How Raising Rates Smooths Inflation
Raising rates cannot stop inflation, but it can stretch it out over a longer time frame
The Valuation of The National Debt
There is a simple indication that raising rates doesn’t credibly eliminate inflation. And that is that raising rates can’t plausibly increase the attainable valuation of the national debt, at least not on its own. If the valuation of the national debt does not increase, then the value of the currency cannot increase either, except by destroying one or the other. Interest without defaults creates more money/debt, in one form or the other.
There is a simple identity between unit value and aggregate value, which is so obvious as to be self-evident, it follows from the definitions. The total value of a count of individual units, is simply the unit value times the number of units.
Can We Borrow Money to Reduce Inflation?
Yes, that is precisely how inflation works. If you have inflation without any national debt, then the price level is arbitrary. It will affect borrowers and lenders, in relative terms, but unless the currency issuer is a “borrower”, then there is functionally “zero” currency in circulation. Debtors and lenders cancel each other out, and net currency is zero.
