[scotty79]

I'm not sure why people think higher interest rates reduce inflation by removing money from the economy.

Main reason high interest rates reduce inflation is that they disincentivise taking new loans and each new loan take is new money printed. So higher interest rates is just putting breaks on money printing.

[neilwilson]

That's the theory. The practice is somewhat different.

Money is a stock. It's the flow of transactions that matter for inflation, and that just increases - as we see from increased credit card lending, and increased trade credit in business (which is the commercial equivalent).

Higher rates just means higher prices, which then leads into higher wage demands.

There is no control until the money becomes 'dead' - saved by people who already have money.

Which funnily enough the banks were doing before they got taxed...

[imtringued]

You are absolutely correct but you are forgetting one thing. The entire system ratchets itself back to a zero money supply automatically as debts are repaid. This means the money supply shrinks overall if the interest rate is sufficiently high and the rate of repayment exceeds the rate of new loans being taken on. This is a very slow acting way of doing things and it can lead to debt deflation. If there was a way to avoid debt deflation, then total debt wouldn't have to rise permanently.

[scotty79]

What's wrong with debt deflation?