Recently David Baker, a frequent commentator to this blog, raised the point that don’t current US inflation, the pending Fed rate hikes in response to inflation, have negative as well as positive consequences for the future short term 2022 trajectory of the US economy? He asked what are the ‘connections’.
As David noted: “
My take away is that inflation is a savage form of class warfare which is why Biden et al will do nothing about it. Where I am confused is how this inflationary spike will play out because Neoliberal policies require cheap money as well as the substantive issues raised in ‘Central Bankers on the Ropes’ obviously there are connections I just can’t process them.
My reply is the following to this important question:
Dr. Rasmus Reply to Baker:
The ‘connections’ you identify are in fact also contradictions. One the one hand owners of bonds and other fixed capital incomes want inflation controlled since it eats into their wealth and income; so they favor Fed rate hikes. On the other hand, corporations don’t like too much rate hike since it raises the cost of borrowing and thus investment (although banks like higher rates that add to their net interest income). Also, US multinational corps don’t like higher rates since it results in an appreciation of the US dollar, which means when they repatriate their offshore profits earned in foreign currency in the countries they do business, they must convert profits from foreign currency to dollars. And if dollar appreciates (due to higher Fed rates), it means they repatriate few profits in dollar form. Also, rising Fed rates and dollar causes big declines in foreign currency exchange rates, that slow foreign economies (and offshore profits in those countries). It also raises fragility of foreign debt, both sovereign foreign government debt and dollarized private corporate bond debt–all of which can result in financial crashes in emerging market economies. So it’s a mixed picture for US capitalists. Some benefit from higher Fed rates; some not. Capitalist governments continually try to balance the contradictions, not letting either get too far out of control. But when crises deepen, the balancing act becomes more difficult. Sometimes they lose control. Then sovereign bond defaults occur and the IMF has to bail them out (e.g. Argentina, Turkey, etc.); or a sector of the global financial economy experiences a crash and crisis; or re-recessions of the real economy emerge. And in a globalized financialized capitalist economy today, the risk of accelerating contagion–real and/or financial–becomes more likely. Capitalism works by enriching the capitalists while feeding more crises and instability within itself. Capitalist policy makers are always trying to maintain an uneasy balance between enriching capitalists more and provoking more instability and crisis within their own system. That’s what’s behind its ‘boom and bust’ characteristic. Problem is the rich and their corporations benefit most from the ‘boom’, and then are the first to be bailed out when there’s a bust. The rest of the population has to fend for itself to different degrees depending on how important this or that segment is to the system itself. The last four decades illustrate the balancing act is getting increasingly difficult–more is going to the capitalists and their corporations during both pre-bust and post-boom, and less and less relatively to the rest. That’s my ‘short’ explanation.
Dr. Jack Rasmus @drjackrasmus
Jack Rasmus 
Addendum comment: bond holders favor rate hikes by Fed because in theory the hikes are supposed to reduce inflation. But they reduce demand and inflation if demand driven. Current inflation is not demand driven but supply driven, in part, and also just a result of monopoly like corporations price gouging to make up for lost profit in 2020. So Fed rate hikes in practice won’t actually dampen supply-price gouging caused inflation. They might do so, if rates raised high enough. As in 1981 when Fed raised rates to 18%, to make workers wages and certain industries pay the price for what was supply driven inflation caused by OPEC, Saudis, and US oil corps’ collusion. A major recession was thus the means by which the ‘demand side’ paid for shaking out the supply side caused inflation. The Fed today would have to raise rates to at least 5-8% to create a similar path to reducing inflation. But it can’t without provoking another double dip recession, so it won’t. I predict it will abandon its rate hikes policy as soon as it shows it’s slowing the real economy. Fed 10 yr. bond rate won’t go higher than 3-3.5% before this happens.