The important difference between the two periods involves rapid bank lending and large monetized fiscal deficits, which Alden suggests are the underlying factors driving inflation. The former occurred in the 1970s as baby boomers began buying houses, while the latter occurred during World War II as a result of funding the war effort.
“So as the Federal Reserve raises rates, federal interest expense increases, and the federal deficit widens ironically at a time when deficits were the primary cause of inflation in the first place. It risks being akin to trying to put out a kitchen grease fire with water, which makes intuitive sense but doesn’t work as expected.”
Raising interest rates to calm inflation can work, but it’s meant for inflation that has its roots in an expansion of credit tied to banking loans. While higher rates tame such inflation by making borrowing more expensive and thus reducing loan creation in the private sector, they make fiscal deficits worse by increasing the amount of interest owed on those debts. The federal debt today is over 100% of gross domestic product , compared to just 30% in the 1970s.
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