The madness of raising interest rates to tackle inflation caused by the war in the Gulf continues worldwide. As The Guardian reports this morning:
The Reserve Bank of Australia has lifted its key interest rate to 4.6%, its highest level since 2011, while warning of further hikes.
The widely expected fourth increase to the cash rate this year will add to repayment costs for millions of mortgage holders across the country. Before Tuesday's meeting, it sat at 4.35%.
In a statement accompanying the RBA's rate setting board's unanimous decision, it warned its fears about inflation were beginning to be realised and it was ready to lift interest rates again.
Did Australian mortgage holders need to be punished as a consequence of Donald Trump and Benjamin Netanyahu starting a profoundly unethical war in the Gulf, which they now do not know how to bring to a halt? The answer is obviously no.
Will increasing costs for Australian mortgage holders address the problems that the inflation in question is creating within the Australian economy? The answer is, again, no.
Is there any chance that raising interest rates in Australia will improve its resilience in a world where multiple supply shocks are being created as a consequence of this war, climate change, El Niño and other events entirely beyond the control of the Australian government or its central bank? Again, the answer is no.
In that case, the question has to be, why is the Reserve Bank of Australia undertaking a policy that is so obviously inappropriate and which will impose real, and unnecessary costs on the people of Australia whilst reducing the economic resilience of that country, increasing its rate of unemployment, and reducing the level of economic activity that might create income to pay the increased, and unnecessary, interest demands that banks will now make of the people of the country? To that rational question, there is no rational answer.
The people of Australia should be up in arms, as should people around the world in the face of the massive injustice that they are facing as a consequence of an unjust war over which they had no say, no control and no part.
The least people can expect from their governments, and their agencies, is rationality. That is the last thing central banks are supplying now.
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It is bizarre.
Higher energy prices are sucking money out of the rest of the economy – higher rates merely compounds the issue.
Suppose, instead, higher energy prices were due to increases in fuel tax of higher VAT on household energy bills. Would ANYONE (including the BoE) think raising rates was a good idea?? No.
For Central Banks it’s all about these elusive “second round effects”…. which, given the state of the broader economy are unlikely to bite too hard, if at all.
RBA: phone rings: “hello is that the RBA?” (US accent) – “yeah – who’s that?” (RBA) – “Fed reserve here – listen we’ve put up interest rates – cos we can & we wondered if you could as well cos otherwise we would be a bit lonely” – RBA “yeah OK,…. you guys still good for next year in Switzerland?” FR “you bet & thanks – the drinks are on us”.
The above is an extract from “Central Banking 101” chapter “How things really work”.
First America, now Australia. This will be catching.
Also, Trump now threatening to stop US exports of American produced diesel will exacerbate the inflation problem
Or is it something to do with seizing an opportunity to increase the wealth of some hidden sponsors? Maybe I am seeing a conspiracy where only stupidity exists!
Maybe Andrew Bailey should convert the £490bn of gilts on the BoE’s ‘books’ to a zero-coupon perpetual bond!?
I have long suggested that
This is rather good. What Is the Federal Bond Market Really?
AI generated TL;DR witha. few edits:
This article argues that the conventional description of US government borrowing gets the nature of money and government debt fundamentally wrong.
Its starting point is that the US government is the ultimate issuer of dollars. It therefore does not need to obtain dollars from taxpayers or bondholders before it can spend. Government spending creates dollars in the economy, while taxation removes some of them. On this view, a government deficit is not evidence that the government has somehow borrowed money it does not have. It represents a net addition of government-created money to the private sector.
That raises an obvious question: if the US government can create dollars, why does it issue Treasury bonds?
The article argues that bond issuance serves purposes other than financing government spending. Bonds can help manage reserves and interest rates, and they provide investors with a safe, interest-bearing place to hold dollar-denominated financial wealth. In that sense, government bonds are better understood as a savings mechanism than as conventional borrowing.
