By how much should the Bank of England increase interest rates in a traditional monetarist economy

[clivem2]

A more redundant financial product it’s hard to conceive of.

Cash ISAs have their uses as interest rates rise. Those who need a fair sized cash pot (eg in drawdown) can avoid tax on interest if they exceed the tax free £1,000 / £500 allowance. But yes, for many cash ISAs are not useful.

 

[MikeMA]

You said "The correct question is how can monetarist policies reduce inflation and the answer is by having mass unemployment and a reduction in GDP."

That is not the correct question. I created the thread therefore the correct question is whatever I want it to be. You may want it to be that and please feel free to create a thread asking that question if you wish.

As you quoted I said "So my question is IF we live in a traditional monetarist economy should the Bank increase rates and by how much, how quickly?". Where did I say "how can inflation be reduced"? I deliberately left open the option that inflation can't currently be reduced by increasing UK interest rates (eg as a result of the endogenous nature of the current inflation episode). There may be other means like running a fiscal surplus that others might have wanted to throw in to the discussion.

Equally it doesn't always follow that lower GDP has to mean higher unemployment. If workers accepted the same share of a smaller pie they could all continue to work. Alternatively they could insist on the same size portion but inevitably if the total pie is smaller that would mean someone won't get any pie.

Now if you consider the possibility that maybe the owners of capital should get a smaller share then maybe the workers could keep the same size pie and hence all stay in work without getting smaller slices. I'm not aware moneterism says that this is a bad thing (though most proponents of monetarIsm may think so but these two things shouldn't be conflated). So that's a possibility that could be discussed as well. Which ties in nicely with recent (somewhat controversial) comments by the Governor..

If it's not not to reduce inflation what do you see as the underlying objective driving interest rate policy ?

 

[ks.234]

ISTM that raising interest rates will just add fuel to the fire. The cost of housing will rise, again, and economic activity will decline as people cut back to essentials only.

The main drivers are external shocks, energy costs being the most acute IMO, and if government needs to intervene, it should do so by capping the rise and using resource to cushion the impact. It could tell Ofgem to reduce the cap. Energy utilities would be at risk of going bust, and could be nationalised, or subsidised by the state. The right of energy companies to make a profit does not override the right of citizens to eat and keep themselves warm.

Yes, raising interest rates will not bring down inflation, interest rates are designed to reduce demand but our current inflation is down to supply. One of the problems with monetarism is that it presumes that everything is a demand problem and the demand it sees as a problem is workers demanding a living wage.

Raising interest rates is supposed to work by reducing spending, but too much spending is not the problem.

Truss and Sunak have been talking about growth, but where is that growth going to come from?

There are a number of options that will address inflation along with other blights on our economy such as an NHS in crisis, but monetarism does not allow them.

 

[ks.234]

This thread is predicated on monetarism.

Monetarism presumes that;

• inflation is a demand problem
• an unfettered market will produce economic stability.
• free competition within the market is most efficient
• Privatisation, deregulation and cuts to public services are essential
• Unemployment and low wages is used as a buffer stock against inflation
• Government spending is confined by income

None of those presumptions is true.

 

[lawrence001]

If it's not not to reduce inflation what do you see as the underlying objective driving interest rate policy ?

So I basically said "should the Bank increase interest rates in this high inflation period?" I didn't say "should they increase rates as that will reduce inflation" as that's a more leading question and I wanted to hear the views of others. I'm not sure it will decrease inflation for reasons I've given above.

But I'm not sure what other tools the authorities have in their toolkit if you buy into their model of the economy, which is the context in which I want to know what trade offs members think should be made.

I know MMT has some alternatives but they have been discussed elsewhere so I just want to discuss the trade offs in the model used by the authorities. These are the difficult decisions they are having to make (either because we are in a hole or they are forced to use an invalid model depending on your view).

 

[ks.234]

So I basically said "should the Bank increase interest rates in this high inflation period?" I didn't say "should they increase rates as that will reduce inflation" as that's a more leading question and I wanted to hear the views of others. I'm not sure it will decrease inflation for reasons I've given above.

