What do interest rates, inflation, and unemployment all have in common? I'm not entirely sure

This post is my attempt to draw the connections between all the bits of information we’ve been reading and the very real effects these ideas have on people around the world. I’m not entirely sure that I’ve got a solid grasp on these concepts, but I need to start somewhere to see how these ideas are interconnected.

Let’s start with money. According to Chris Martenson money (US Dollars) is loaned into existence. This happens a few different ways. One way is at my local bank. When I deposit $100 into my local bank they can loan out a certain percentage of that money, let’s say $90, to my sister. Bam, they just created $90. Now there is $190 in existence. I have $100 in savings and my sister has a $90 loan.

Building off that idea is the next concept, interest. Interest is the cost of borrowing money. When money is cheap (interest rates are low) people “buy”, or borrow a lot of it. When money is expensive (interest rates are high) people don’t borrow very much of it.

Inflation happens when there is more money in the marketplace than there are goods and services. What is one way that money is made? Loans from banks. So it stands to reason that when money is cheap (low interest rates) inflation will be higher. When money is expensive (high interest rates) inflation will be lower. Regardless, money is usually being created either at a faster or slower rate, that means that my dollar today can buy me more things than my dollow next year can buy me. So, I should buy now while my money is worth something. As Chris Martenson says, “inflationary money regimes impose a penalty on savers. The opposite side of this is that inflationary money regimes promote spending and require that money be invested or speculated, so as to at least have the chance of keeping pace with inflation.”

Unemployment….this is where things get fuzzy for me. Manfred Steger and Ravi Roy in Neoliberalism say that a main tenet of Reaganonomics and Thatcherism was low levels of inflation was more important than achieving full employment (pg. 20). This leads me to believe that inflation (and thus interest rates) are tied to employment levels. Why? Perhaps when money is cheap (low interest rates, high inflation) it is easier to spend, so people hire more labor? So, when money is expensive (high interest rates, low inflation) money is hard to come by so people are laid off? I’ll go with “yes” for now.

Exchange rates between countries is the last piece of the puzzle. When a country’s currency has high inflation, their currency is worth less compared to a country with relatively low inflation. This means that goods and services from a country with high inflation are cheaper than in countries with a relative low inflation.

It seems like economies are on teeter-totters trying to balance growth and employment on one side and low-inflation and cheaper foreign goods on the other side. Both are enjoyable, but it’s difficult to have them both at the same time.

If all my ponderings are true, then it seems that the cycles of boom and bust, employment and unemployment, are ways in which the system is trying to find balance. I will say that it certainly sucks to be a piece of wood caught in the economic tide as it moves back and forth, but I am happy that I am learning to see the broader system and how it moves.

I look forward to seeing how these concepts tie into trade deficits and national debt. Then I look forward to taking that knowledge and diving in deeper to the question Jill raised in one of our first classes - what is the relationship between capitalism and colonialism. Which brings me to my final question for the evening - what is the relationship IMF policies and economic policies-du-jour in old colonial powers.

“They” say knowledge is power. Bring it on.