[Plura-list] Higher interest rates increase both the monetary supply and inflation

[Cory Doctorow]

Read today's issue online at: https://pluralistic.net/2023/02/04/if-i-was-a-horse/

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Next week (Feb 8-17), I'll be in Australia, touring my book *Chokepoint Capitalism* with my co-author, Rebecca Giblin. We'll be in Brisbane on Feb 8, and then we're doing a remote event for NZ on Feb 9. Next is Melbourne, Sydney and Canberra. I hope to see you!

https://chokepointcapitalism.com/

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Today's links

* Higher interest rates increase both the monetary supply and inflation: It takes a lot of motivated reasoning to believe otherwise.

* Hey look at this: Delights to delectate.

* This day in history: 2003, 2018, 2022.

* Colophon: Recent publications, upcoming/recent appearances, current writing projects, current reading

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💃🏼 Higher interest rates increase both the monetary supply and inflation

Here's the theory: first, hike interest rates, which makes borrowing more expensive and reduces the supply of money in circulation. With less borrowing, there's less expansion, which leads to layoffs that lower the spending power of workers, which means that there are fewer dollars chasing the same goods, which means that prices go down. Q.E.D.

If you'd like an essay-formatted version of this post to read or share, here's a link to it on pluralistic.net, my surveillance-free, ad-free, tracker-free blog:

https://pluralistic.net/2023/02/04/if-i-was-a-horse/#friedman-was-a-dolt

This orthodoxy comes to us from Milton Friedman, the father of neoliberal economics, who believed that every economic problem was down to a mismanagement of the money supply. As economist Robert Solow quipped: "Everything reminds Milton of the money supply. Well, everything reminds me of sex, but I keep it out of the paper."

https://www.nybooks.com/articles/2007/02/15/who-was-milton-friedman/

Friedman's orthodoxy - monetarism - has reigned supreme for decades, which is ironic, given that Friedman and his colleagues at the Chicago School of Economics claimed that they had elevated economics into an empirical, quantitative science, a kind of physics of human action, not like those squishy, social sciences.

You'd think that a self-styled physicist of human behavior would avail themselves of the underlying methodology of the "hard" sciences, which is to say, forming falsifiable hypotheses and then checking to see whether they were borne out by real-world outcomes.

But that's not how the neoclassicals roll - they function like the caricature of the physicist whose every inquiry begins with "imagine a perfectly spherical cow of uniform density on a frictionless plane." Or, as Ely Devons famously quipped, "If economists wished to study the horse, they wouldn’t go and look at horses. They’d sit in their studies and say to themselves, 'What would I do if I were a horse?'"

https://pluralistic.net/2022/10/27/economism/#what-would-i-do-if-i-were-a-horse

(This is why the most heralded revolution in economics for generations is "behavioral economics," which is a fancy way of saying, "Doing economics but checking to see if our assumptions about human behavior are actually right.")

The evidence for monetarism and its interest-rate prescription for reducing the monetary supply and taming inflation is...not good. In a post called "Do High Interest Rates Reduce Inflation? A Test of Monetary Faith," Blair Fix brings out some empirical big guns to test the Friedman method, and finds it sorely in want of a practical basis:

https://economicsfromthetopdown.com/2023/02/04/do-high-interest-rates-reduce-inflation-a-test-of-monetary-faith/

Fix pulls data from the World Bank to investigate the link between interest rates, monetary supply and inflation. He finds that even extremely high interest rates (e.g. Nicaragua's 1992 interest rates of 450%) correlate with an *increase* in the monetary supply - this is likewise true for single- and double-digit interest rates.

Fix measures this in several ways to validate his conclusion, and finds it robust. A few countries have sometimes experienced a modest contraction in monetary supply when interest rates rose, but they are outliers: most of the time, rises in interest rates correspond with increases in the monetary supply.

OK, so hiking rates doesn't reduce the monetary supply. But does it tame inflation? Once again, our uniform spherical cow on a frictionless surface nevertheless skids to a painful halt: "As interest rates grow, it seem that inflation responds by … increasing."

This is another robust finding, one that persists whether we measure inflation between countries or within a single country over time: "For the vast majority of countries — about 82% — the interest-rate-inflation correlation is positive. In other words, when interest rates get hiked, the norm is for inflation to *increase*."

