An Increase in Interest Rates Would Be An Act of Class Warfare

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Yves here. I am not sure that most Americans would agree with Richard Murphy’s perspective on interest rates. The big reason the prospect of higher interest rates is so alarming in the UK is that most (all?) mortgages have floating interest rates, so interest rate increases translate quickly into higher housing costs for many. I’m unsure as to the interest rate regime for commercial real estate, as in multi-family housing. If even some mortgages on apartment building are also variable rates, landlords would seek to recoup that cost through rent increases, although that would move through the economy more slowly.

By contrast, here mortgage borrowers get fixed rates. Credit card interest rates are sticky (it takes a while for non-penalty interest rates to rise). I believe student loans are on fixed rates. Personal credit lines are often variable rate or have their rates increase fairly quickly after a prevailing rate increase. So consumer interest rates here are not as sensitive as in the UK.

The point that Murphy misses is that super low interest rates favor financiers and asset holders, and leveraged speculators above all, meaning private equity, hedge funds, and banks. Quite a few papers have argued that the increase in wealth concentration is due not simply to the rich and particularly rich investors getting more and more favorable tax treatment over time, but the way every-falling and now super-low interest rates have goosed the value of their holdings and hurt the middle and lower classes by making housing un/barely affordable. Thus I don’t think many super rich Americans would say they hate low interest rates; they understand full well that higher interest rates would translate in short order into less lofty asset prices.

A related issue is that super low interest rates punish savers, such as retirees. It used to be that old people with some liquid holdings could put them in bonds and have a comfortable life on that income plus Social Security (Social Security is seldom enough with it being deliberately eroded through inadequate inflation adjustments). Now they are faced with cutting their spending to meet their lowered income or taking on more risk in the hope of achieving better returns.

However, I do agree with Murphy’s contention that this inflation can’t be tamed with interest rate rises. It’s due to energy cost increases and supply chain issues, which are worse in the UK due to Brexit. But the flip side is at least the Fed and perhaps the Bank of England too realize that super low interest rates are creating major economic distortions by encouraging so much unproductive speculation. The Fed signaled it wanted to back out of super low interest rates in 2014 but lost its nerve when Mr. Market whacked Bernanke via the taper tantrum. So since US investors are freaked out about inflation, the Fed may use this as cover to put through some increases since investors may haircut asset prices to reflect their inflation forecasts regardless.

By Richard Murphy, a chartered accountant and a political economist. He has been described by the Guardian newspaper as an “anti-poverty campaigner and tax expert”. He is Professor of Practice in International Political Economy at City University, London and Director of Tax Research UK. He is a non-executive director of Cambridge Econometrics. He is a member of the Progressive Economy Forum. Originally published at Tax Research UK

The Bank of England is sending out signals, again, that it is expecting to increase bank interest rates soon. The current official interest rate is, admittedly, at a record low level, but the question to be asked is what would an increase achieve?

The official response is that it will help curb inflation. This, however, makes no sense. The inflation that we currently have is very largely due to increases in the prices of durable goods, such as cars. The supply of these has been severely disrupted after COVID because of worldwide disorganisation of shipping as world economies sought to reopen. This disruption is already resolving, but meanwhile people have already deferred their purchases of these goods in anticipation of prices falling. Once they are back on the shelves, or on the forecourts, there is a real chance that prices might actually fall. In that case It is very likely that current inflation is going to solve itself very soon, and that we could even see deflation at least in the price of these goods.

This, factually based, reasoning appears to have no influence on Bank of England thinking. so, in that case why are they really looking to increase interest rates, even if only modestly? I can offer three reasons.

The first is that dogmatically they believe that they have a duty to respond to any inflation increase by increasing interest rates. Their logic has a number of dimensions to it. They do, for example, think that interest rate increases simply change the economic mood, and so deter spending, so cutting inflationary pressure. They also think that households with fixed budgets who have to pay more interest will, inevitably, spend less and so reduce their consumption spending, which reduces inflationary pressure. And they think that saving is motivated by interest rates and that higher rates will result in increased saving, again reducing consumption spending. In combination they do, therefore, think that they will do good, although they also know that because the feedback loops that create these processes of change are very long the immediate impact of anything that they do is decidedly limited. In fact, the current inflationary pressures may resolve well before these consequences are seen.

Second, bankers look after bankers, and low interest rates make it very hard for banks to make any profit from conventional deposit taking. So, whenever they have opportunity, bankers will seek to increase rates to in turn increase bank profits. Most members of the Bank of England Monetary Policy Committee have some association with banking. Do not dismiss this as an issue in that case.

