This morning (5/17/00) on National Public Radio, Bob Edwards, in an interview with economist Steve Cawley, Assoc. Dir. of UCLA Real Estate Center, regarding yesterday's 1/2-point increase by the Fed in the interest rate, asked, "what makes the Fed think that this latest hike in the rate will slow inflation when the previous five raises have not?"
Cawley patiently repeated what he had already said twice before: there is no sign of increase in the current rate of inflation. The Fed actions are based on ANTICIPATION of inflation. Listen up, Mr. Edwards!
What a choice piece of supply-side PROPAGANDA! For almost a decade now inflation has been below 4% and most of the time under 3%. Such miniscule rates of inflation are insignificant. Of course, wage inflation is really the principal target of Fed Chairman Alan Greenspan. The idea that working people may organize and demand a piece of the prosperity pie is repugnant to the corporate interests that Greenspan represents.
The Bob Edwards interview included the admission that the current policies are pure experimentation, that the increases in interest rates may go over the edge and push the economy into recession. That was what Ronald Reagan did intentionally in 1981 when the inflation rate had risen to 16%. At that time the interest rate was 18% - making the REAL interest rate received by lenders only 2%, and many bankers and other lenders with outstanding loans bringing in only 5-6% were being hurt (and the debtors were benefitting). Reagan trashed the economy, increasing the official rate of unemployment over 15% - the highest since the Great Depression. The "Great Communicator" justified all this pain with the demonizing soundbyte: "inflation is the cruelest tax of all."
Now, with inflation at or under 3% and the prime interest rate at 9.5%, the bankers and lending corporations are receiving over 6% real interest on their outstanding loans. That is real bucks and Greenspan and the Fed are doing all they can to preserve this profit margin for their sponsors. This is the actual goal of the Fed policy.
To the contrary: If we consider financing and the interest on borrowed money as a cost of doing business, as a commodity or a raw material,it is nonsense to think that, by increasing the cost of borrowing by raising interest rates, the overall price of goods and services can be held in check. The sledgehammer of interest rates can only affect inflation by crippling the economy. The irony is that in this time of prosperity, such triage tactics are being employed under the guise of inflation control. So much for the "FREEMARKET" economy.