Raising interest rates will be a class war
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Here comes Yves. I’m not sure that most Americans will agree with Richard Murphy’s view on interest rates. One important reason why the prospect of rising interest rates is so worrying in the UK is that most (all?) mortgages have floating interest rates, so for many people, rising interest rates quickly translate into higher housing costs. I am not sure about the interest rate system for commercial real estate, such as multi-family housing. If even some mortgages for apartment buildings have floating interest rates, landlords will seek to recover costs by increasing rents, although this will affect the entire economy more slowly.
In contrast, mortgage borrowers get a fixed interest rate here. Credit card interest rates are sticky (it will take some time for non-penalty interest rates to rise). I believe that student loans have a fixed interest rate. The personal credit limit is usually a variable interest rate, or the interest rate increases quite quickly after the general interest rate increase. Therefore, consumer interest rates here are not as sensitive as in the UK.
One thing Murphy overlooked is that ultra-low interest rates benefit financiers and asset holders, especially leveraged speculators, namely private equity, hedge funds, and banks. Many papers believe that the increase in wealth concentration is not only because the rich and particularly wealthy investors get more and more favorable tax treatment over time, but also because of the continuous decline and the current ultra-low interest rates that increase the value. Their wealth is reduced and they hurt the middle and lower classes by making housing impossible/almost unaffordable. Therefore, I don’t think many super wealthy Americans will say that they hate low interest rates; they know very well that higher interest rates will translate into lower asset prices in the short term.
A related problem is that ultra-low interest rates punish savers, such as retirees. In the past, old people with some liquid assets could deposit them in bonds, and rely on this income plus social security to lead a comfortable life (social security is rarely deliberately eroded due to insufficient inflation adjustment). Now, they are facing the problem of cutting expenses to cope with the decline in income, or taking more risks in order to obtain better returns.
However, I do agree with Murphy’s argument that it is impossible to curb inflation by raising interest rates. This is due to increased energy costs and supply chain issues, and the situation in the UK is worse due to Brexit. But on the other hand, at least the Federal Reserve and perhaps the Bank of England are aware that ultra-low interest rates are causing serious economic distortions by encouraging so much unproductive speculation. The Fed expressed its desire to withdraw from ultra-low interest rates in 2014, but when Mr. Market cracked down on Bernanke by reducing panic, it lost its courage. Therefore, because US investors are panicking about inflation, the Fed may use this as a cover to raise interest rates because investors may cut asset prices to reflect their inflation forecasts anyway.
Author: Chartered Accountant and Political Economist Richard Murphy (Richard Murphy).He has been The Guardian description As an “anti-poverty campaigner and tax expert”. He is Professor of Practice in International Political Economy and Director of UK Tax Studies at City University of London.He is a non-executive director Cambridge Econometrics. He is a member of the organization Progressive Economic Forum. Originally published on UK Tax Research
The Bank of England signaled again that it is expected to raise bank interest rates soon. It is true that the current official interest rate is at the lowest level in history, but the question to be asked is what will a rate hike bring?
The official response stated that this will help curb inflation. However, this does not make any sense. Our current inflation is largely due to the increase in the price of durable goods, such as automobiles. As the world economy seeks to reopen and shipping is chaotic around the world, these supplies have been severely disrupted after the COVID-19. This interruption is already being resolved, but at the same time, people have postponed the purchase of these goods due to the expected price drop. Once they are back on the shelf or in the front yard, prices may actually fall. In this case, the current inflation is likely to resolve itself soon, and we can even see at least deflation in the prices of these commodities.
This fact-based reasoning seems to have no effect on the Bank of England’s thinking. So, in this case, why do they really want to raise interest rates, even if only moderately? I can provide three reasons.
First, they dogmatically believe that they have a responsibility to respond to any rise in inflation by raising interest rates. Their logic has many dimensions. For example, they do believe that raising interest rates will only change economic sentiment, thereby curbing spending and reducing inflationary pressures. They also believe that families with a fixed budget have to pay more interest, which will inevitably reduce expenditures, thereby reducing consumer spending, thereby reducing inflationary pressures. They believe that saving is driven by interest rates, and higher interest rates will lead to an increase in saving, again reducing consumer spending. Therefore, they do think they will do well, although they also know that because the feedback loop that creates these changes is very long, the direct impact of whatever they do is obviously limited. In fact, current inflationary pressures may be resolved before these consequences occur.
Secondly, bankers take care of bankers, and low interest rates make it difficult for banks to profit from traditional deposit business. Therefore, whenever there is an opportunity, bankers will seek to increase interest rates to increase bank profits. Most members of the Monetary Policy Committee of the Bank of England have some connection with the banking industry. In this case, don’t treat this as a problem.
Third, bankers also serve the interests of their best customers, and their best customers are the rich. They are very strongly opposed to the current low interest rates, even though they have made huge profits due to the asset price increases they promoted. However, for this group, owning their cake is not enough. They also want to eat it, which means they also want to increase the rate of return on income. The signal that interest rates will rise pacified their need for action.
So, it is easy to explain why bankers want to raise interest rates. However, all of this implies something else. Please pay attention to who bears the largest proportion of the burden of this change. Is the borrower. The rich choose to borrow money. Those who are the least wealthy do this out of necessity. Therefore, the rich can also choose to avoid the influence of any decision made by the Bank of England. In contrast, indebted families cannot do this. Therefore, any interest rate hike is entirely to suppress those who are already facing pressure on family budgets. These people are often parents, young people, people with lower incomes, and people who are now unable to enjoy the social security benefits that were once available.
There is no need to raise interest rates at this time. There is no need for the Bank of England to signal to the financial markets that they should raise interest rates in turn. But they are doing it. In the process, they are engaged in what anyone could call a class struggle. You don’t need to be a Marxist (I am not) to say that. This fact is written in the policy.
I am opposed to raising interest rates because they are not necessary and may destabilize the economy. But I also oppose the second reason, that is, the policy being implemented aims to send wealth from the least people to the most people. This is not the foundation of any sustainable society.