I have a comment piece in The Mirror today:
There's not much to add to that.
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There’s another possibility (that can run in parallel with your predictions). They don’t actually think interest rates will fall and we are in for a lot worse.
They are not expecting rates to fall much – maybe by 1% over 5 years
Thinking in the Central Bank will see significantly higher interest rates as a more important disincentive to any future Government’s inclination to increase the National Debt than any other option that can rescue neoliberal policy from paying the price of its failure (given it is hard to believe the Bank are not factoring in the likelihood that this disaster of a Government’s life expectancy is terminal). You can already read the Mail, Sun and Telegraph headlines of the horrendous cost of servicing the debt, every time Labour spends five-bob on anything at all.
The Bank’s commitment is to neoliberalism, not any Party. They can do this and look pious. Ah, independence eh?
Failing badly, not understanding what you are doing, still less not doing the decent thing are not likely to prove terminal for the Central bank and its faux independence; especially when they know Labour are so hopeless they cannot even deliver the electoral knock out blow, sufficient to persuade anyone they are credible winners, even with an opponent already conveniently prostrate and senseless on the canvas (once people see you are a powder-puff policy puncher whose words are a confection of smoke in a bottle, you are finished); thus a rapid increase in interest rates to much older norms with increasingly punitive impact is a policy that embeds the established order of things, has few downsides when the politicians are all weak and easily led by the nose on monetary economics; and the Bank will already calculate, this effectively disarms (or even paralyzes) a notably timid future Labour government’s policy/budget room to manoeuvre; and ensures the long-term continuation of the neoliberal status-quo ante.
There that’s fixed it. No need for neoliberals to worry about an election, politics, change and all the palaver and worry. The substance is all over, the wind is out of Labour sails (we all know the LibDems are political vegetables), long before the election has begun, or the new Government reaches Downing Street. Job done. Already.
It feels like Nigel Lawson all over again, but in a less ebullient way. There is no alternative etc. And people fall for it.
The “totally out of control” is a phrase that could be applied to the ECB (I commented on this in response to Mr Warrens very good piece on the BoE in your blog on GDP and Sunak). There seems to be a more general problem on interests rates, government finance and money.
Who can forget Thatchers truly imbecile statement: “The state has no source of money other than the money people earn themselves” and pay as taxes. Read below for a re-statement of this, in an extract from Politico – Germany (= EU “country council” in gov finance terms)
starts
Berlin is running short of money “We cannot finance everything we have set out to do,” Finance Minister Christian Lindner. Lindner expects tax revenue of €920.6 billion this year, which is “worse than expected in the October estimate,” Lindner expects that tax revenues will continue to be around €30 billion lower on average each year, meaning that by 2027 this will amount to a shortfall of €150 billion. The German economy is still struggling from the consequences of the coronavirus pandemic and Russia’s war on Ukraine, and as rising interest rates (MP comment: caused by the ECB – & fully supported by the German political establishment) as well as inflation begin to bite.
Linder – going full on Thatcher: “We can only spend the money that the people and businesses in this country generate, we all have to face up to this budgetary reality. In preparing the budget for the coming year, we will strictly prioritize spending. Instead of always inventing new spending programs, we must return to a stability and supply-oriented fiscal policy that advances the competitiveness of our economy. New debt or even tax increases are counterproductive.” (Mp Comment: I was laughing out loud at this point).
ends.
Insainty rules. BoE out of control, ECB – out of control, ditto the Fed. In supposedly “democratic societies” it is mad allowing banksters to “do their own thing”. The problem is, most politicos have little knowledge about gov finance – which is why time and again they make a mess of it.
You are right
Insanity rules
I think that this all reveals the biggest struggle of our times – who controls the money supply and who should benefit more or less from it’s existence.
The answer is that such policies and clashes benefit ‘the monied’ rather than the many who are still working to build wealth. Yet we are told again and again that these classic anti-inflationary measures are good for everyone – and they are not.
