Economist Criticizes Central Bank Rate Hikes for Inflation and Debt Concerns

5:07 PM ETDeveloping

Business Desk

In Short: Daniel Lacalle, an economist and fund manager, argues that rate hikes won't address inflation or debt issues.

Daniel Lacalle, an economist and fund manager, joined Mike Maharrey on the Money Metals Podcast to discuss the latest economic challenges. According to Lacalle, central banks are tackling the wrong issues with their rate hikes. He argues that raising interest rates won't bring down oil or natural-gas prices, curb government deficits, or reverse monetary debasement, which erodes purchasing power.

Lacalle noted that small and medium-sized businesses in the euro area face financing costs between 7 and 12 percent, significantly impacting their operations. He pointed out that a U.S. rate hike would not affect energy prices or federal deficits but would add pressure on families and smaller businesses. Lacalle also highlighted that roughly 90 percent of job creation in developed economies comes from these businesses, which are most affected by high borrowing costs.

A New York Fed paper, cited by Lacalle, found that staying above the neutral rate in the federal funds rate can destroy about one million jobs per year. This, he argued, is a compelling reason for the Federal Reserve to avoid raising rates. Lacalle further emphasized that the common claims that higher oil prices automatically mean inflation is rising are incorrect. He stated, "War is inflationary" and "oil prices are inflationary," but these are incorrect premises.

Lacalle also criticized the reported Consumer Price Index (CPI) rate of 3.5 percent, arguing that it may not reflect the reality for families dealing with soaring housing, food, energy, and college costs. He noted that consumers often blame the business owner who raises the price of bread instead of the government policies that debase the currency. This misunderstanding, he argued, makes it easier for advocates of greater spending and money creation to present themselves as the solution to affordability problems.

While the U.S. deficit is unsustainable, Lacalle argued that U.S. debt still plays a foundational role in the global financial system in a way that euro-area, Japanese, and British debt do not. He warned that the race of global debt is not a race to see who wins, but who loses first. Lacalle stressed that the greater danger may lie in other advanced economies, not just the U.S.

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