Raising interest rates is not the solution

Economist and University of Chicago business school professor Raghuram Rajan, former governor of the Reserve Bank of India and formerly chief economist and director of research at the International Monetary Fund, recently discussed on Bloomberg News the ramifications of U.S. Federal Reserve policy. 

Rajan thinks, like his academic peers and the Washington establishment, that interest rate policy is the key tool to fight inflation. 

It isn't.  Monetary policy is the wrong method for combating bad politics.

The real cause of inflation is the Biden administration.  The appropriate inflation policy therefore is to remove it. 

America is seeing inflation across the general economy due to deliberate disruptions to traditional energy production and supply, creating shortages and price escalation.  The Biden administration, moreover, remains committed to supporting or escalating a major regional war, rather than brokering peace, which will continue to disrupt global energy, and agriculture.  The administration will also continue to deliberately interfere with domestic U.S. energy production and undermine or administratively reject new oil exploration and production projects.  World food supply has also been disrupted, creating price rises in numerous basic commodities.

These political, ideological interventions are combined with extreme, runaway government spending.  Interest rates will do nothing to combat government corruption and incompetence.

There is a reason why price inflation suddenly occurred right after the 2020 election: Trump was forced out, and with him, his administration's policies.  These policies were especially coherent because they were based on real-world, practical business understanding.

Professor Rajan demonstrated perfectly why treating inflation, as if it randomly came out of nowhere as a price distortion, is precisely wrong.  It is a political distortion.  He also underscores how the intellectual class generally refuses to face reality: no amount of policy abstraction can address the real culprit of unprecedented U.S. price inflation: the Biden administration's deliberate, systematic interference in the physical production of key industrial sectors, in order to "transform" and "reset" a real economy into an imaginary one.

That real economy runs on oil.  There are currently no mature alternatives to realistically augment or replace it.  This is also why lower tax rates that free up direct investment in new energy are a more appropriate policy response than taxing carbon, especially when those taxes merely disappear in government overhead.

Higher interest rates will, however, drive higher corporate and consumer tax rates, in order to pay for higher government debt service costs.  In the meantime, inflation lowers purchasing power as a hidden additional tax.  By the 2024 election, consumers and business will be longing for the Trump administration's reality-based policies.

Matthew G. Andersson is a former CEO and graduate of the University of Chicago Booth School of Business.  He has been featured in the Wall Street Journal, the Financial Times, the New York Times, the Journal of Private Equity, and by the National Academy of Sciences in law and economics.  He has testified before the U.S. Senate and studied with White House national security advisor W.W. Rostow at the LBJ School of Public Affairs.

Image: Gage Skidmore via Flickr, CC BY-SA 2.0.

If you experience technical problems, please write to helpdesk@americanthinker.com