So what's going on here? Fix turns to a 2022 paper by Tim Di Muzio called "Do Interest Rate Hikes Worsen Inflation?" in which Di Muzio injects some much-needed political economy realism into the thought-experiment dreamland of the Friedmanites:

https://strangematters.coop/interest-rate-hikes-worsen-inflation-volcker-shock/

Di Muzio observes that when interest rates go up, businesses *don't* reduce their borrowing, as the neoclassicals would predict. Why not? Because businesses in our real world enjoy pricing power, which means that when their costs of borrowing go up, they pass those increases on to their customers (economists call this "cost-plus pricing").

Which is to say that because interest rates increase the costs for businesses who enjoy monopolistic market power, interest rate increases also cause *price* increases. And not to put too fine a point on it, the economists' term of art for "a sustained rise in the price level" is...*inflation*.

Fix says that at best, monetary policy - raising interest rates - simply fails to cause inflation. But at worst, it actually *increases* inflation. Here he echoes Joseph Stiglitz and Regmi Ira, who compare interest rate hikes to bloodletting. If the patient gets worse, you're not bleeding them enough. If they get better, the bloodletting clearly saved them. If they die, well, some diseases are simply incurable:

https://rooseveltinstitute.org/wp-content/uploads/2022/12/RI_CausesofandResponsestoTodaysInflation_Report_202212.pdf

For Stiglitz and Ira, interest rate hikes don't address inflation because inflation isn't caused by too much money. Rather, it's caused by things like wars and pandemics (which reduce the supply of key inputs and goods), mass deaths (which reduce the workforce), lack of daycare and other policies (which reduce it further), and more:

https://pluralistic.net/2022/12/14/medieval-bloodletters/#its-the-stupid-economy

For Fix, the interest rate/inflation superstition is a tragicomedy: tragic because it worsens the problem it seeks to solve, and comic, because of the absurd motivated reasoning that Friedman-pilled economists indulge in when they are confronted with the overwhelming evidence against their ideological certainty.

Fix describes how, if a neoclassical is argued into a corner by empirical evidence that disconfirms their hypothesis, they will turn, at last, to the idea of distortion: the economy *should* work the way my model predicts, and if it doesn't, it's because the gubmint has "distorted" the economy by "intervening."

This magical thinking insists that we just need to bleed the patient a *little* more, remove a few more guardrails and give a little more control to shareholder-worshipping financiers and a little less to democratically accountable regulators, the map will become the territory.

"Hurry, bring more leeches, the patient is dying!"

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💃🏼 Hey look at this

* Seizing the means of computation – how popular movements can topple Big Tech monopolies https://www.tni.org/en/article/seizing-the-means-of-computation

* On legal bubbles: some thoughts on legal shockwaves at the core of the digital economy https://www.cambridge.org/core/journals/journal-of-institutional-economics/article/on-legal-bubbles-some-thoughts-on-legal-shockwaves-at-the-core-of-the-digital-economy/62964F5EE993E8A7CC60EB4833FA71CA

* The Breadth of the Fediverse https://www.eff.org/deeplinks/2023/02/breadth-fediverse

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💃🏼 This day in history

#20yrsago Pixar dumping Disney? https://www.bloomberg.com/news/articles/2003-02-09/is-steve-jobs-about-to-move-his-cheese

#20yrsago Brighton Pier burns https://news.bbc.co.uk/2/hi/uk_news/england/2726951.stm

#20yrsago Penguins shit all over historic shack https://web.archive.org/web/20030415143832/www.pulse24.com/News/Top_Story/20030203-020/page.asp

#20yrsago Verisign: holding us accountable will kill the Internet https://www.theregister.com/2003/02/03/sex_com_case_heralds_end/

#1yrago When crypto-exchanges go broke, you'll lose it all https://pluralistic.net/2022/02/03/liquidation-preference/#we-live-in-a-society

#5yrsago Wells Fargo’s punishment for fake account scandal: no more growth until Fed is “satisfied” https://money.cnn.com/2018/02/02/news/companies/wells-fargo-federal-reserve/index.html

#5yrsago The coming EU privacy regulation will end up remaking the world’s web https://www.politico.eu/article/europe-data-protection-privacy-standards-gdpr-general-protection-data-regulation/

#1yrago Rail monopolies destroyed the American supply chain https://pluralistic.net/2022/02/04/up-your-nose/#rail-barons

#1yrago A covid vaccine for your airways https://pluralistic.net/2022/02/04/up-your-nose/#nasal-vaccines

#1yrago Money is power: A political economy parable (with a side of environmental racism) https://pluralistic.net/2022/02/03/liquidation-preference/#sweet-sweet-corruption

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💃🏼 Colophon

Currently writing:

* Picks and Shovels, a Martin Hench noir thriller about the heroic era of the PC. Friday's progress: 520 words (102259 words total)

* The Bezzle, a Martin Hench noir thriller novel about the prison-tech industry. FIRST DRAFT COMPLETE, WAITING FOR EDITORIAL REVIEW

* A Little Brother short story about DIY insulin PLANNING

* Vigilant, Little Brother short story about remote invigilation. ON SUBMISSION

* Moral Hazard, a short story for MIT Tech Review's 12 Tomorrows. FIRST DRAFT COMPLETE, ACCEPTED FOR PUBLICATION

* Spill, a Little Brother short story about pipeline protests. ON SUBMISSION

Currently reading: Analogia by George Dyson.

