Interest Rates... and why you're just a slave to The Market
Or, how the little guys ALWAYS get screwed over so the rich guys can get richer.
I loved my time studying Economics. My first lecturer was a guy called Harbhajan Singh (no, not the cricketer), and he was a man emboldened in appearance by a wonderous moustache and a turban that never changed. I liked him very much, but he had the devastating misfortune of lecturing our class through the intricacies of Supply And Demand theory, which he ended up likely not enjoying very much. It was my fault.
Supply And Demand is a pretty simple concept, but economists try to make it seem more complex than it is, and I just can’t help but point that out and ask lecturers questions I know they can’t possibly answer. You see to me Economics is an art. But Commerce is not really a humanities degree, so when you teach Economics in a Commerce degree you sure as shit need to make it look like a science instead of an art. You know, with graphs and numbers and shit. And this is where Supply And Demand Theory falls down.
I’ll give you the brief McClutchin overview, because Supply And Demand Theory is vital to understanding inflation, and why governments try to destroy your financial wellbeing to control it with the brutal axe of interest rates rises.
The basic concept of supply and demand is simply that when a product, let’s say apples, is cheap, consumers will buy more than when they are expensive. Pretty obvious. That’s Consumer Demand. But then you have the Supply side, which basically holds that when a product is cheap, suppliers will want to supply less product than if it were more expensive. So you have this balancing act, based on price, where consumers want lower prices and suppliers want higher prices, and somewhere those two things will meet at a certain price where everyone is relatively happy, and consumers will buy a number of apples that suppliers are happy to grow. This is known as the Equilibrium Point in the market for apples.
Check out this diagram for those who learn with pictures;
That kind of explains it, and when you study this stuff, they give you a pair of quadratic equations, one for the Supply curve and one for the Demand Curve. They make you solve the equations and plot the curves on a graph, just like the one above, and find the market equilibrium point. They make you do it hundreds of times.
That’s where I become a bad student. I can handle the maths of it all. What I can’t abide is this idea that as an economist you could possibly ever really know exactly how many apples consumers are prepared to buy at any given price. You cannot possibly know. Too many variables come into play. So how could you possibly deign to say we can draw a line to plot demand, let alone derive from that a quadratic equation, of all things. You may be able to go to apple growers and ask them how many apples they’d be prepared to sell at a given price, but then you have other issues. For example, apple growers only have a certain number of apple trees, so their production is limited, and most would like to sell all the apples they can produce. They can’t simply grow more apples because the price goes up. And every apple farmer would have a different cost structure at their farm, so they would all have a different idea of what a fair price was.
So the mechanics of Supply and Demand theory are sound, but in my feeble mind it must be treated as conceptual rather than scientific, because most of it is completely impossible to measure and put on a nice graph.
So what does this have to do with Interest rates?
Everything. What Supply And Demand Theory really does is encapsulate consumer behaviour, and underpins why Governments and Reserve or Central Banks around the world use interest rates to beat you over the head when they want to control an economy in a certain way.
And here’s the one thing you need to remember in all of this.
They’re not doing it for you.
You are the worker bees of the economy. The expendable fodder that can and must be destroyed in the name of protecting The Market. And if they must destroy you, then that’s exactly what they will do, because The Market rules (almost) all. I say almost, because there’s one group of people who are not ruled by the market, and that is the very rich. They are the people who have the cash reserves and the ability to leverage assets to take advantage of any movement in the economy, whether it’s good or bad. If an economy is expanding or growing, they have the ability to make more money because of their asset base. If an economy is contracting or slowing, they have the ability to buy more assets at a cheaper price, taking advantage of those who have to sell assets cheaply to survive, then they make even more money off those assets when prices stabilise and rise again.
So don’t for a second think that economic management is about you. It’s about the people who have the power that comes with influence, and that means money. The top end of town. They hold the power here. They are the owners of The Market. It’s not a free market. That is a misnomer.