The apparent link between government spending and bond issuance is instead created by US law. Congress has chosen institutional arrangements that restrict how the Treasury and Federal Reserve interact and require government financing operations to involve bond sales. Those rules could be changed.
The political consequence matters. Describing Treasury securities as government “debt” encourages the belief that government spending is financially constrained in much the same way as household spending. The article argues that this framing disguises the government’s monetary capacity and helps justify claims that desirable public spending is unaffordable, while simultaneously providing owners of financial wealth with safe, interest-bearing assets.
As I am inclined to say, much to agree with.
The central bank should be the ‘people’s bank’ and a part of administering democracy and that includes ensuring that crises are shared between the people and its government using the widest range of mitigations possible, rather that exploited.
Sorry to lower the tone of the blog but what is happening here is fucking disgraceful – no two words about it.
Agreed
Never mind sending Burnham your forthcoming book, I think your solution focussed output for the Ely event needs to be sent to him first and right quick BTW.
Only you have seen it so far, PSR. It will be out at the weekend.
On the ABC news this morning Professor Richard Holden of the University of New South Wales claimed that the war in Iran has no effect on the “trimmed mean inflation” figure used by the RBA and that the inflation we are seeing in Australia, and the resulting increase in interest rates, is purely due to excessive government spending. If this is true then why is inflation also occurring in the UK and many other countries? Neither Prof Holden or the interviewer seemed to notice this anomaly. Holden then went on about how successive government deficits create a debt problem which must be dealt with.
He is talking utter drivel.
You’re in good company. Steven Hail (on LinkedIn) says…
“I regularly get people I have not heard from in years sending me links to articles by Richard Holden.
How to spoil my day.
For future reference, he is on my ignore list.
…
he has a strange (and boring) obsession with straw man attacks at MMT.”
Nuff said.
There are a great many like him, as I have found on YouTube.
Richard Holden has form:
https://theconversation.com/printing-more-money-isnt-the-answer-to-all-economic-ills-71334
It was perhaps the most ignorant tirade against MMT (and monetary economics in general) I have ever read.
Thank you
It’s unfortunate that someone like Holden gets a lot of attention whereas Dr Matthew Crocker, who talks every bit as much sense as Richard has (according to Google) been interviewed on the ABC a grand total of once, which was the interview I mentioned a few weeks ago.
As confirmation that raising interest rates is not the way to reduce demand in the economy I have just received an email from my bank telling me the interest rate paid on our savings account is being raised as a result of the RBA’s announcement on Tuesday. I can’t sit here babbling any more, I have to rush rush out and spend the money on something I wouldn’t otherwise have bought.
https://experts.deakin.edu.au/71977-matthew-crocker
That’s what happens until the momentum changes.
While interest rates remain above inflation, it might be helpful if building societies rediscover their founding 19th-century ethos: a closed ecosystem where a community pools its wealth to shield neighbours from financial ruin. They might then launch a “mutual solidarity bond” that pays interest pegged to CPI, perhaps as an ISA, for savers with a conscience (there are some). The benefit of this pool of cheaper capital could be passed on to homeowners within the society’s membership, perhaps targeting those facing potential default on their primary residences. A temporary bond along these lines might enable a mutual institution to demonstrate that the power of cooperation can triumph over volatile, exploitative market forces.
Much to agree with
The interest rate increases are totally rational in that they help maintain or even increase the value of savings which would fall in real terms if interest rates were not increased
Why should the preservation of savings that are not generating economic value be a national priority when real economic activity is harmed as a result?
They shouldn’t be but when the stated aim of raising them is removed then the only conclusion left is that keeping or increasing wealth inequality is the main objective and as far as this goes it is effective just not for the majority of the people, but if you only walk in wealthy circles then they are your world. A uncle of mine once told me that all US citizens had air conditioning and within his experience it was of course true, the others just didn’t exist or weren’t trying hard enough
I agree it just feels like it is the only effect it will have