Ritchie doesn’t get macroeconomics, does he?

But the implication is obvious , and is that within 18 months or so of a new parliament the more than 9 million households with mortgage debt will be seeing their average monthly outgoings increase by about £200 a month. That is, to put it in context, about £22 billion of consumer spending that will not be happening each year as a result – which is the equivalent of increasing VAT by more than 4%.

So the simple question to any potential Chancellor is how are you going to keep any recovery going in the face of this?

You’re only going to raise interest rates if aggregate demand is rising by more than that £22 billion, obviously.

£22 billion is about 1.4% of GDP. So, if immigration and economic growth (and you can play around with inflation as well if you want) are increasing demand by more than 1.4% then you can raise interest rates.

Current estimates of real UK GDP growth are 3.2, 3.3 %.

This isn’t even a difficult part of macroeconomics.

19 comments on “Ritchie doesn’t get macroeconomics, does he?

  1. Plus his figures are wrong. He’s saying that a 2.5% increase in interest rates equals an average increase in repayments of £200pm. This is only true if absolutely everyone in the UK has an interest-only, variable rate mortgage. Anyone on a fixed rate mortgage won’t see an increase at all. Anyone on a repayment mortgage will see their monthly repayments increase by less. As any fule kno.

    This has been pointed out to him, but he never was one for correcting his mistakes.

  2. “That is, to put it in context, about £22 billion of consumer spending that will not be happening each year as a result”

    No, it won’t will it. That’s the point!!!!

    I recall Margaret Thatcher at PMQs answering a Neil Kinnock question “Could she tell the peole of Britain how raising interest rates on their mortgages is supposed to reduce inflation”. Her response: “There is no need to ask that question, no need.”

  3. Tim, what the hell are you going on about? I’m pretty sure the argument that raising interest rates depresses aggregate demand is not all that controversial. More general growth might offset that drop in demand, but reducing aggregate demand is kind of the point of raising interest rates.

  4. Or put differently, if raising interest rates will have a large negative impact on demand then the bank won’t have to raise rates by very much to kill any incipient inflation

  5. As a net saver, when interest rates rise my income will increase and I’ll be spending more. Along with several million other net savers.
    Just a gentle reminder to the world that savers do exist.

  6. Alex

    “As a net saver, when interest rates rise my income will increase and I’ll be spending more. Along with several million other net savers.
    Just a gentle reminder to the world that savers do exist.”

    I’d keep my head down if I were you. R Murphy would, at the very least, like to subject your savings to NICs.

  7. Hi Christie

    Are you aware that Ritchie has recently argued that you must be breaking ICAEW rules by blogging under a pseudonym? I would call that an attempt at ‘gagging’ an opponent if he hadn’t denounced the ‘Gagging Bill’ so many times and told us what a champion of free speech he is.

  8. @ Christie

    If his calculation is based on the average mortgage outstanding (and I think it is), then whether mortgages are interest only or repayment is irrelevant. Interest is calculated on the amount owed, not the amount borrowed.

    You’re right about fixed rates, but they only delay matters – and probably not for all that long (what’s the average fix period? two years? that would have the average person only having 12 months protection from rate rises).

  9. Ironman

    I quote from the genuine blog (as opposed to the fake blog you and I find ourselves on periodically) that sums his outlook up perfectly…..

    ‘I would stress: agreement with me is not a condition of a comment being accepted, but disagreement must be reasoned and be offered within the framework of understanding that this blog seeks to promote. That is, it must begin with the axiom that the post is correct and the comment merely seeks clarification.

    This policy is necessary to make the comments section on each blog useful, meaningful and enjoyable for readers.

    For those who disagree or think this an act of censorship I have one suggestion to make: please go and start a blog of your own.

    Free speech is valuable. But not here.

    I support it. But not here.

    It is what permits you to offer your opinion as readily as I offer mine. But not here.

    Nothing requires that I must offer your opinion on my site. To say so is an act of editorial freedom – an issue as important as that of free speech. Translation: you are here to listen to me speak truth to power, but I will use my power to deny you the truth of speech.’

  10. Also the ricktard somewhat ignores the fact that as rates have fallen, many people who aren’t financially embarrassed (most people) have taken advantage of the rate drops by shortening mortgage terms or overpaying capital. Interest charges increase, either on trackers or they drop of fixes, and they’ll normalize the capital element.

  11. Agree with seulmoi’s point – I’ve been overpaying since I took this mortgage out. At some points, I’ve just been rounding it up to the next £100 point – currently I’m paying approximately double. Which, clearly, is more than double the capital element.

  12. This is ridiculous.

    The whole point of raising interest rates is to reduce aggregate demand. This is a feature, not a bug.

    Rate rises are not shocks that happen randomly. They are responses to the healthy condition of the economy.

  13. @The Thought Gang

    Fixeds over 5/10 years have become much more prevalent over the past few years. They were virtually unheard of in 2007 but a lot more common when I moved in 2013. However the potential rate rise was already factored in even then. Cost vs certainty innit.

  14. Matt, could even say they are a response to an economy thats so healthy it needs to change its diet a little.

    Would not suprise me if interest rates started going up in the next few months. A few would panic – but they would have the exact same panic if interest rates went up in 10 years time instead.

  15. @Ironman

    Part of the ICAEW’s ethical code is that you don’t spout your mouth off about something of which you entirely ignorant.

    So I don’t suppose their support for Dick is going to be too vigorous.

  16. How much does the increased income to lenders offset the reduced spending power of borrowers? In a toy economy, the two balance. You know, if you have to give me £5 per month more in interest on my loan to you, you’ve got £5 per month less to spend, and I’ve got £5 per month more to spend, that kind of thing.

  17. Ian B – but you’d also be a bank, not a consumer, so your spending patterns will differ. I was going to buy a new car or tv or kitchen but that’s not what you’ll do with the money. Also by virtue of being a bank you’ll be affected by the interest rate rise in other, compensatory, ways. Higher interest rates don’t suddenly make the bank super-profitable.

  18. @Ian B
    The whole point is that rates have been manipulated lower rather than there’s been an excess of savers over borrowers lowering rates(as interest rates should be controlled by).

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