Week 5 Blog

Hello and welcome back! Over the past week I have been reading about the use of federal interest rates as a deterrent to inflation. In the United States it is commonly accepted that raising the federal interest rate through the Federal Reserve is an effective counter-inflationary strategy. The argument is that by making borrowing more expensive you can slow down the movement and prevent spending throughout the economy. Additionally while borrowing becomes more expensive, holding your money in banking systems becomes more profitable and establishes a baseline income for people who invest their money as continual interest is paid upon it. Following this logic in the United States after the “inflationary effects of Covid era spending the government responded by raising rates. However, while widely accepted in America as a useful tool this is not true throughout the world. 

In Japan throughout and after the pandemic, despite similar if not higher spending to the US the government held steady in refusing to raise interest rate. Japan has opted to maintain low rates, 0.0% compared to the American 5.33%. Japan operates this way because raising interest rates in their view does not have the same interaction with the economy as the US Fed would like you to believe. The general public interacts with interest rates largely through mortgages or any other type of borrowing. For the vast majority of people, high interest rates mean cost of living expenses go up and become more unachievable. This would not have an impact however on smaller day to day expenses where the vast majority of Covid inflation was felt. Food and gas prices are not dependent on interest rates, as people do not typically need to borrow considerable amounts of money to afford those products. This means that while larger expenses get more expensive the smaller costs which saw the actual inflation would experience no change as a result. On the other hand, people with enough money to store large amounts in banks see vast benefits. Remember, interest rate increases also establish a baseline income for savings accounts and the ultra wealthy who hold the majority of American savings see those payments. This largely accounts for why in America, raising interest rates has not stopped us from seeing far higher inflation than Japan has experienced at any point. Understanding macroeconomics through the lens of Modern Monetary Theory tells you why our expectations of the Japanese government’s effectiveness have been subverted. Rather our government has been bankrolling the ultra wealthy who see immense profit everytime rates are raised. See you next week!