I probably do not understand economics that well, so feel free to inform me. But here we go:
The consumer price index goes up by x% mainly because of food and energy (drought, floods, sudden gas shortages, increasing energy company profits), but possibly also because of Covid lockdowns in China, or climate change in China, India and Pakistan which is knocking factories out.
The central bank claims people have too much money (there is a loose money supply), so that is why we are getting inflation. I have not seen much evidence that most people, have too much money, or that inflation is being driven by wages increasing faster than profits. Indeed quite the other way around….
Anyway, the central bank appears to assume that people in general must have too much money, therefore it increases interest rates to restrict the money supply.
As those with loans pay more for those loans, they have less money to spend… there is less demand and so prices are supposed to come down.
However, low to median wage people already have less money because its being eaten up by price rises in food and energy – which they might NEED.
Now after the interest rate rise they have even less money and may get thrown out of their homes because they also need to eat etc…. and can’t pay off the loan increases…. Some people live pretty close to the edge.
They can always starve the children I guess, but the situation is likely to get worse as small business with little capital reserve need to put up prices in general to pay off the increased interest on the loans they have taken….
So inflation increases as prices go up and therefore the central bank puts interest rates up again, to try and lower inflation, and drives more people out of their homes and, just maybe, some small businesses go out of business, because they cannot compete with those big businesses with capital reserves…. and the economy gets even more centralised, and people have even less chance of upwards social mobility.
And given small businesses are major employers, it possibly means that closing small business increases unemployment. The IMF apparently has argued that US unemployment should about double to about 7.5% (I can’t find this information, so it may not be correct.). You might wonder about a system whose solutions to problems, openly involve making ordinary people’s lives more precarious.
With less competition, big companies can put up prices, and they can easily coordinate putting up prices, and blame it on inflation. They don’t have to do this of course, but I’d be surprised if some near monopolies don’t – after all making profit for the least cost, is the point of the game. They can also argue that because of cost increases they can’t afford to put up wages – again making profit for the least cost. So the policy is likely to help the transfer of income from ordinary people to the corporate rich and shareholders.
With all the homes being sold, and high interest rates perhaps house prices fall, perhaps they don’t – they didn’t with huge interest rates some years back, where I live. I guess people with money just bought more property.
So this common anti-inflation technique, is bad for people and small business, but ok for big business and people with money to invest in property, and it protects the banks because they get more income, and more foreclosures?
Is that how it works?
Tags: economics, neoliberalism
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