So let’s get to inflation, or price increases, and why it’s a problem. In economic theory, inflation is an indicator of demand. Remember Supply And Demand Theory says that if demand is high, then prices will rise. Therefore it holds that if inflation is high it MUST be due to consumer demand. That’s the problem with Supply And Demand Theory… it’s too simplistic. Not all inflation is driven by demand. Some is driven by supply side factors. If apple production is halved because some farms are affected by floods, and getting them to the shops gets more expensive because diesel fuel has gone up due to world oil prices, then that is supply side factors pushing prices up, not demand. Remember not so long ago when we were paying ten bucks for an iceberg lettuce in Australia? It wasn’t because we love them so much, it was because the NSW floods destroyed production and they were in short supply.
And too much inflation is bad, because it means the value of money is falling. The $100 you have in the bank might buy 100 apples today, but if inflation is out of control it might only buy you 90 apples next week. Congratulations, you just became 10% poorer, even though you have the same amount of money. You just can’t swap your money for as much stuff. So it’s a measurement of the value of money. Your money. And a measure of your financial worth.
And you know who doesn’t like their money becoming worth less? Everyone. But especially the people who have lots of it.
At it’s worst, inflation can be catastrophic. Just ask Germany, and the millions who died in World War II. Because WWII was a direct result of hyperinflation in Germany. Following WWI the allies forced Germany to pay reparations, which is essentially compensation for the damage done in the war. It was part of The Treaty Of Versailles, which ended the war. The level of reparations were such that the only way the Germans could pay it was by printing money (which is inflationary, we’ll get to that shortly). So they printed money, and then more money. Then they printed some more. As they did it their currency held less and less value, and what you could buy with a German Mark dropped dramatically. You would literally need a suitcase of cash to buy your apple. I’m not being dramatic. That is completely literal.
The German people, already ravaged by the war, were now destitute. Their cash and assets were worthless. Germany could no longer import food and other products, like medicine, because their money was worth almost nothing. At the peak of their inflation problems, one American dollar could buy around one trillion German Marks. In desperation, the Germans turned to the far right nationalist party politicians who promised compensation to those who had been harmed by inflation, and revenge on those who caused it, and elected a Nationalist Government. This further led to the rise of the Nazi Party and a guy called Adolf Hitler. I’m guessing you know the rest.
Without their financial problems, they would likely not have elected the Nazis, and WWII may not have happened. So yeah, inflation is bad, ok?
So how do you control inflation? Assuming you have decided that the inflation is a result of excess consumer demand, and all economists believe that, then you must reduce that demand. And that means taking money out of people’s pockets. If they have less money, they can’t spend as much. Demand falls. Simple really.
And British economist John Maynard Keynes had all the answers. He was the one who tied consumer demand to inflation and economic growth. It’s a whole lot more complicated than that, and I’m a devotee of Keynesian economic theory, but it does get used by governments as a reason to do stupid things.
Anyway, Keynesian Theory dictates that to slow inflation you need to lower demand, because reduced demand lowers the equilibrium price point of the Supply And Demand chart, therefore lowering prices across the economy. Simple, right?
So the Reserve Bank of Australia, charged with managing inflation and keeping it at a target level of around 3% (any lower than that and it is a sign the economy is likely stalling because demand is too low), is using the main tool at their disposal to do just that. And that tool is interest rates. Using interest rates to manage demand is what is known as Monetary Policy in the Keynesian world. Increasing interest rates means your mortgage payments increase, and landlords likely increase rents to cover their own increased mortgage repayments, so everyone is paying more to put a roof over their heads. Therefore less money is left in your pocket, and you reduce your spending on other things. That lowers aggregate demand, and brings prices back down. How’s that working out for you?
There’s another way to reduce demand, and that is Fiscal Policy. This one is out of the hands of the Reserve Bank and is the domain of the Government. Both Federal and State Governments have an impact here. To slow an economy they need to run contractionary budgets, (or a surplus) where they spend less than they receive in taxes, thereby removing money from the economy. Running a budget in deficit is inflationary. To quickly move to a surplus budget from a deficit budget position, a government would need to increase taxes and sack lots of public servants. Neither of which would be popular, so they never want to do it. Not quickly anyway.