Immediately after the crash of 2008 there was a palpable sense of change that society was going to learn something and apply the lessons. But nothing really happened or it was inadequate and the sense I get is that there has been a concerted effort to put the ‘2008 genie’ back into its bottle and revert back to the ‘good old days’.
The other big moment was that the 2008 crash reified the truth about money creation – central banks – as Perry Mehrling summed up: ‘…..But the big picture remains the same: central banks using their position at the top of the hierarchy to manage the inherent instability of credit.’
Opening up a society to the prospect of knowing that the people they vote for potentially have this hierarchical power in their hands is basically being prevented. Societies will not be afforded a ‘red pill moment’ or a fiscal epiphany. Questions and expectations that had every right to flow will be stopped. All in the name of preserving the capital order, and enabling exploitation by that capital order.
Covid, and Russia will all be posed as insurmountable problems – not challenges – just like peaks in the elderly population, immigration and the need for people to assert their rights are turned into ‘threats’.
So now the story is that is was OUR need for ‘cheap money’ , decent pay, health care and investment that has caused all the instability.
Yes – according to some, it’s society’s fault – not finance.
This narrative is a big lie meant to control us once more. But the real truth of the matter is HOW our needs are being met by finance – not WHAT is needed.
And the ‘how’ is wrong – credit based, using the methods of the turf accountant – it is inherently instable and too expensive in more ways than one. And, as long as the state is encouraged to step away from society (and yet, behind the scenes at the same time be the fairy godmother to capital’s excesses using the blackmail device known as the CBRA for example) we are being denied better ways of doing things.
We must keep banging on therefore about what is money. That’s the only choice.
Never has it been demonstrated so clearly that the needs of the few shall indeed outweigh the needs of the many…
It’s that disconnect again – between those in the lofty halls of Threadneedle Street and Westminster and your ordinary citizen who couldn’t give a hoot about GDP or economic growth, and who just wants enough to live on with enough left over for perhaps an annual holiday, or a trade in on a newer car every couple of years or so. To paraphrase what someone on BBC HYS said today, “they want us to carry on spending in order to support growth and GDP, whilst not getting a penny more in wages and dealing with food inflation running at near 20%, and above 10% on everything else”. Why not ask us to divide 5 loaves amongst 10,000 whilst we’re at it? Not just a disconnect – more a complete departure from the rational world into the realm of faeries…
A massive housing program is now needed. I recommend you use Municipal Land and Government Land still having title to it and the Housing Corporation pays as part of its rent a percentage of the rent for its use, that eliminates the cost of land which is two thirds of a house cost, then use Industrial House building at half the cost and it works to house millions.
First confiscate all second and in some cases third homes. Second, use ex industrial land to build houses. Using both these methods will negate the need to build so many new homes, especially on prime farming land.
There is so much ignorance about the reality of life on a little island. 65% + of all food has to be imported, no prime agricultural land should have been used for anything other than food production for the last 60 years.
Fact – agricultural land is being lost at an alarming rate right across the planet and the bipeds are still over breeding at a rate of knots. So, countries that are now exporting food will not do so in the near future. When not if Sterling collapses just how much of the 65% of food imports will the devalued currency be able to afford.
The ignorance about basic facts of simple survival from so many Brits is almost unbelieveable – Macawberism is rampant.
Shall we not be silly here?
Confiscation is not acceptable
Tax is but if you want to put forward stupid ideas go elsewhere
Correct. Little to add…. except to say it’s an accurate concise summary. Does nobody get the time lag concept?
Apparently not
Does the BoE “get the time lag concept?”. If they do, they are presumably following Tacitus’s description of Calgacus’s words on the Romans: “they make a desert and call it ‘peace'”. It requires only the prosaic, but plausible substitution of the words ‘reducing inflation’ for ‘peace’.
Notably and perhaps relevant here, Calgacus was a Scot, who happened to notice that the Romans were rampaging through Britain, laying waste everywhere they visited with a large army; and came without a formal invitation, but nevertheless offered anyone who resisted them, slavery as the best thing for them, in what were after all, difficult circumstances.