But I'm not sure what other tools the authorities have in their toolkit if you buy into their model of the economy, which is the context in which I want to know what trade offs members think should be made.

I know MMT has some alternatives but they have been discussed elsewhere so I just want to discuss the trade offs in the model used by the authorities. These are the difficult decisions they are having to make (either because we are in a hole or they are forced to use an invalid model depending on your view).

None. Monetarism only has one tool in it’s tool kit, and that is one rusty well used 10mm spanner. Only useful for undoing 10mm nuts. Not much good for keeping an engine going.

 

[lawrence001]

Yes, raising interest rates will not bring down inflation, interest rates are designed to reduce demand but our current inflation is down to supply. One of the problems with monetarism is that it presumes that everything is a demand problem and the demand it sees as a problem is workers demanding a living wage.

Raising interest rates is supposed to work by reducing spending, but too much spending is not the problem.

Truss and Sunak have been talking about growth, but where is that growth going to come from?

There are a number of options that will address inflation along with other blights on our economy such as an NHS in crisis, but monetarism does not allow them.

I agree it's cost push rather than demand pull inflation which then means we could look at supply side reforms, I think Thatcher was big on those in the 80s. Alternatively lowering taxes faced by producers would reduce their total costs (ie cancel out input cost increases) and therefore reduce consumer price rises, the thing is both these are govt led rather than Bank led and the Bank has to act in isolation based on current govt policy when setting rates, and constrained by the economic target they have been set by the govt so until fiscal changes are enacted they have to act on that basis

 

[lawrence001]

None. Monetarism only has one tool in it’s tool kit, and that is one rusty well used 10mm spanner. Only useful for undoing 10mm nuts. Not much good for keeping an engine going.

So do you think they should keep interest rates where they are? Reduce them? Increase them? By how much?

Or maybe put it another way, if we assume a trade off between unemployment and inflation, which is the lesser of two evils?

 

[clivem2]

Raising interest rates to choke demand is the last thing we need. Talk about recession.. Demand is already being choked by the need to pay for inflated basics - energy and food. Why make the situation worse? Find ways to reduce the upward trend for the cost for these basics, we will then start to get inflation down.

 

[lawrence001]

Raising interest rates to choke demand is the last thing we need. Talk about recession.. Demand is already being choked by the need to pay for inflated basics - energy and food. Why make the situation worse? Find ways to reduce the upward trend for the cost for these basics, we will then start to get inflation down.

Great thanks these are the sort of views I'm seeking. So keep rates low, but what needs doing to reduce the pain on the average citizen?

 

[Seeker_UK]

A more redundant financial product it’s hard to conceive of.

It's zero tax, low risk and I'm not minted...

 

[Woodface]

An economy built around normal interest rates should but with years of QE and ultra low rates, and so much leveraged investment (real and financial) only profitable at these rates, I wouldn't call it balanced.

I never said it was but we have had much higher interest rates in my lifetime.

 

[Super Bigote]

Great thanks these are the sort of views I'm seeking. So keep rates low, but what needs doing to reduce the pain on the average citizen?

A monetarist would recommend things like soup kitchen's, food banks, perhaps using state schools and gyms for a small amount of communal warmth on cold nights, a minuscule UBI etc until the workers reduce their wage demands so that they would become employable again.

 

[Sue Pertwee-Tyr]

Raising interest rates to choke demand is the last thing we need. Talk about recession.. Demand is already being choked by the need to pay for inflated basics - energy and food. Why make the situation worse? Find ways to reduce the upward trend for the cost for these basics, we will then start to get inflation down.

Indeed. The thing everybody seems to be terrified of is 'stagflation'. ISTM that choking the economy by raising interest rates is rather more likely to bring that about than not.

So I basically said "should the Bank increase interest rates in this high inflation period?" I didn't say "should they increase rates as that will reduce inflation" as that's a more leading question and I wanted to hear the views of others. I'm not sure it will decrease inflation for reasons I've given above.

But I'm not sure what other tools the authorities have in their toolkit if you buy into their model of the economy, which is the context in which I want to know what trade offs members think should be made.