Latest podcast: Social Quitting https://craphound.com/news/2023/01/22/social-quitting/

Upcoming appearances:

* Avid Reader (Brisbane), Feb 8
https://avidreader.com.au/pages/6834-ChokepointCapitalism-RebeccaGiblinandCoryDoctorow

* Chokepoint Capitalism: A Kiwi Perspective, Feb 13
https://chokepoint-capitalism-a-kiwi-perspective.lilregie.com/booking/attendees/new

* Future of Arts, Culture & Technology, ACMI, (Melbourne), Feb 14
https://www.acmi.net.au/whats-on/in-conversation-cory-doctorow-rebecca-giblin-esther-anatolitis/

* State Library of NSW (Sydney), Feb 15
https://www.sl.nsw.gov.au/events/chokepoint-capitalism-rebecca-giblin-and-cory-doctorow

* ANU/Canberra Times Meet The Author (Canberra), Feb 16
https://www.anu.edu.au/events/in-conversation-with-rebecca-giblin-and-cory-doctorow

* Australian Digital Alliance Copyright Forum (Canberra), Feb 17
https://digital.org.au/2022/11/08/doctorow-giblin-first-speaker-announcement-ada-forum-2023/

* Antitrust, Regulation and the Political Economy (Brussels), Mar 2
https://www.brusselsconference.com/registration

Recent appearances:

* Chokepoint Capitalism: Can It Be Defeated? (UCL Institute of Brand and Innovation Law):
https://www.youtube.com/watch?v=xs0c7qE-Yyk

* A theory of how internet platforms die (Marketplace Tech)
https://www.marketplace.org/shows/marketplace-tech/a-theory-of-how-internet-platforms-die/

* Graeber's Pirate Enlightment (Everyday Anarchism)
https://www.everydayanarchism.com/graebers-pirate-enlightment-cory-doctorow/

Latest books:

* "Chokepoint Capitalism: How to Beat Big Tech, Tame Big Content, and Get Artists Paid, with Rebecca Giblin", on how to unrig the markets for creative labor, Beacon Press/Scribe 2022 https://chokepointcapitalism.com

* "Attack Surface": The third Little Brother novel, a standalone technothriller for adults. The *Washington Post* called it "a political cyberthriller, vigorous, bold and savvy about the limits of revolution and resistance." Order signed, personalized copies from Dark Delicacies https://www.darkdel.com/store/p1840/Available_Now%3A_Attack_Surface.html

* "How to Destroy Surveillance Capitalism": an anti-monopoly pamphlet analyzing the true harms of surveillance capitalism and proposing a solution. https://onezero.medium.com/how-to-destroy-surveillance-capitalism-8135e6744d59 (print edition: https://bookshop.org/books/how-to-destroy-surveillance-capitalism/9781736205907) (signed copies: https://www.darkdel.com/store/p2024/Available_Now%3A__How_to_Destroy_Surveillance_Capitalism.html)

* "Little Brother/Homeland": A reissue omnibus edition with a new introduction by Edward Snowden: https://us.macmillan.com/books/9781250774583; personalized/signed copies here: https://www.darkdel.com/store/p1750/July%3A__Little_Brother_%26_Homeland.html

* "Poesy the Monster Slayer" a picture book about monsters, bedtime, gender, and kicking ass. Order here: https://us.macmillan.com/books/9781626723627. Get a personalized, signed copy here: https://www.darkdel.com/store/p2682/Corey_Doctorow%3A_Poesy_the_Monster_Slayer_HB.html#/.

Upcoming books:

* Red Team Blues: "A grabby, compulsive thriller that will leave you knowing more about how the world works than you did before." Tor Books, April 2023

* The Internet Con: A nonfiction book about interoperability and Big Tech, Verso, September 2023

* The Lost Cause: a post-Green New Deal eco-topian novel about truth and reconciliation with white nationalist militias, Tor Books, November 2023

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