Borrowing - Does Raising Interest Rates Really Curb Inflation?

Introduction

I am writing this because I am asked to go on the Steffen Peddie Show on BBC Newcastle to talk about the state of the economy, and very often I see governments and banks doing things that, in my opinion, just do not work and punish the working and middle classes, who are the ones who actually make the economy work.

These are just a few points that come to mind, some are my own experiences and some are my own observations. Feel free to shoot me down in flames, put me right, offer your own opinion or agree with me and if you want to leave a comment on this story please sign up for Vocal. You can do this as a free member or if you want to be paid for your own writing and enter their remunerative challenges please sign up here.

Going Back A Bit

I’m going to try and not be too political in this piece, but we have to remember that governments have to run the economy responsibly. A country’s economy is not like a household or business economy, households and businesses have to bring in more money than they spend or else they head towards bankruptcy.

A government has other options, they can print their own money if necessary, look up quantitative easing on Google to find out more about that. A government’s job is to create a situation where businesses and households can thrive because their income outstrips their outgoings.

After the Second World War Britain voted in a Labour Government, and despite the debt incurred from the war, Labour embarked on an audacious play to grow the infrastructure of the United Kingdom. You can read about this here.

Labour under Clement Atlee introduced Social Security, Council Housing, the National Health Service, and nationalising Coal, Heavy Industry and Railways, effectively laying the foundations for the infrastructure of the UK. Under Thatcher, most of this was sold off allowing financial institutions and the already rich to take advantage of anyone without a decent financial situation, and that is still true today.

This was similar to Roosevelt’s New Deal to fix the disaster of the Wall Street Crash in the thirties which you can read about here. This reformed the Financial system to ensure that a Crash could never occur again.

Some Bankers Are Thick As Two Short Planks.

In 1980 I got married and bought a house, my wife stopped working and I moved to a nom shiftwork job resulting in a huge drop in income, but that was planned. Then the Tory government presided over a 7% to 15% interest rate rise which meant my mortgage payment was going to double. I went to see my manager at the Midland Bank in Southport and asked for some advice and help as this would only be a problem for two months. The idiot said to me “But it’s only gone up 8%, you should be able to cope with that”.

I pointed out that my payments had not gone up by 8%, they had risen by over 100%, but he refused to see what was happening. With some help from my mum, dad and the building society I got through it and switched banks.

It was at this time that Thatcher and Reagan dropped the Financial regulations that Roosevelt had put in place paving the way for the Financial Crash of 2008.

Still In The Seventies

In the seventies no one thought about buying a house because everybody could do it,the wage to house price ratio was fine. My salary at the time was about £4,000 a year and my first house cost me £12,000. Today no one thinks about a house because they can’t afford to buy one, many people earn less than £25,000 a year and house prices are six to ten times that.

Towards the end of the seventies, banking became more aggressive and wage suppression became policy, check out the Adam Curtis documentary “Hypernormalisation” for detailed information on this situation.

Now to get to the point of this post having laid the groundwork

How It Is

Raising Interest Rates is supposedly a strategy for curbing inflation but this is the reality. Partially because of wage suppression and the increase in the costs of goods, most people have less disposable income. Some have mortgages, loans, credit cards as well as the general cost of living in food and transport, and utilities.

The excuse for interest rate hikes is to stop borrowing, but most people have already borrowed, so the ones who have borrowed pay the price of interest rate hikes, especially those who have taken out a mortgage to buy a house. They have invested in the country.

The thing is an interest rate hike will not stop people from borrowing. If they need a car for work, they will still have to borrow. If they need a house to live in they will still take out a mortgage.

The only people who benefit are the financial institutions. Full stop.

Not only that, this takes money out of the economy because people have less disposable income, and may be even forced to borrow more at a higher rate. So the economy slows and the financial institutions are the only beneficiaries.

How It Should Be

Nick Hanauer is very rich and sensible. He is a caring capitalist. He rightly argues that the government should be taxing him at 50% or 60% and that there should be a high minimum wage. His argument is that if the people at the bottom of the pay grades have a good wage and therefore disposable income they will spend that money on goods, stimulate the economy, and make him more money.

The thing is that if people do not have disposable income they become poorer workers because they are more worried about not being able to pay their bills rather than concentrating on their work.

Seattle implemented a $15 minimum wage (still nowhere near high enough) but what happened then is that people started eating out, and getting takeaways causing a huge improvement in the local economy.

Trickle-down does not work because, as Nick says, he is only going to buy himself a couple of pairs of jeans, no more, so his wealth needs to be properly taxed.

Interest Rate Hikes cause inflation and only benefit financial institution and put most people under intolerable hardship.

Interest rates on long-term agreements should not go up, and we need to ensure the people at the bottom, including those on social security, must have disposable income otherwise a county’s economy will simply crash and burn.