Stimulating economic growth without inflation

Some inflation is desirable because:

1. Debt becomes less expensive. You’re paying with cheaper dollars.
2. Business income goes up. Businesses hire more workers, consumers spend more, So, the Fed aims for a 2% annual inflation rate, which translates into a 21.9% increase in 10 years and a 3% annual rate increase price by 34.4% in ten years.
3. Unemployment goes down.
4. People tend to spend more and hoard less money when they expect prices to rise.
5. The economy expands because businesses expect higher returns.

Though the Fed may aim for a 2% rate, it has very little ability to control inflation. It raises interest rates — its only available tool — when it anticipates inflation, the philosophy being:

1. When loans (e.g., mortgages, car loans, business loans) become more expensive, fewer people and businesses borrow money, leading to less spending.
2. Higher rates make it costlier for businesses to expand, hire, or invest in new projects, slowing economic growth.
3. Stocks and real estate prices often drop when rates rise, making people feel less wealthy and thus spend less.
4. Higher interest rates attract foreign investment, increasing demand for the U.S. dollar. A stronger dollar makes imports cheaper and reduces the cost of foreign goods, which can help bring down inflation while reducing exports.

The Fed tries to control inflation by recessing the economy while hoping not to cause a true recession. 

Unfortunately, higher interest rates do not address the real cause of inflation: A shortage of key goods and services. Instead, higher rates can actually make inflation worse by raising costs:

Businesses pass on higher borrowing costs to consumers, raising prices. Housing costs rise as mortgages become more expensive, worsening rent inflation.

Even stranger, while the Fed (falsely) believes that adding dollars to the economy is inflationary, raising interest rates forces the federal government to pay more interest on its T-securities, which adds dollars to the economy.

The fundamental problem is that the Fed lacks the tools to grow the economy and fight inflation. Its one tool, interest rates, cannot do both.

But Congress and the President do have the tools.

To understand why, one first must ask why inflation occurs. The standard response is, “Too much money chasing too few goods and services.” Sadly, “too much money” translates into the false belief that federal deficit spending causes inflation.

If federal deficit spending caused inflation, you would expect the following graph to look much different:

For contrast, look at the following graph:

The above graph demonstrates that inflation is essentially parallel to oil prices. A shortage of oil is a powerful driver of inflation.

This false belief that federal spending causes inflation prevents the government from taking the actions that would prevent and cure inflation, i.e., targeting the shortages that are the actual cause.

Shortages of key products and services are responsible for inflation. While oil and food top the list, also included are shortages of housing, shipping, labor, metals, lumber, computer chips, doctors and nurses, medicines, etc.

To test the hypothesis that all inflations are caused by shortages, I asked an Artificial Intelligence to list any inflations that were not caused by shortages:

1. Speculative Bubbles Leading to Inflation

• Example: Real estate bubbles

• When investors pour money into assets (like housing or stocks), prices can skyrocket due to speculation, not necessarily due to a physical shortage of housing units.

• However, counterpoint: This involves shortages because investors hoard properties, reducing supply for actual buyers/renters. The speculators would not be able to raise prices if housing were plentiful.

2. Demand-Pull Inflation from Sudden Stimulus

• Example: Some argue that pandemic stimulus checks created inflation by increasing demand too quickly.

• However, counterpoint: The pandemic inflation was due to shortages of goods, labor, and logistics capacity. The stimulus just increased the demand for already-scarce goods. Rather than randomly sending money into the economy, the government should have directly targeted the shortages.

3. Monopoly or Corporate Price Gouging

• Example: Some large corporations raise prices because they can, not because of true shortages.

• However, counterpoint: If corporations can raise prices without competition pushing them back down, it suggests an artificial scarcity of competition, which is still a shortage.

Feven 4. Hyperinflation Due to Currency Collapse

• Example: Weimar Germany, Zimbabwe, Venezuela

• These cases involve a loss of confidence in the currency itself, leading to runaway price increases.

• However, counterpoint: These hyperinflations began with food shortages, a war-damaged economy, loss of productive capacity, sanctions, etc).

If we take a broad view, even cases like price gouging and asset bubbles still involve some form of scarcity.

The brilliant economist, Professor Stephanie Kelton, gave me a counter example: Shipping insurance has become more costly because of global warming. More extreme weather (hurricanes, floods, wildfires) increases the risk of damaged or lost cargo, so insurers raise premiums to cover the higher expected payouts. Although inflation is a general increase in prices, and insurance is just one relatively small part of overall costs, even here shortages are responsible, and federal spending could prevent price increases. Federal spending could address better port infrastructure to withstand extreme weather, better storm tracking, improved logistics, more storm-resistant boats, and subsidizing insurance for essential goods shipments to keep costs stable.

Instead of seeing deficit spending as a cause of inflation, Monetary Sovereignty recognizes that it can be used strategically to eliminate the shortages that drive inflation in the first place.

The key is targeted spending—investing in areas where shortages exist (like infrastructure, energy, or production capacity) to reduce prices.

It completely flips the mainstream economic narrative on its head. Rather than fighting inflation by cutting spending or raising interest rates (which can worsen shortages), the government should spend to solve the root causes of inflation.

Rodger Malcolm Mitchell

Monetary Sovereignty

Twitter: @rodgermitchell

Search #monetarysovereignty

Facebook: Rodger Malcolm Mitchell;

MUCK RACK: https://muckrack.com/rodger-malcolm-mitchell;

https://www.academia.edu/

……………………………………………………………………..

A Government’s Sole Purpose is to Improve and Protect The People’s Lives.

MONETARY SOVEREIGNTY