Third, bankers also serve the interests of their best customers, and their best customers are the wealthy. They are objecting very strongly to current low interest rates even though they have profited enormously as a consequence of the asset price increases that they have fuelled. Having their cake is not enough for this group, however. They also want to eat it, which means that they also want an increased income rate of return as well. Sending out a signal that interest rate rises will happen appeases their demand for action.

It is, then, easy to explain why bankers want to increase interest rates. But, implicit in all this is something else. Note who bears the greatest proportional burden of this change. It is borrowers. The wealthy borrow by choice. Those least well off do so out of necessity. The wealthy can, then, also choose to avoid the impact of any decision by the Bank of England. In contrast, indebted households cannot do so. Any interest rate increase is, as a consequence, wholly intended to oppress those who already face stressed household budgets. These tend to be parents, younger people, those on lower incomes and people who cannot now enjoy social security benefits that were once available.

There is no need to increase interest rates at present. There is no need for the Bank of England to signal to financial markets that they should, in turn, increase rates. But they are doing so. In the process they are engaging in what anyone might call class warfare. You do not need to be a Marxist (and I am not) to say so. This fact is written all over the policy.

I object to interest rate increases because they are not needed and could destabilise the economy. But I object just as much for this second reason, which is that yet again policy is being put in place that is intended to send wealth from those with least to those with the most, and that is not the basis for any sustainable society.

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  1. curlydan

    Yeah, I’m a little skeptical here, too.

    I can’t think of many wealthy people who want higher interest rates.

    Low interest rates help the super wealthy via stock buybacks. Rates are so low now that corporations borrow money to buy back stock.

    Low rates also help bond holders. I guarantee howls of protest from any and all bondholders (especially indebted companies) once interest rates start increasing. There are going to be A LOT of people/companies/banks caught in a trap once interest rates start increasing, and I think the Fed knows this and is afraid of the consequences.

    The housing market is a bit insane here in the U.S. because of low interest rates. Housing affordability partly is out of control due to low rates helping some people afford higher-priced houses. A bit higher rates might help cool that off.

    And of course the stock market’s high value is partly tied to low interest rates. The wealthy certainly benefit from low rates here, too, with something like 80% of stocks owed by the top 10% of Americans (or something close to that). So again, increasing rates actually could dent wealthy Americans’ portfolios.

    Lastly, the poor in my experience rarely get a sniff of low rates to begin with. Predatory lenders keep their rates sky high.

    1. Kevin

      ” and I think the Fed knows this and is afraid of the consequences”

      The market has always had consequences. People have paid those consequences. But now, the people who would pay due to a rate hike or two have gotten mighty powerful. The Fed shouldn’t be shied away by consequences; but to your point – I also believe they are afraid. The “market” aint what it used to be.

    2. vidimi

      yeah, i agree with all this plus higher rates tend to increase the velocity of money in the economy, contrary to classical economics thinking. this means that investors who pour their money into stocks when rates are cheap may have to invest in the real economy (ie new businesses) in search of alpha thus helping employment. Nobody’s going to buy risky debt when yields are low but they just might when they go higher. What hurts bondholders is not high rates but higher rates, and with rates near the floor, few want to buy in since they can only go up from here. that said, there is a risk of stagflation in the short term as investors won’t want to put their money in until rates have stabilized

      The idea of low rates to stimulate borrowing relies on there being something worth borrowing for, and in a zombie economy this isn’t the case. Conversely, higher rates may provide more opportunities and people are more likely to borrow (on fixed rates) if they think rates will increase.

    3. eg

      I’m with Murphy on this. A rate rise helps bankers more than anyone else — and how many bankers are poor?

      Like Mosler says, “interest payments are welfare for rich people.”

      1. DTK

        the government is a net payer of interest so raising rates increases inflation-raising rates also increases forward pricing

    4. TimD

      Interest rates are related to demand for money and are a function of real economic growth. They have been trending lower since the early 1980s and have been very low since the last US Great Recession. Banks make money off the spread between what they pay for money in deposits and bonds and what they charge for money. They have been doing just fine under the low interest regime of the past 13 years.

  2. w d w

    while i dont think trying to treat inflation that is caused by a pandemic, ceasing a crash in supply chains will be addressed in any way by raising rates. and bankers have (just almost eliminated) old way of generating profits (the difference in loan rates versus deposits), so that wont be fixed either. and the .01% want to get paid and not having to work to do that

  3. Carla


    “A related issue is that super low interest rates punish savers, such as retirees. It used to be that old people with some liquid holdings could put them in bonds and have a comfortable life on that income plus Social Security (Social Security is seldom enough with it being deliberately eroded through inadequate inflation adjustments). Now they are faced with cutting their spending to meet their lowered income or taking on more risk in the hope of achieving better returns.”