There’s another way, and that is to reduce the Money Supply. This is a measure of the total amount of money in the economy. Less money moving around means less money to be spent. The Reserve bank manages this in two ways. They can remove money from the economy by issuing bonds, which are basically financial instruments that investors buy from the government at a specific interest rate, and they can be traded and then eventually cashed in when they mature at a set time. They are doing this now. When they do this, the government reduces the money supply, because they are taking cash out of the economy.
The flip side of issuing bonds is when the Reserve bank goes into the financial market and buys up bonds and other financial instruments, giving cash to the owners of them in exchange. That puts more money into the economy, and drives economic growth. To do this, they literally print more money with which to go out and buy up the bonds. You saw how this worked in the Germany example. Yes, printing money is inflationary. So that’s bad, right? That’s why they give it a special name, so people like us don’t know they’re doing it. They don’t call it “printing money”, they call it “quantitive easing”. See? Sounds much more friendly and less irresponsible than just printing money to pay your bills.
So the Australian government would never do anything like that, right?
At the very time former Australian Prime Minister Scott Morrison was giving this speech about how well the economy was going in the middle of the Covid Emergency, the Federal Government, via the Reserve Bank, was printing hundreds of billions of dollars of currency to help pay for the Covid bills. And yes, that’s hundreds of billions of dollars worth of money printing that we are now paying the price for in the form on inflation. All that Jobkeeper money? We’re paying for it now. But Qantas isn’t paying back the money they were given to keep afloat. Gerry Harvey isn’t paying back the money he was given, even though his company increased its profits during Covid. You get my point.
To be fair though, quantitive easing during Covid is not the only contributor to inflation right now. Food prices are high due to world grain prices, shortages due to all the floods in the last couple of years, supply chain issues, etc. Throw in high fuel prices that are out of our control and you can see where we’re headed in terms of inflation numbers. And we pay stupid prices for energy because that moron John Howard locked us into the world gas prices for our own domestic gas. Because the big end of town makes more money out of our gas that way. Sure, they could supply us with our own gas much cheaper than they do, but they can make more money selling it on the world market, so Little Johnny decided it was only fair to the rich guys that us Aussies pay the world price too, even though we own the stuff. That then flows onto electricity prices, etc. You get the drift.
So here’s my problem with all of this. Very little of this inflation is actually being driven by consumer demand. We’re not driving inflation because we’re buying Gucci track suits and Lamborghinis. We’re just trying to survive. We are paying higher prices because we have to, not because we want to.
And when the conservatives say that the increase in the minimum wage that the Labor government pushed through a little while ago is going to drive inflation higher, you know they are full of shit. People living on those wages spend every cent they have just to survive. They’re not the ones driving inflation. To even suggest that is manifestly deceitful, and even the Governor of the Reserve bank agrees with me on that one, as he recently told a Liberal politician at a recent senate inquiry.
But one group who is wilfully driving inflation are businesses. Corporate profits are soaring in Australia, with many companies taking advantage of inflation as a cover to put prices up unnecessarily. This gouging of consumers is artificially increasing prices and contributing to inflation.
So next time you see a politician say giving the poorest workers a few percent more wages is going to destroy us all, remember who they work for. It’s not you. They work for the big end of town. They really have no fucks to give about your welfare.
Every interest rate rise is a blow to average Australians who are just trying to get through the day. Meanwhile, the rich ones are waiting to pick up cheap property from vendors who can’t afford their mortgage any longer, to buy out businesses that are struggling because their customers have dried up, to pick up discounted assets from people forced to sell them to raise cash to pay their bills. Remember how I said the rich can make money no matter whether an economy is expanding or contracting? That’s how it works.
But do you want to know the most obscene part of the whole thing?
Inflation is measured using what’s called a “basket of goods” method. They take a bunch of items that people buy regularly and monitor the prices of those goods over time. Pretty simple in theory.
So guess what is in that basket of goods? The cost of housing is included. Rents. And a bunch of other things that go up in price when interest rates are pushed up. So every interest rate rise actually, in part, contributes to an increase in the inflation rate.
