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Reducing Inflation Will Come at a Great Cost: Stagflation

Ray Dalio outlines the common misconceptions of how central bank policies impact individuals and companies. He goes on to discuss how raising interest rates is a tool to combat inflation but given current levels of debt and productivity in the U.S., it is unlikely the economy will smoothly recover. The only way living standards improve over the long term is to raise productivity, and central banks can’t do that. Due to the current rate of inflation and the high levels of debt the most likely future will take the form of stagflation.

Key Takeways

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Central banks fight inflation by taking money and credit away from people and companies to reduce spending.
Raising interest rates lowers overall spending because more money is used to pay interest rather than going towards the principal amount of an asset.
While tightening reduces inflation because it results in less spending, it doesn’t necessarily make things better because it simultaneously takes buying power away. It shifts some of the squeezing of people via inflation to squeezing of people via giving them less buying power.
Ray Dalio believes the Central Banks have done a poor job because of their aggressive moves with monetary and fiscal policy rather than providing a gentler application.

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