One of the biggest challenges new pilots face is keeping an airplane straight and level. Airplanes react more slowly than automobiles, creating a tendency for trainees to overcorrect. The resulting oscillation would make anyone in the back seats queasy, where motion is exaggerated. Which, by the way, is why first class is always in the front of the plane.
When the plane is off course, the instructor teaches the pilot to make very small movements with the yoke and then watch to see how the plane responds. Patience is the key because airplanes have a delayed response. If more correction is needed another small adjustment can be added. Developing this delicate technique is key to becoming a pilot that passengers want to fly with.
The economic risk making headlines today is runaway inflation. The textbook solution is to raise interest rates. Increasing the cost of borrowing slows down the “Demand” side of the economic equation, which should lower prices. Though a risky move, this solution has generally worked in the past, but I fear that today things may be different.
Generally, the cause of inflation is an overheated economy, or too much demand. But today’s inflation is more linked to the “Supply” side of economic math. For example, in my area home prices are up substantially in what appears to be high demand, yet in each of the last two years fewer homes have actually been sold due to a very low supply. The same problem exists in the auto industry where prices are high, yet significantly fewer cars were sold last year than in 2019. Chip shortages have tightly squeezed the supply side of the auto equation.
I am on record in favor of higher interest rates but for other reasons. I believe there is a long-term social benefit to having “borrowing money” be a bit painful. We don’t want a society addicted to easy debt like our government is. I don’t believe that is healthy economically or personally. Additionally, savers should be rewarded with a decent interest rate.
But raising interest rates too quickly to stop inflation may not only create new problems, it may not even solve the problem at hand. Increasing rates would make homes more expensive for those who borrow but in my area over half of home buyers in 2021 paid cash. This interest rate move may push the weakest segment of society out of the housing market, and favor those who least need the governments help. And prices may still go up with so many cash buyers if supplies do not increase.
Our current inflation is uniquely and largely tied to government policy that is squeezing the domestic oil supply, (a main inflation contributor) and general supply problems around the globe. Solving the problem without unfairly punishing the less wealthy segment of society will require addressing the supply side of the equation more proactively. In any case, if the federal reserve wants to raise rates to correct our course, I hope they proceed like a skilled pilot, with patience and very small moves.