As I said, it’s more art than science.
If they get this wrong and increase rates too high and for too long, the economy will stall and we will slide into recession. And they won’t know they’ve screwed up until it’s too late, because measuring this stuff is all on delay. You don’t know you’ve fucked up until it’s obvious, and by then you can’t do anything about it.
And here’s the worst part of all of this, and why I say you are just a slave to the market. Slowing the economy by taking money out of your pocket does have the effect of reducing demand and lowering inflation to some degree. But it does other things as well.
It causes people to lose their jobs. Then they can’t pay their bills. They drop out of private health insurance. They stop seeing the dentist, damaging long term health outcomes. They can’t pay their rent. They lose their homes. The banks repossess their houses and sell them. They can’t pay their car loans and the bank repossess them, or they have to sell them. Then finding and getting to work becomes difficult. Rates of alcoholism and drug abuse increase. Gambling goes through the roof (which the gambling lobby adores). Crime increases. Domestic violence rates increase. Domestic murder rates increase. Suicide rates, particularly among men who have families to support, increases dramatically.
These economic policies destroy people’s lives. They literally kill people. But they never talk about that on the news. They only talk about what the latest rate increase looks like in terms of the repayments on a $750,000 mortgage. It’s just a headline, and it’s the wrong headline. Investigating the effects of interest rate rises on domestic violence rates is too tough for journalists these days, because most of them are shit at their jobs. It’s only PHD students and community organisations who do that research, and nobody listens to what they have found. People like this.
Yeah. We’re slaves to the market. We are utterly expendable in the name of maintaining The Market at its peak, for the benefit of those best placed to take advantage of it.
Any I know some of you will say, ok, what’s your answer then? Fair enough too. I certainly don’t have them all. But here’s one idea that might have legs.
Instead of reducing our spending power by making us all give more money to the banks, either directly through our mortgage or indirectly via our landlord, how about they bring in a compulsory personal Superannuation contribution. For example, tell us all that we have to put in maybe 5% more of our income as a personal contribution to our Super. It might be more, it might be less depending on the economic problem we’re trying to solve. The employers take it straight from your pay-packet and send it to your super fund with the rest of your super.
If they want to take away money from our discretionary spending pool, don’t make us give it away to the banks. Make us save it. Then we can’t spend it right now, which will still soften demand the same way, but at least it will still be our money to spend when we retire. And it will have grown. We earnt it, we shouldn’t lose it because the Reserve bank wants to use our money as a way to manage the economy. It would help reduce our future reliance on the aged pension, it would increase the pool of national savings for investment, and we wouldn’t all be so pissed about getting poorer, because at least we wouldn’t feel like we were being robbed. Then, as the economy slows, they can reduce the required contribution percentage. Eventually back to zero. Some people may even choose to keep it at higher levels if they can afford it. God knows nobody will be able to survive in retirement solely on the compulsory super paid by employers. Getting people into the habit of co-contributing themselves would be a good thing for those who can afford it.
It also means, if you did it as a fixed percentage of income, that those with the most disposable income, who are more likely to be driving demand than those with a lower income, will be putting more away than the poorest of us. Those on welfare would lose nothing, so are more likely to not end up living on the streets. And those on average incomes are more likely to survive having to put an extra 5% in their super than they are having to pay and extra $2500 a month on their mortgage or rent.
And remember, plenty in the top end of town don’t even have a mortgage or pay rent, so the effect of interest rate rises on them isn’t the same as someone on the average wage trying to pay for a $850,000 home.
Not perfect, but it’s an idea.
It’s an art, not a science. And there’s no artists running the show. We need to find some.
nice one Tug, i have been sprouting my gob off for 12 months re this. No increases during LNP term, in fact a promise that rates wouldn't go up. Then low and behold , Labor's first month in, "here we go fella's". Fuck off Reserve Bank.
Tugs, wow that's a really well written article. Super understandable with no words that require reaching for a dictionary, aka words used by politicians to bamboozle the fuck out of you. Bravo matey