June 9, 2023

The recent change in narratives of why interest rates need to go up is interesting.

First it was supply chain bottlenecks. Then it was Russia's war against Ukraine and the West's necessary policy response to that.

Then, when inflation was not temporary, neoclassicals started blaming workers' wages—they were too high and that created too much demand. The line was too much money was given out during the pandemic and that caused prices to go up.

The soft left (Post-Keynesian) responded and said that it was greedflation. Profits were too high because companies were increasing prices because they are greedy nasty people who do not care no one can afford food.

Now it is neutral rates. Central bank rates are too low and are still causing real rates to be negative, creating a massive incentive to borrow.

The odd thing for me is that some of these narratives are somewhat true. True in that wages have gone up and profits did go up—though not because of "greedflation" whatever that is. But, none of these issues explain why inflation is high, most of these supposed "causes" did not have a direct impact on inflation, and none explain the mechanism is for reducing inflation using the prescribed policy response.

The pandemic-caused supply chain crisis was an instigator to higher inflation. But, so was:

• a real reduction in production
• a printing of money not tied to production
• a response to the war in Ukraine that increased fuel costs
• climate change responses driven by cheap money incentives
• lack of profitable productive investment opportunities where money was put into highly speculative financial markets (i.e., crypto currency markets and the stock market)
• climate change-caused droughts and floods pushing up the price of food
• a transition away from internal combustion engine cars reducing car production
• an economy already heading towards a recess because of the longer pattern of debt under capitalism.

All of the things outlined by the narratives above are a consequence of climate change under capitalism.

The new narrative around neutral rates has come out because central banks need a new reason for increasing rates than "wages are too high". The funny thing is that it is closer to the truth than all the other reasons.

Central bank money printing to save capital's profits over the previous decade created the inflation bomb. Then climate change (pandemic, floods/droughts, etc.) lit the match.

For me, the solution to the inflation issue is the solution to climate change through socialist-style investment programs.

We need to transition the world economy away from poorly structured investment regimes based on profit.

We need certain investments and the low interest rate failed to deliver this. The new regime of tax credits and direct profit gifts to capital will, for only slightly different reasons, also fail to deliver the change we need.

The only alternative is to direct our money where we need it to go.

• Climate change mitigating investment in energy
• Just transition
• Support for those in crisis resulting from the pandemic (mental health, housing, food distribution)
• Productive job creation
• Regulating down the wasted investment generated by untethered, negative capital investments
• Opening-up technology
• Local production chain development
• Sustainable food security

These are only going to be possible with active public investment programs.

They will all reduce the price pressure from inflation.

The alternative is to keep chasing the neutral rate while sinking the economy into recession. A recession where investment declines just as we need more of it.