    Thank you, Yves. You’re just about the only one making that point. And you’re certainly speaking for me. God knows, nobody else is.

    1. Arizona Slim

      The fact that the words “punish” and “savers” are right next to each other is yet another reason why I like this site. And, shameless plug, if you haven’t given to the fundraiser already, do it!

    2. flora

      Yep. Inflation is running 5-8% here on groceries, gas, rents, utilites, and my savings are earning 0.5% interest. One-half of one percent interest. My savings are earning a negative interest compared to the inflation rate.

      1. TMoney

        You’ve been at a negative real interest rate for years -> about 26 to 28 by my hazy memory. I remember when it happened, wondering what the point of “saving” was – but the need for some sort of cushion for bad times kept me from spending everything.

        “saving” = the now defunct tradition of putting money into the bank for a period of time in exchange for interest.

        I have “earned” more money looking through rolls of 1/2 dollars pulling the silver ones that I have in bank interest !

        1. flora

          Yep, but the disparity wasn’t always this extreme or this blatant, imo, at least not since the late 70’s. I’m still saving, aka putting money in my local bank, for a cushion in the bad times, as you say.

      2. rsm

        Yves: “Now they are faced with cutting their spending to meet their lowered income or taking on more risk in the hope of achieving better returns.”

        Flora: “My savings are earning a negative interest compared to the inflation rate.”

        Flora (separate comment): “And there was/is the Greenspan put: the govt backstops the stock market with limitless cash whenever they lay a rotten egg.”

        Why not invest in an S&P index fund, since it’s less risky now due to the Fed put?

      3. deplorado

        The Treasury I series savings bonds currently pay 7.12% (it’s a variable rate changing every 6 months linked to inflation). The taxpayer is allowed to put in $10k a year per household person, with a spouse and children you can multiply this accordingly.

        It’s a great deal if you can set the money aside.

        1. lordkoos

          At my age I am afraid to invest in an S&P fund — how long can the Fed put go on? (A lot longer than I thought apparently.) This is not my father’s stock market, it seems to be a Ponzi scheme completely detached from fundamentals. I’ve lost a lot of potential gains from being out of stocks, but on the other hand I really like having assets outside the banking system even though it is costing me.

          It’s interesting that despite the inflation we are seeing, the price of gold has remained little changed. Up a little bit, but not as much as I would have expected.

          1. Pate

            “It’s interesting that despite the inflation we are seeing, the price of gold has remained little changed. Up a little bit, but not as much as I would have expected“

            Is Bitcoin the new, alternative to gold as an inflation hedge, store of value?

        2. juno mas

          Just returned from the Treasury Direct website: This I Bond is indeed attractive. Even more so if you are in a low income tax bracket (The bond is taxable to the Feds, but not State.)

          Since it has a $10K annual limit you can manage your purchase with your projected/expected taxable income and come away with something close to the current 7% interest rate. Adding funds each year while monitoring other income opportunities (and the Fed) in the near future can mitigate the current Bank negative savings rate.

          Here’s the link to Treasury Direct:

      4. Quobono

        You forgot the tax on your “interest,”
        just doing your fair share within the
        voluntary cooperation tax system.

    3. Bart Hansen

      And the low savings rates pose an additional vulnerability to my cohort of Olds.

      Seeking more returns, we may well be tempted to pull out savings to invest more than is prudent in stocks. Yes, they keep rising but they will not do so forever.

      Which recalls Bush’s plan to invest Social Security payments in the stock market.

      We must remain vigilant for the next Cat Food Commission. Remember Simpson/Bowels?

    4. eg

      The “sainted savers” narrative is among what my brother calls “incomplete sentences” — savings are demand destruction and lead to unemployment absent the monetary sovereign’s willingness to run deficits sufficiently large to offset private savings preferences plus net imports.

  4. Jason

    Before covid and government lockdowns/reactions existed, the world had experienced 10 yrs of near-zero interest rates and tremendous misallocation of money. Business changed from borrowing to invest in development and production, to borrowing to buy back stock. Far too much cheap money, far too close to the spigot of cheap money. The financialization of the economy changed how people made wealth — from making something or doing a service for someone, to playing in the world financial casino (stocks, bonds, derivatives, crypto). Covid sped up the process of people leaving their legitimate work to play in the casino — where nothing of value (goods/services) is made for anyone.

    It blows my mind how many young people, who are negatively affected so thoroughly by high asset prices (can’t afford house, can’t afford car, must work multiple jobs…), are terrified of deflation!!

