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Rightie ho

Inflation rates are tumbling in Europe, the UK, and the USA.

Despite what mainstream economists in all these places suggested, which was that this would not happen until significant unemployment was created, which desired increase in unemployment required an increase in interest rates to precipitate an economic crisis requiring that redundancies happen, the reality is that the impact on unemployment of those rate increases has, so far and thankfully, been limited and inflation has fallen anyway.

Those who, like me, argued that inflation of the sort that we suffered was always going to be transitory would appear to have been proven right; that is exactly what it was.

Unemployment is necessary for higher interest rates to curb inflation. OK, that’s the Spudclaration there.

As a result, economies that have survived for over a decade on negative real interest rates are now having to endure positive real interest rates, i.e. base rates of interest that are in excess of the rate of inflation. What we can be sure of is that these positive real interest rates will do three things.

Firstly, they will redistribute income and wealth upward in society.

Second, they will penalise those who borrow, significantly reducing their capacity to spend.

And there we have the second Spudclaration in the same piece. Higher interest rates reduce spending and thus inflationary pressures – without there needing to be unemployment.

Good, innit?

9 thoughts on “Rightie ho”

  1. It must be torture to know you have the solutions, but no-one will listen to you:

    tony philpin says:
    January 26 2024 at 1:25 pm
    We are certainly being prepped.

    R4 are busy reinforcing the conventional TINA wisdom of debt reduction. Using the IFS as a goto source, and then the IEA “for balance” seems to be becoming rigid editorial policy.

    Evan Davis’s assumption in PM earlier ths week that increasing growth rates is the absolute bottom line in the next parliament for both parties spending programmes was an unquestioning echo of Rachel Reeves’ own mantra.

    R4’s Briefing Room, allegedly an in depth analysis, is about to look at the economic constraints on both Tory and Labour parties for the next government in next Friday’s edition. The trailer was depressingly obvious.
    It is a pretty certain bet it will all be about ‘fiscal headroom’; desirable debt to GDP ratios; and will presume debt reduction as the ultimately desirable goal. ALL the reporting I have heard in recent weeks on R4 has been straight down the line neoliberalism.

    We rarely even see a reference to alternatives outside this conventional wisdom, let alone explanations of what these options are.
    Even coverage of the impacts of the US Inflation Reduction Act has been somewhat sniffy.

    With repeated reinforcing messages such as Ed Balls’ ludicrous recommendation to completely abandon the £28bn Green investment intention (formerly a commitment), manipulation is all in the direction of reinforcing the inevitability and correctness of the neoliberal consensus.

    The need for dissident voices like Richard’s has rarely been greater.

    +1
    Reply
    Richard Murphy says:
    January 26 2024 at 1:33 pm
    But they never come calling….

  2. Boganboy. The whole of the UK is being fracked. Bearing in mind “fracked” is a contraction of fractured. (Or sometimes a polite version of fucked)

  3. An OT question, but related:

    Why have massively increased interest rates not appeared to have had that big an impact on Western economies? A few years ago if you’d said that rates would go to 5% there would have been predictions of economic chaos, as the debts built up in the ZIRP years because impossible to finance. But here we are, OK we have no great amount of growth, but a good deal of that is down to idiot other policies like Net Zero and importing our Russian diesel via India at a massive markup. But no catastrophe, yet at least. So why is this? Is it because the money printing during covid was so stupendous that we are still living on the fumes of that? Basically what is holding the Western world up, because to my way of thinking it has no visible means of economic support.

  4. “economies that have survived for over a decade on negative real interest rates “

    “Survived” ain’t exactly a glowing reference, is it?

  5. This from John S. Warren, who does appear to at least have a degree of coherence

    This is driven by the obsession with reducing national debt; strictly, not reducing the underlying debt, but the debt-to-GDP ratio. This itself should wave a red flag; using an indirect measure (a ratio here) as a fixed point carries implicit dangers because it is not measuring the underlying disparate elements of the (real) phenomena, each affected by multiple different causal influences, but a simplified abstraction. Ever since Rogoff and Reinhart there have been determined efforts to ‘prove’ (and remember, economics is not science; it has no idea how to prove anything), largely by bullying assertion nd more and more complex econometric regression modelling that a Debt-to-GDP above 85% is bad for growth. In fact over the last ten years the uncertainties over the accuracy of the models have grown (they are models detached from reality); but while the downsides are known this has led, not to abandoning the models; but rather to a peculiar phenomenon that mens that as the models become more complex, the results they produce tend to reduce the cut-off point, while increasing the uncertainties. Now we are in the territory below 70%, and in some cases falling well below even these levels. The mainstream neoliberal economic, abstract world we are moving towards is one where growth is only possible with no public borrowing exists at all

    So models are bad in economics, but in regard to things like ‘Net Zero’ and COVID where the inaccuracies are far greater and the impact of the policies has been literally lethal all is hunky dory??

