Quote:
Originally Posted by burn_this_city
Good to see the inflation thread has morphed into the EV thread.
I saw a graph yesterday that historically the only way the Fed was able to tame inflation was to raise borrowing costs above the inflation %. Inflation at 8.6% means rates might have to climb to similar levels, which would absolutely crush asset prices. Sample size was 5 times in the past between the 60s and today.
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Basically, yeah. The one difference this time is how quickly it came on, so theoretically it's less entrenched than those examples. Something similar happened in the early '50s where they went from deflation to near 10% inflation within a year, but then it dropped right back down within a year or two back to a normal level without interest rates having to go above the inflation rate.
Whereas in the late 60s, inflation slowly rose up over a period of several years. And the big mistake they made then was once inflation started to recede, they almost immediately dropped rates to where they were before. So in 1972, inflation was a relatively modest 3.2% after a few high years, but they had dropped interest rates from ~9% to ~3%, and it just started back up again stronger than before and was then spurred on by high energy prices.
That whole cycle happened again in the mid-'70s, except this time the floor for inflation and interest rates was even higher. The only way they finally solved it was ridiculously high interest rates in the early '80s that were sustained well above the rate of inflation for years on end. For a while in the '80s, you could get 10% bank interest rates while inflation was in the 3% range.
So at least they're acting relatively quickly now, though it was obvious that they should have been raising rates more in 2017 and 2018 when inflation was above the target rate. But yeah, I think it's pretty optimistic to think that 3-4% interest rates are going to cure inflation, but I guess you never know. I have seen some compelling arguments that our current situation has more in common with the 1950s inflation than the 1970s. The start of the Korean war led to a pretty quick shift in the economy and there was a supply crunch for a lot of things which drove inflation. But once those began to be sorted out, supply and demand came back into balance and inflation dropped quickly.