Paul Krugman and Dean Baker have both written pieces in the past few days regarding the need to increase inflation in order to “reduce the real interest rate” (emphasis mine). That “real interest rate,” in case you are not familiar with it, is the actual interest rate minus inflation. So, if the interest rate on your loan is 3.5% and inflation is running at 2% then the “real interest rate” on your loan is 1.5%.
There are so many things wrong with that that it’s hard to decide where to begin.
Let’s open with the fact that interest does not apply only to loans, it also applies to savings, so reducing interest is devastating to people who depend on income from their savings to augment their retirement income in their declining years. Inflation generally is devastating to people on fixed incomes, but economists don’t really care about that. They are perfectly willing to screw the senior population in the name of “growing the economy.”
There is also the working person who is setting aside money for future retirement and wants to see those savings grow. Reducing interest means they will be disappointed and will have to work longer or retire more frugally, and economists don’t really care about that either. No economist is willing to say outright that savings are bad for consumers, but they prate constantly that they are “bad for the cconomy,” so they are perfectly to screw the working class as well as seniors.
There is also the little fact that while I am having to pay more for practically everything I buy, my house payment is still the same because the bank thinks the “real interest rate” is the one printed in the loan documents. I have not had the temerity to go to a loan officer and demand that they reduce the interest rate by whatever the current inflation rate is, because I don’t want to get thrown out of the bank.
Notice I did not say that I’m paying more for food and energy, because those are not included in the calculation of inflation. They are excluded because they are “too volatile,” meaning that their prices change too rapidly. It’s interesting that computers can keep up with stock prices that change hundreds of times per second but cannot keep up with changes in the price of beef at Safeway.
At any rate, after that little side trip, inflation means that people pay more for the goods and services that they buy, but it does not mean that they pay lower interest rates. Not to mention that the Fed is breathlessly waiting for increased inflation so it can raise interest rates.
Part of the rationale is that businesses are more willing to borrow because they believe they will repay the loan with inflation-affected money that is "worth less." I’ve never met a businessman who subscribed to that little piece of insanity; the only ones who buy into it are economists, who know as much about business as the average house cat does. If nothing else, it depends on knowing not what inflation is now, but what it will be in the future when the loan is repaid, and no reasoning businessman is going to stake his future on that kind of uncertainty.
What planet did these economists come from anyway?