital markets, private equity, and stock markets. This expanded landscape reduces the direct impact of interest rate adjustments on business costs, making it less likely for interest rate hikes to result in significant price changes. The evolving financial ecosystem necessitates reevaluating the role of interest rates in controlling inflation.
The Rise of Alternative Thinking on Interest Rates and Inflation
In this podcast episode, the hosts discuss the growing acceptance of the idea that raising interest rates does not necessarily lead to a decrease in inflation. The episode highlights the work of Dimunizio, an economist whose research challenges the traditional view on this topic. Dimunizio's research gained traction and was cited by several reputable sources, including Investopedia. The episode also discusses the impact of this alternative thinking, with well-known economists like Joseph Stiglitz supporting the idea that raising interest rates could do more harm than good. The hosts emphasize the significance of this shift in discourse and the changing landscape of economic thought.
The Politics and Controversies of the Economics Nobel Prize
The episode delves into the origins and criticisms of the so-called Nobel Prize in Economics. The hosts explain that it is not actually a true Nobel Prize, but a separate award established by the Swedish central bank. The creation of this prize was driven by the neoclassical economists' desire to promote their ideology and the concept of central bank independence. The hosts highlight the dissatisfaction among mathematicians who view economics as lacking rigorous mathematical foundations. They also discuss the inherent political nature of the economics Nobel Prize and how it has been awarded predominantly to neoclassical economists rather than those challenging the mainstream perspective. The episode concludes with a call for skepticism towards the economics Nobel Prize and the need to challenge the prevailing economic narratives.
Mia once again talks with Steven Mann and John Michael Colón about the further expansion and spread of their inflation work and how mainstream economists steal from heterodox economists
