This is Naked Capitalism fundraising week. 1351 donors have already invested in our efforts to combat corruption and predatory conduct, particularly in the financial realm. Please join us and participate via our donation page, which shows how to give via check, credit card, debit card, or PayPal. Read about why we’re doing this fundraiser, what we’ve accomplished in the last year, and our current goal, more original reporting. Yves here. I am not sure that most Americans would agree with Richard Murphy’s perspective on interest rates. The big reason the prospect of higher interest rates is so alarming in the UK is that most (all?) mortgages have floating interest rates, so interest rate increases translate quickly into higher housing costs for many. I’m unsure as to the interest rate
Yves Smith considers the following as important: Banking industry, Credit cards, Credit markets, Economic fundamentals, federal reserve, Guest Post, hedge funds, Income disparity, investment management, Investment outlook, Private Equity, The destruction of the middle class, UK
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Lambert Strether writes Links 11/25/2021
Yves Smith writes Why Don’t We See Headlines Touting the Pentagon’s Hefty Price Tag?
This is Naked Capitalism fundraising week. 1351 donors have already invested in our efforts to combat corruption and predatory conduct, particularly in the financial realm. Please join us and participate via our donation page, which shows how to give via check, credit card, debit card, or PayPal. Read about why we’re doing this fundraiser, what we’ve accomplished in the last year, and our current goal, more original reporting.
Yves here. I am not sure that most Americans would agree with Richard Murphy’s perspective on interest rates. The big reason the prospect of higher interest rates is so alarming in the UK is that most (all?) mortgages have floating interest rates, so interest rate increases translate quickly into higher housing costs for many. I’m unsure as to the interest rate regime for commercial real estate, as in multi-family housing. If even some mortgages on apartment building are also variable rates, landlords would seek to recoup that cost through rent increases, although that would move through the economy more slowly.
By contrast, here mortgage borrowers get fixed rates. Credit card interest rates are sticky (it takes a while for non-penalty interest rates to rise). I believe student loans are on fixed rates. Personal credit lines are often variable rate or have their rates increase fairly quickly after a prevailing rate increase. So consumer interest rates here are not as sensitive as in the UK.
The point that Murphy misses is that super low interest rates favor financiers and asset holders, and leveraged speculators above all, meaning private equity, hedge funds, and banks. Quite a few papers have argued that the increase in wealth concentration is due not simply to the rich and particularly rich investors getting more and more favorable tax treatment over time, but the way every-falling and now super-low interest rates have goosed the value of their holdings and hurt the middle and lower classes by making housing un/barely affordable. Thus I don’t think many super rich Americans would say they hate low interest rates; they understand full well that higher interest rates would translate in short order into less lofty asset prices.
A related issue is that super low interest rates punish savers, such as retirees. It used to be that old people with some liquid holdings could put them in bonds and have a comfortable life on that income plus Social Security (Social Security is seldom enough with it being deliberately eroded through inadequate inflation adjustments). Now they are faced with cutting their spending to meet their lowered income or taking on more risk in the hope of achieving better returns.
However, I do agree with Murphy’s contention that this inflation can’t be tamed with interest rate rises. It’s due to energy cost increases and supply chain issues, which are worse in the UK due to Brexit. But the flip side is at least the Fed and perhaps the Bank of England too realize that super low interest rates are creating major economic distortions by encouraging so much unproductive speculation. The Fed signaled it wanted to back out of super low interest rates in 2014 but lost its nerve when Mr. Market whacked Bernanke via the taper tantrum. So since US investors are freaked out about inflation, the Fed may use this as cover to put through some increases since investors may haircut asset prices to reflect their inflation forecasts regardless.
By Richard Murphy, a chartered accountant and a political economist. He has been described by the Guardian newspaper as an “anti-poverty campaigner and tax expert”. He is Professor of Practice in International Political Economy at City University, London and Director of Tax Research UK. He is a non-executive director of Cambridge Econometrics. He is a member of the Progressive Economy Forum. Originally published at Tax Research UK
The Bank of England is sending out signals, again, that it is expecting to increase bank interest rates soon. The current official interest rate is, admittedly, at a record low level, but the question to be asked is what would an increase achieve?
The official response is that it will help curb inflation. This, however, makes no sense. The inflation that we currently have is very largely due to increases in the prices of durable goods, such as cars. The supply of these has been severely disrupted after COVID because of worldwide disorganisation of shipping as world economies sought to reopen. This disruption is already resolving, but meanwhile people have already deferred their purchases of these goods in anticipation of prices falling. Once they are back on the shelves, or on the forecourts, there is a real chance that prices might actually fall. In that case It is very likely that current inflation is going to solve itself very soon, and that we could even see deflation at least in the price of these goods.
This, factually based, reasoning appears to have no influence on Bank of England thinking. so, in that case why are they really looking to increase interest rates, even if only modestly? I can offer three reasons.
The first is that dogmatically they believe that they have a duty to respond to any inflation increase by increasing interest rates. Their logic has a number of dimensions to it. They do, for example, think that interest rate increases simply change the economic mood, and so deter spending, so cutting inflationary pressure. They also think that households with fixed budgets who have to pay more interest will, inevitably, spend less and so reduce their consumption spending, which reduces inflationary pressure. And they think that saving is motivated by interest rates and that higher rates will result in increased saving, again reducing consumption spending. In combination they do, therefore, think that they will do good, although they also know that because the feedback loops that create these processes of change are very long the immediate impact of anything that they do is decidedly limited. In fact, the current inflationary pressures may resolve well before these consequences are seen.
Second, bankers look after bankers, and low interest rates make it very hard for banks to make any profit from conventional deposit taking. So, whenever they have opportunity, bankers will seek to increase rates to in turn increase bank profits. Most members of the Bank of England Monetary Policy Committee have some association with banking. Do not dismiss this as an issue in that case.
Third, bankers also serve the interests of their best customers, and their best customers are the wealthy. They are objecting very strongly to current low interest rates even though they have profited enormously as a consequence of the asset price increases that they have fuelled. Having their cake is not enough for this group, however. They also want to eat it, which means that they also want an increased income rate of return as well. Sending out a signal that interest rate rises will happen appeases their demand for action.
It is, then, easy to explain why bankers want to increase interest rates. But, implicit in all this is something else. Note who bears the greatest proportional burden of this change. It is borrowers. The wealthy borrow by choice. Those least well off do so out of necessity. The wealthy can, then, also choose to avoid the impact of any decision by the Bank of England. In contrast, indebted households cannot do so. Any interest rate increase is, as a consequence, wholly intended to oppress those who already face stressed household budgets. These tend to be parents, younger people, those on lower incomes and people who cannot now enjoy social security benefits that were once available.
There is no need to increase interest rates at present. There is no need for the Bank of England to signal to financial markets that they should, in turn, increase rates. But they are doing so. In the process they are engaging in what anyone might call class warfare. You do not need to be a Marxist (and I am not) to say so. This fact is written all over the policy.
I object to interest rate increases because they are not needed and could destabilise the economy. But I object just as much for this second reason, which is that yet again policy is being put in place that is intended to send wealth from those with least to those with the most, and that is not the basis for any sustainable society.