If you listen to financial pundits talking about the Federal Reserve and the current state of the markets you might hear this term mentioned:
What is it? And what does it mean for you and me?
We’ll first discuss the mainstream understanding of the concept and then unpack why it’s more nefarious than you think.
The Mainstream (Wrong) Understanding of Demand Destruction
The mainstream idea goes something like this: The Federal Reserve stimulated economic activity when the markets were frozen from Covid, but now the economy is overstimulated. It’s too hot, like an overheating car engine.
People are spending too much money, and the prices of things are going up–inflation. The economy needs to cool down, and not overheat.
The Fed stimulates by lowering interest rates. Logically, the playbook for un-stimulating, and cooling things down, is to hike interest rates. Hiking interest rates tightens up credit, reduces demand, and therefore should brings prices down.
Seems plausible enough. But let’s dive deeper.
This is a must read in its entirety HERE