Tuesday, May 10, 2022

Inflation - deflation

Two sides of one coin: Instability. That’s what we have in economies across the world at this time.

Right now, prices are going up rapidly on all manner of goods and services, with energy/food being major ones, as well as the cost of borrowing money which feeds into prices as well.

Raising interest rates is a tool used by central bankers to try to slow down price increases in an economy, but it has to be used with a great deal of caution lest people stop buying goods and services to the point of causing a deflation in prices.

From a central banker’s point of view it is like driving a big truck with a sloppy steering:
You turn the wheel a bit one way and the truck start sliding out in that direction. You try to compensate by turning the wheel the other way, and by the time you notice a change in direction, you have had to apply quite a bit of pressure (change interest rates) on the wheel.

That’s when things (the truck) can go sideways and when the driver (central bank) can lose control.

And energy/food shortages and wars are like ice on the road.

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