  6. So far, the only explanation that those central bankers can provide is that they fear that there will be inflation in the future, although they cannot say from where it will come. Nor can they explain why high interest rates will be any more appropriate as a tool to deal with the inflation that they fear than it clearly was not with regard to the last round, where rate rises clearly had no impact on the fall in inflation.

    Let’s see now?

    – War in Middle East
    – War in Ukraine
    – Impact of Net Zero and rolling power cuts
    – Longer term impact of MMT
    – Continued printing of money by Biden and concomitant likely US Debt default
    – Population of UK increasing by size of Birmingham each year through official policy
    – Total mismanagement of the UK economy at all levels and likely currency collapse due to cost of Economically inactive and Public sector

    No – nothing to see there…

    We are, therefore, left with a situation where central bankers’ self-serving and self-fulfilling paranoia about inflation provides cover for the redistribution of wealth within society while simultaneously creating a recession with cost to the majority without there being any logical explanation for their fear that supposedly motivates the retention of high interest rates in the economies of Europe and the USA.

    Far better that I confiscate all pensions, equities and other savings and reallocate it on a one off basis, thereby totally destroying any future savings or investment of any kind in the UK

    To put it another way, we are being governed by irrationality, and politicians appear to think themselves helpless in the face of this fact as if the power of democracy is to be sacrificed to the whim of financial ideologues who have lost any sense of rational ideology.

    The notion that Murphy represents ‘rational ideology’ would be laughed out as inappropriate by Waterford
    Whispers or The Babylon Bee

    . As a recipe to precipitate the collapse of economies and to create a consequent invitation to fascists this approach makes sense. In every other context, it can only be seen as deeply dangerous.

    To adapt Ray Davies:

    They seek him here, they seek him there
    His voice is loud, but he don’t care
    It will make or break him so he’s got to buy the best
    ‘Cause he’s a dedicated follower of fascism

    And when he does his little rounds
    ‘Round the wash and Ely town
    Eagerly pursuing all the latest fads and trends
    ‘Cause he’s a dedicated follower of fascism

  7. Long term, normal interest rates are 5%. So we are in normal territory now. Yet people are screaming we must return to more than a decade of abnormality. By “normal” I mean over the last 320 years, not over the last 32 years.

  8. Jim;

    Japan’s Lost Decade (or three of them, and possibly still counting) – didn’t exactly collapse the economy, and the BoJ/MoF tried all sorts over the period.

    UK Base Rate is 5.25% or about where it was for a long time from around post-ERM through to the 2008 GFC and the Euro Crisis a couple of years later. So the real rate went negative about 15 years ago. It depends on exactly when corporate debt was actually issued and for what maturities, but it’s possible corporates (broadly) don’t really need to refinance in a major way right now, or close to the assumed peak rate. US Corporate issuance was down over 2022/3 compared to 2020/1, but it’s picking up on the assumption the Fed will begin cutting soon-ish.

    There’s a couple of other things – somewhere in the early ’90s, firms realised that they got a bigger bounce exiting a recession if they didn’t cut advertising budgets during the downturn, so behaviour changed. The expensive bit of letting people go as a downturn hits, is the re-hiring process as you exit the recession, thus labour hoarding, as you avoid the cost of going to market, potentially incurring higher wages compared to what you’ve already been paying, plus the whole tedious time-consuming bit of wading through CVs and doing the interviews, and then waiting for the nerk to actually join and become effective. Keeping staff on means to ramp back up quicker. There’s an implication that firms might decide to get rid of the deadwood around 24 months after the recession ends, potentially leading to a small-ish spike in unemployment shortly after.

    Then there’s the shift to the Cloud – firms don’t really need the same level of capital to build out the on-premises data centre and buy all the servers, with the implied replacement cycle. They shift to a subsciption model for compute and storage.

    You shouldn’t also forget that it was Tech VC/PE rapidly cutting costs that lead to the collapse of SVB about a year ago.

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