Article;
You cannot control inflation by hoping to choke demand.
Comment;
Controlling inflation through higher interest-rates has many
positives too... Not one but many… Firstly, it encourages people to save more
and reduces the pressure on lending rates to go-up, we need to match deposit
growth rate with the lending growth rate to maintain stability, and, Secondly,
it reduces prices and increases real wages. We can not underestimate these two
effects because it does the same thing lower interest rate will do, stoke
demand, increase employment and generate growth… Higher interest-rate will
increase interest income and, as have been said, real wages/income will also
increase... in both ways demand is going up; employment and growth will follow… We
have to choose which-way we want to go… We want to appreciate in the nominal
terms or in real terms… Generally we make the argument that inflation and
wages/income should increase with the same rate to keep the purchasing power
intact… Everything appreciates in the long-run, but the value of currencies in
going down in real-terms; we need to pay more every next-year for the same
things… the value of our coins are going down… If gold is a metal and is
appreciating in value then why not the value of our coins… We can say that
metals used in the coins are not scarce relative to gold, but they are scarce
they must also grow in value and buy more things every next year… In real
appreciation the value of money increases with time and in nominal appreciation
it goes down…
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