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What if Volker killed the Soviet Union?
December 9th, 2019
…back when you had to raise rates to kill inflation.
We’re not so sure the machine works the same way these days.
Seems like these days, lower rates stimulates production a lot more than consumption.
Lower rates today, and you get more supply of scooters, and apps.
Lower rates today, and you get more supply of…oil.
Raise rates from here, and all of a sudden the investments in future capacity don’t look so rosy.
Raise rates from here, the cost of capital for a lot of shale drillers becomes too high to drill.
Raise rates here, and you contract oil supply…increasing the price. Which is inflation.
So rather than stimulate demand through lower rates, we’ve gotten to a tricky place.
A place where there is so much money, in the hands of so few, that interest rates don’t really matter for demand.
After all, Demand is about the 99%.
Lower rates don’t stimulate demand if demand is just poor people who are already levered up.
On the other hand, lower rates do matter for supply.
Maybe enough to flip the direction of that linkage, for a time.
Begging the question, if Volcker killed the Soviet Union by raising rates (forcing the uneconomic communist machine to say Uncle) then what would raising rates do today, and who’s ready for that world?