Zero Interest Math

They say that higher interest rates reduce the demand for money. It is probably more precise to say that higher rates reduce the demand for debt.  Borrowers tend to be spenders, after all, that is why they borrow. However, there is at least one way that higher rates actually increase the demand for debt: existing borrowers must cover their outstanding debts or default.  At least one of these borrowers is the country itself.  Unless the treasury can reinforce the contraction of debt based money, by shrinking the national debt, it is hard to imagine that high interest rates can fight inflation on their own.  But there is a much simpler and direct way that a nominal rate hike may add difficulty to the task of inflation reduction. For a nominal hike to be deflationary, the real rate increase must outpace the nominal rate increase. To demonstrate this, let's look at the fisher equation again.  I like to first recall the fisher equation as the definition of the real rate of interest.  It

This post will cover a lot, but in a shallow way, because I think a lot of things are connected.  Each idea discussed involves a deeper line of thinking that I could explain in depth. The relativity of interest and inflation I was tempted to say that price indexes are "arbitrary", in the sense that you can choose any one. But the term arbitrary is not quite right.  Price indexes are relative.  If you switch from one index to another, you get the exact same information, it is only framed differently.  This is exactly how classical Newtonian relativity works, you can use any frame of reference, so long as you transform information properly between them.  Calculations can be done in any frame, for the most part. But given our human experiences are what we use to understand and interpret the world, it helps to have a consistent frame of reference.  Sometimes things can be so muddied that this is impossible. So the point here is, calling something interest or inflation is complete