The flaw in my analogy is that I have some difficulty seeing Andrew Bailey; protesting his understanding of the pain his policy will have on those worst affected, as a kind of paper-shuffling, bank-manager version of Gnaeus Julius Agricola. Nope, it doesn’t quite work.
The end of 2024 is just over 18 months away.
Yes
So?
Labour is not planning to change anything
I really liked this blog by Blair Fix. A spoof explanation that higher wages would be as effective as higher interest rates in reducing inflation. If inflation is cyclical, and higher interest rates or higher wages are correlated with inflation, then by looking at inflation a year or two later, higher wages can be “proved” to reduce inflation.
In the same way, you can show that there is a negative correlation between deaths in England and deaths the previous year.
https://economicsfromthetopdown.com/2023/03/02/the-key-to-managing-inflation-higher-wages/
That is very good
And spot on re inflation treating itself – as Danny Blanchflower and I say
Inflation always returns to the mean. No action is required. Hundreds of years of data proves it
Hey guys,
Well said.
But why not add interest and mortgage payments to the list of factors that measure inflation. That would keep interest rates as low as necessary. And to not
keep driving them up.
Let me try and help you with some basic economics, Richard:
In this country we import a lot of items from other countries, including energy. The cost of these items is linked not only to the underlying cost of these things, but also to the exchange rate between this country and the country where the item comes from.
Exchange rates are driven by future expectations of relative interest rates between the relevant countries.
Higher interest rates in this country increase the demand for (and hence the value of) sterling, reducing the cost of items bought from overseas, hence reducing inflation EVEN IF THERE IS NO CHANGE IN THE COST OF THE UNDERLYING ITEM.
Hence how interest rates are used to manage inflation.
Wrong
Exchange rates are driven by relative productivity
It helps to get things right
See my post above.
Richard, it’s Interesting that the rest of the (economic) world doesn’t agree with you:
https://www.investopedia.com/terms/i/interestrateparity.asp
https://en.wikipedia.org/wiki/Interest_rate_parity
https://www.thebalancemoney.com/what-is-interest-rate-parity-4164249
https://study.com/learn/lesson/interest-rate-parity-formula-types.html
https://saylordotorg.github.io/text_international-finance-theory-and-policy/s08-01-overview-of-interest-rate-pari.html
https://www.wallstreetmojo.com/interest-rate-parity/
https://corporatefinanceinstitute.com/resources/derivatives/interest-rate-parity-irp/
I think you might be thinking of the (limited) correlation between real exchange rates and productivity growth
Can you explain why everyone else is wrong? Can you link to other credible sources supporting your suggestion?
So I challenge the neoliberal world
Have you been paying attention?
I wonder why Andrew Bailey doesn’t use that explanation? He says it works by reducing demand. Still, he doesn’t know anything anyway.
“Higher interest rates in this country increase the demand for (and hence the value of) sterling,…”
The above is not only incorrect but demonstrably so, by simply looking at the effect on sterling following rate-rises. So easy to do that it makes me wonder who you are trying to fool with the above statement?
Anyone with a conscience would return and accept that they were wrong.
Will you?
That is an interesting contention, Bill.
How much cheaper is energy and food today as a result of the Bank of England increasing base rates, would you say?
Or is this an economic “just so” story?
Mr Bradley, we import some energy, but but no means all. A substantial amount of our electricity is produced by renewable at less than 20% of the international price of gas at the peak price paid by the consumer. The reason for that is the pseudo-market established by the British Government in domestic energy. Some of the companies are now bust. All of this was avoidable, but not by following the logic of your case. The problem with your sources is that the economics discipline is not physics; it does not possess or deserve the claims to authority you wish to assert; indeed it is in some disarray; microeconomics is particularly weak, because it has no substantive test of theory. It is deeply flawed.
The B o E is certainly out of the control, or even influence, of the general citizenry.
Might the B o E be under the control of the rich who also contribute some of their wealth to the Conservative Party?
It’s not only BoE that’s out of control.
https://www.youtube.com/watch?v=DNxXRigHri4
That is very amusing