Interest Rate Madness

[ks.234]

Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.

John Maynard Keynes​

Our only solution to today’s inflation assumes that it is caused by poor people having too much money. Our current conventional wisdom assumes that inflation is always and everywhere cause by poor people having too much money. Which is why the only ever solution is to take money away from poor people and give it to rich people because rich people having more money is not inflationary. Our current economic policy makes no sense, and will only succeed in proportion that it trashes the economy. But it is the current conventional wisdom, so it gets trotted out again and again because no-one is prepared to do anything that does not fit with conventional thinking

Madness, and the sort of madness the will see us heading into a recession.

Two podcasts featuring Warren Mosler explaining the consequences of high inflation and high interest rates and much else besides. Warren Mosler is a founder of MMT, so not for the closed minded. He has however also worked in bond markets, owned and run his own bank, created his own companies selling high end cars and speedboats he himself has designed and is worth a listen for the more curious of mind.

Things really do not have to be this way

https://www.appliedmmt.com/2117653/12701565
https://www.appliedmmt.com/2117653/12701595

 

[narabdela]

Our current inflation is caused by energy price increases, but our only solution assumes it is caused by poor people having too much money, so we need to take some away and give it to rich people.

A somewhat simplistic, and imo erroneous, point of view.

 

[ks.234]

A somewhat simplistic, and imo erroneous, point of view.

You don’t think our current inflation is cause by energy prices? Or that our current solution is based on an ideological assumption about aggregate demand? Or that interest rate rises benefit the rich and harm the poor?

 

[mandryka]

I think the idea is that prices are sticky. Once prices have gone up companies are loathe to reduce them, even after their costs have started to come down. Reducing people's disposable income puts pressure on prices to come down faster.

 

[tiggers]

Couldn’t agree more OP, the Bank of England either actually think higher interest rates will stop all those nasty people who are fuelling inflation by wasting all their spare cash on feeding their families and keeping them warm… or maybe they have another motive… to keep lining the pockets of themselves and their political mates of course. Trouble is, it can’t last.

 

[Seeker_UK]

You don’t think our current inflation is cause by energy prices?

You'll notice an upwards trend way before energy prices rose: Brexit and depressed supply side struggling to keep up with demand after the mot rigorous lockdowns of Covid are equally, if not to blame. High energy prices are a result of this (along with conflict in Ukraine) and contribute, but are not the only, or possibly even the main, reason.

 

[ks.234]

You'll notice an upwards trend way before energy prices rose: Brexit and depressed supply side struggling to keep up with demand after the mot rigorous lockdowns of Covid are equally, if not to blame. High energy prices are a result of this (along with conflict in Ukraine) and contribute, but are not the only, or possibly even the main, reason.

Which is further evidence that inflation had nothing to do with demand. Post Covid, people started going out more than during lockdown, obvs, but hospitality was still struggling so people still spending below pre Covid levels. The cost of increased energy bills are still a significant factor for people which raising interest rates will not addressing.

According to the OBR, household disposable income is decreasing and set to stay below pre Covid levels

“In 2022-23 and 2023-24, living standards are set for the largest fall on record. This box set out our forecast for real household income, the impact of government policy in buffering the income shock, and its implications for our consumption forecast.”

However, I don’t want to go down this rabbit hole because the central point that a combination of inflation and interest rate rises is bad for the economy and raises the potential for recession, as outlined in the podcasts. I have edited the OP accordingly

 

[ks.234]

I think the idea is that prices are sticky. Once prices have gone up companies are loathe to reduce them, even after their costs have started to come down. Reducing people's disposable income puts pressure on prices to come down faster.

“In 2022-23 and 2023-24, living standards are set for the largest fall on record.

 

[narabdela]

You'll notice an upwards trend way before energy prices rose: Brexit and depressed supply side struggling to keep up with demand after the mot rigorous lockdowns of Covid are equally, if not to blame. High energy prices are a result of this (along with conflict in Ukraine) and contribute, but are not the only, or possibly even the main, reason.

This. /\/\/\

 

[ks.234]

This. /\/\/\

Where does supposed increased demand come from when, according to ONS, household disposable income has fallen? How does the monetarist conventional “always and everywhere” wisdom work when the money supply, in households at least, has fallen?

 

[ks.234]

Interesting Start the Week on R4. A panel of commentators with a range of views from the monetarist to the historical to some wonderful northern practicality.

All different views, but all agree that we are heading for trouble because of the way we do economics today.

 

[Cheese]

all agree that we are heading for trouble

Could it be because they all have their own solution to sell ?

 

[dweezil]

Interesting Start the Week on R4. A panel of commentators with a range of views from the monetarist to the historical to some wonderful northern practicality.

All different views, but all agree that we are heading for trouble because of the way we do economics today.

It was certainly hard to draw any conclusions from the range of views.

The big problem i have with the interest rises is that it's diverting a lot of our expenditure from keeping plant and machinery up to date with spending in the local economy to paying interest to banks with no gain to the local economy.

I thought the theory was that spending benefits a larger part of the economy through multiplier effects. On the other hand i'm sure the bank will be willing to give our cash back, subject to usurious Ts & Cs.

 

[stevec67]

I thought the theory was that spending benefits a larger part of the economy through multiplier effects.

I think that's always been the accepted view and I'm not aware of anyone disputing it. Open a widget factory and the direct employees buy lunch at the local shops, go for a pint after work at the pub around the corner, and get their cars mended at the garage opposite. I know I do. The local businesses consequently need to take on extra staff, etc.

 

[andyoz]

We were predicting this mess in threads here in 2020 once we saw the governments reacting to COVID.

Central bankers think they are way too smart.
They don't account for human nature/greed for starters.

 

[spxy]

inflation is everything to do with "demand" , demand in economic terms is the willingness and ability to pay. The increase in money supply meant that there was an ability to pay the inflated prices we currently have by the majority of the population. Without that energy suppliers could not have increased pricing as far as they did as no one could have paid.

 

[andyoz]

The Fed and other central banks around the world ONLY started being honest about inflation once they had the cover of the Ukraine war to blame.
It was baked into the system well before that.

Our local builders merchants managed to double their Profits in 2021/22 trading year (the total Profits, not the percentage) during a supply side shock. Impressive feat hey? Price gouging cause of the War innit.

 

[kensalriser]

I think the idea is that prices are sticky. Once prices have gone up companies are loathe to reduce them, even after their costs have started to come down. Reducing people's disposable income puts pressure on prices to come down faster.

Prices don’t have to come down at all for inflation to reduce.

 

[Sue Pertwee-Tyr]

I think the idea is that prices are sticky. Once prices have gone up companies are loathe to reduce them, even after their costs have started to come down. Reducing people's disposable income puts pressure on prices to come down faster.

Doesn't seem to work for rental property rates, does it?

 

[andyoz]

Prices don’t have to come down at all for inflation to reduce.

I wonder what percentage of the population confuse Falling Inflation with Deflation. I'm pretty sure politicians are hoping that the percentage is high...