A Reason to Raise Rates

The US Federal Reserve needs a reason to raise the discount rate. Announcement of trade tariffs provides a reason.

Many economists have been strongly opposed to raising the rate of interest because it would deflate demand in correlation with rising income inequality, turning the so-called recovery into a recession.

There is little reason for rising rates since wage inflation is practically non-existent. (The inference is that raising the rate of interest is primarily for the purpose of controlling rising wages and salaries due to rising demand for goods and services, which results in a naturally declining rate of profit.) President Trump says the tariffs are needed to support jobs and wages. Since most economists contend that tariffs increase prices for everybody, the president is providing the 2% target the Fed needs to raise rates against disinflation of wages and salaries known as the new normal.

Disinflation of what workers are paid — working more for less in a competitive, global-market environment — tends to result in deflation and a declining rate of profit. This natural tendency is normal but it is not at all new.

What is new is the tolerance for consolidation of industry and markets against disinflation of wages and salaries. Competitive market pressure will result in a general, deflationary trend so that products and services cannot be sold at any price due to lack of income (falling demand, as opposed to disinflation of consumer prices in which consumer income “effectively” increases against falling profit margins). Something has to be done to resist that trend, and since deconsolidation of industry and markets is considered to be the model of inefficiency, although competitive pricing tends to naturally disinflate prices and thus increase income to spend and create demand for jobs, we are stuck with the inefficiency of creating barriers to entry, and the inherent political risk of a trade war, existing on command.


About griffithlighton

musician-composer, artist, writer, philosopher and political economist (M.A.)
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