The European Central Bank reacted to inflation data in the usual monetarist knee-jerk way, by increasing interest rates from 2 to 2.25%. This is the first rate increase in almost three years. Inflation had surged to 3.2%, well above the ECB target of 2%. The U.S. Fed is also poised to start raising interest rates, according to press accounts.
Dominant economic doctrine assumes only two causes for inflation: rising costs, especially wages ("cost push") and “excessive” demand ("demand pull"). But inflation can have many causes, such as energy price shocks such as the one that has hit the world economy because of the war against Iran, and especially hyperinflation of worthless financial aggregates (speculation) which contaminates the entire system. Tightening the money supply won’t solve the problem, but will make it worse, by increasing production costs and ultimately consumer prices.
Higher interest rates are also going to accelerate the financial collapse, by making liquidity tight and therefore increasing the price of refinancing the everything bubble.
Lower interest rates are also the wrong policy—so long as the financial bubble remains intact—because they will only facilitate further funds flowing in the direction of the financial cancer. In short, under the current system, the options available are all lose-lose.
