(Finance) – “Now I commonly hear that inflation is the big problem, so the Fed has to tighten (monetary policy, ed) to fight inflation, which will make things good again once inflation it will be under control this is naive and inconsistent with the way the economy machine works. ”He said that Ray Daliohead of the world’s largest hedge fund (Bridgewater) in a LinkedIn post.
“This is because that view only focuses on inflation as a problem and sees the Fed tightening as a low-cost action that will make things better when inflation goes away, but it doesn’t,” he explained, bringing two arguments. . The first is that “prices rise when the amount of spending increases more than the quantities of goods and services sold, while the second is that the way central banks fight inflation is stealing money and credit from people and companies to reduce their spending “.
Furthermore, the central banks “they take away purchasing power by raising interest rateswhich increases the amount of money that has to be used to pay interest and decreases the amount of money that goes into shopping. “
In his conclusions he states that “there is nothing the Fed can do to fight inflation without creating economic weakness”, “private credit growth is likely to contract, weakening the economy” and that “in the long run the Fed will most likely plot one middle ground which will take the form of stagflation“.