Thread by @CryptoNick_1

I’ve long read that Central Banks have to fight inflation to help stocks and #BTC gain ground again.

But is inflation the only enemy? Should Central Banks only focus on fighting it?

I believe this is both naïve and inconsistent with how the economic machine works.

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That’s because that view only focuses on inflation as the problem and it sees Fed tightening as a low-cost action that will make things better when inflation goes away, but it’s not like that.

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The facts are that:

1) prices rise when the amount of spending increases by more than the quantities of goods and services sold increase

2) the way central banks fight inflation is by taking money and credit away from people and companies to reduce their spending.

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They also take buying power away by raising interest rates, which increases the amount of money that has to go toward paying interest and decreases the amount of money that goes toward spending.

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Raising interest rates also lowers spending because it lowers the value of investment assets because of the “present value effect”, which further lowers buying power.

My main point is that while tightening reduces inflation because it results in people spending less, it doesn’t make things better because it takes buying power away. It just shifts some of the squeezing of people via inflation to squeezing them via giving them less buying power

The only way to raise living standards over the long term is to raise productivity and central banks don’t do that. 

Central banks move demand around by providing and withdrawing spending power by influencing the creation and amounts of debt assets and debt liabilities. 

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They do that in a way that naturally produces cycles in markets (bull and bear markets) and economies (expansions and recessions).

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They stimulate the system via injecting credit and money into it, which produces increases in demand for goods, services, and investment assets that are followed by periods of paying back and withdrawals of the stimulations, which produce lows in demand that are depressing.

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Whenever these depressing periods of paying back become too depressing, central banks typically provide another and even bigger dose of stimulation. They produce the short-term debt cycles (also known as the business cycle), which typically last for about seven years give or take

Banks should:

1. Use their powers to drive the markets and economy like a good driver drives a car - with gentle applications of the gas and brakes to produce steadiness rather than by hitting gas hard and then hitting the brakes hard, leading to lurches forward and backward.

2.Keep debt assets and liabilities relatively stable and, most importantly, not allow them to get too large to manage well.

To do this they should not allow interest rates and availabilities of money to be either too good or too bad for the debtors or the creditors. 

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In summary my main points are that:

1) there isn’t anything that the Fed can do to fight inflation without creating economic weakness

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2) with debt assets and liabilities as high as they are and projected to increase due to the government deficit, and the Fed also selling government debt, it is likely that private credit growth will have to contract, weakening the economy

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3) over the long run the Fed will most likely chart a middle course that will take the form of stagflation