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dissonant1's avatar

There is a counter-argument to the "Fed is trapped" argument. I have seen it made in several places but here is the one I just was able to find:

https://wolfstreet.com/2022/06/27/can-the-government-even-pay-the-rising-interest-expense-on-its-gigantic-debt-as-the-fed-pushes-up-rates-yes-heres-why/

I like Mark am not an economist but in simple terms the argument being made here is that 1) there is a lag between rates raising and the impact of such on servicing government debt, since higher rates only apply to new debt; and 2) In an inflationary environment, nominal rates of GDP growth and tax revenue will be able to compensate for the loss of real GDP growth and real tax revenue inherent in a recession. It sounds sort of like sticking steel needles in your eyeballs to make you forget about that leg you just broke... and then deciding which injury needs to be treated first... but there you go.

Luongo makes a similar argument about the "goodness" of rising rates (https://tomluongo.me/2022/08/08/economic-redution-inflation-expansion-everything-out-stock-nothing-cheaper/):

"The way out of this situation for the US is to raise the cost of capital, which the Fed is doing through raising interest rates and force fiscal discipline on Congress by curbing their ability to run deficits while simultaneously lowering taxes at all levels especially on small businesses and wealth preservation. "

The bad thing as Luongo notes is that Congress can still pass outrageous unneeded spending bills and thereby make the Fed's job of curtailing inflation that much harder. No fiscal discipline is statutorily enforced like it is with many states. Now of course Luongo does not think the Fed raising rates is about taming inflation, anyway. If he is right, the notion of them raising rates high enough to make any real difference to overall inflation on the demand side is moot from their point of view anyway.

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Amanda R's avatar

https://tomluongo.me/2022/08/10/from-davos-without-love-true-detective-or-true-conspiracy/

Tom Luongo is a fan of Mark's Substack! He gives it a thumbs up in this article.

I think that's pretty cool :)

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