Do high interest rates fix high inflation?
What a great article.<p>This idea that high interest rates coupled with high levels of public debt are likely to exacerbate inflationary pressures is one I&#x27;ve heard before and one I tend to agree with.<p>My overall view is that we&#x27;re now in a situation where there is no longer any good options. Not that this needs to be said it&#x27;s worth remembering that to reduce debt&#x2F;GDP a nation must grow its GDP component relative to the growth of its debt. Typically this can be done my limiting the growth of public spending relative to the growth of the economy, but today I think there&#x27;s reason to suspect we can&#x27;t do that.<p>The issue is that in recent years trend economic growth even with the expansion of public debt has been anemic in developed economies. People like to just attribute the growth in public spending to stupid politicians, but the reason every developed country has been doing the same thing isn&#x27;t simply because all politicians have suddenly became fiscally irresponsible, but that the trend rate of growth in developed nations has dropped significantly.<p>To prevent stagnation (and in some cases out-right deflation) central banks have become ultra accommodative and governments have spent more money. Despite this increase in public spending it&#x27;s only just about allowed developed countries maintain a slightly positive inflation rate (around 1-2%).<p>But this trend can not longer continue now we have higher rates, and at the same time governments also can&#x27;t afford to spend less. To spend less would lower trend economic growth and this only makes it harder for us to service our debt since we can no longer grow GDP relative to the debt level.<p>Worst yet would be a scenario where this drop in public spending doesn&#x27;t just cause stagnant growth, but deflation or recession since in both scenarios the real cost of servicing public debt will increase relative to GDP.<p>So given demographics and slower trend growth this decade the government probably both has to both increase debt levels to keeping the economy growing while reducing debt levels relative to growth to be confident in its continued ability to service its debt. In my opinion this is probably an unworkable situation.<p>While I agree with Lyn that we&#x27;re going to see waves of stagnation and deflation, followed by growth and inflation the only realistic way this ends is with developed nations defaulting on their debt or hyper-inflating it away (assuming they have that option).<p>This of course assumes that public debt growth is in fact needed to prevent economic from stagnating. If you believe things have changed since the pandemic and we can now grow GDP without increasing debt levels then perhaps we&#x27;ll be fine, but I suspect the trends in place prior to the pandemic are only likely to accelerate in the coming years.<p>In my opinion if you want to remain relatively unaffected by what&#x27;s coming it will become increasingly important to reduce your personal debt levels and avoid saving large sums of money in sovereign currencies.