I think what this tells us, more than anything, is that their toolkit isn't designed to address situations like this, so sticking rigidly to a limited set of tools isn't going to be the best solution. (That implies there are, to say the least, flaws in their model of the economy but you don't want to discuss that so I'll leave it as an aside).

So another option, always available, is 'do nothing'. Ride it out, in other words. Let time fix the issues in due course. The question is whether that would lead to a worse outcome, short- and long-term, compared to using the limited toolkit they have granted themselves. It does seem arguable that 'do nothing' is a better option than 'make things worse' if you are ideologically committed not to 'fix things'.

 

[Super Bigote]

Then the supply shocks we have at the moment will result in capitalists retaining their return to capital and the workers will absorb the brunt of the loss in wealth whilst not causing lasting damage to business profits.

 

[Seeker_UK]

So another option, always available, is 'do nothing'. Ride it out, in other words. Let time fix the issues in due course. The question is whether that would lead to a worse outcome, short- and long-term, compared to using the limited toolkit they have granted themselves. It does seem arguable that 'do nothing' is a better option than 'make things worse' if you are ideologically committed not to 'fix things'.

At a time when an Electorate are either smarting or worried the financial pain is coming then they are looking to their government for solutions. Even if it is the best option, "do nothing" does not portray as much of a a sense of being in control as "doing something"; that is a key consideration if trying to reassure a worried electorate help is at hand or, more cynically, if you wan to keep their vote in 0-5 year timescales.

 

[Sue Pertwee-Tyr]

I agree it's cost push rather than demand pull inflation which then means we could look at supply side reforms, I think Thatcher was big on those in the 80s. Alternatively lowering taxes faced by producers would reduce their total costs (ie cancel out input cost increases) and therefore reduce consumer price rises,

That supposes that the tax burden is greater than the increased cost burden. In the case of energy, I'm not sure it is, at the moment. Nor perhaps for other raw material supplies which have ramped up dramatically in price of late - building materials being one example.

But supposing for a moment that yes, you could offset the input cost rises by reducing taxation. That implies, in a monetarist economy, that either taxes rise elsewhere (ie PAYE) which again suppresses the economy; or cuts to services. Inevitably that means the services used most by the same people who are hardest hit by the inflation in fuel and food costs.

But in a real sense, tax cuts are just another form of government subsidy, such as I suggested upthread. Just a more ideologically palatable one than, you know, actual subsidy.

 

[Sue Pertwee-Tyr]

At a time when an Electorate are either smarting or worried the financial pain is coming then they are looking to their government for solutions. Even if it the best option, "do nothing" does not portray as much of a a sense of being in control as "doing something"; that is a key consideration if trying to reassure a worried electorate help is at hand or, more cynically, if you wan to keep their vote in 0-5 year timescales.

Completely agree. But if you are determined to do something, then don't do a thing that makes everything worse still.

 

[Mike Reed]

And the central bank does what the government tells them to do.

So much for independence (from the gov't) then. D'you mean that G.B.'s decision was in reality all smoke and mirrors?

Re. ISAs (I have a few). They used to be as competitive in rates as ordinary savings accounts. Then the £1000 tax threshold came in, reducing their advantage. Then, ISA rates were priced in at well below other savings acc'ts. About the only useful thing about ISAs, which have almost become a Cinderella product, is that they reduce the input and calc's when doing one's returns. Mind, you, if your interest on non ISA savings acc'ts exceeds £1K on an annual basis, the disparity of rates between ISAs and other vehicles becomes less of an issue and possibly even an advantage, as they automatically roll on annually.

With rising returns, ISAs may once again be a viable savings vehicle. Very naughty of institutions to offer lower rates on ISAs as they then cream off the difference under the guise of 'tax free'. ISAs are hardly more costly to implement for thee savings bodies.

 

[TheDecameron]

Re. ISAs (I have a few).

I read that as ‘regrets, I’ve had a few’.



But then again, too few to mention
I did what I had to do
And saw it through without tax exemption
I planned each charted course
Each fiddle along the byway
And more, much more than this, I did my PAYE

Yes, there were times, I'm sure you knew
With BTL I bit off more than I could chew
But through it all, when there was doubt
I hid it in my pants and flew it out
I faced it all and I stood tall and did it my way