    The central banks of the world have incentivized horrible behavior and created the dramatic wealth inequality. It’s time to end the fed.

    1. Arizona Slim

      “End the fed.” Oh, my goodness. Is this a love post for Slim?

      I’ve already noticed the juxtaposition of the words “punish” and “savers.” And now this.

      I think I’ll go sit down for a few minutes.

    2. flora

      Yep. Since the late 1970’s inflation when then Treas. Sec. Paul Volcker raised interest rates as high as 15.0% at one point, financialization and the stock market has traded on lowering interest rates expectations, imo. That was the start of the current financialization of the economy. As interest rates came down prices on houses and stocks went up. For the last 10 years or so int rates have been near zero. Interest rate arbitrage has now been replaced by stock buy backs to keep prices going up, imo. (The tbtf banks keep floating the idea of breaking the interest rate zero-boundary and going to official negative interest rates to keep lowering rates, but that hasn’t happened. We have virtual negative rates now.) And there was/is the Greenspan put: the govt backstops the stock market with limitless cash whenever they lay a rotten egg.

        1. LilD

          I can’t believe it was 12 years ago. That article is still relevant and will be historically interesting in the next century

    3. eg

      Deflation is terrible, especially for debtors, as anyone living in the late 19th century could tell you. And debtors are reliably poorer than creditors.

      Allowing stock buybacks is a regulatory failure — before the early 80s they were rightfully banned as stock manipulation.

  5. Susan the other

    I wonder if raising interest rates in the UK is a preemptive measure in anticipation of the borrowing they plan to do. They could lose credibility with the EU otherwise. Even though the EU no longer has direct control over their sovereign spending levels. Richard Murphy sounds a lot like Powell in his view that inflation will take care of itself. We shouldn’t let all the tails wag the dog – here in the US we have no such preemptive requirement to insure pension funds are adequate and secure. That might be a good thing to start since their bones are being picked clean as we speak. If we focused on some special government bonds that had flexible returns in hard times, issued only for pensioners, or some other assistance, it would be a more stabilizing action that broad spectrum inflation ups and downs with the interest rate chasing frantically after them.

  6. Mikel

    The credit card interest rates for the average american are sticky in that they are already pinned to double digits.

    All these alleged low interest rates don’t trickle down.

    And it looks like there are people that are taking on more mortgage than they can actually afford.
    The actual full price really does matter…not just the monthly payment.

  7. Kevin

    It is nteresting to look at the “Rule of 72” today.
    The “rule” states that if you divide the rate of interest your earning by 72, you will have the time it takes for your money to double at that rate of return.
    Back in ’85, when the 10 Year Treasury was at 13.75% – it would take you 5 years.
    Today, with the 10 Year at 1.56%, it will take 46 years.

  8. chuck roast

    I can’t read the minds on the ex-firemen, dog-catchers and secretaries on the board of my retirement fund. But I do know that the 5% interest rate on the old Fed and Muni bonds are no longer available to them. Such a situation leaves them open to the slick presentations of the PE parasites who constantly circle and woo with promises of pie in the sky by and by. They have been at it for ten years and control $1.5B in assets. Last I could figure, there were no profits in sight. Now the annual financial report has become so opaque that I can’t even remotely parse how much they are stealing. I put most of the blame on the Plutocrat Boutique Bespoke Bank.

  9. rsm

    Why not pay inflation as interest on Central Bank Digital Currency accounts, to encourage individual savings directly as prices rise unwantedly?

    1. saywhat?

      Because even that protection from price inflation* constitutes welfare proportional to account balance, not according to need.

      But the richer, those with larger accounts, are no more deserving than the poorer to be protected from price inflation (arguably, even less so).

      *Not to mention that measuring price inflation is controversial to begin with. Rather, we should make sure that all price inflation is produced ethically.**
      **eg via deficit spending for the general welfare and/or an equal Citizen’s Dividend along with completely de-privileged banks.

      1. rsm

        Why not populate everyone’s CBDC account with a basic income, itself inflation-adjusted, and let consumers de-privilege banks by voluntarily withholding their business?

        1. saywhat?

          and let consumers de-privilege banks by voluntarily withholding their business? rsm

          Won’t happen if inherently risk-free accounts at the Central Bank or Treasury paying no* interest have to compete with government-guaranteed accounts at private banks that do pay interest.

          So deposit guarantees (and all other explicit and implicit privileges) have to be phased out as well if we truly desire an inherently risk-free payment** system apart from private banks.

          *to avoid welfare proportional to account balance, a violation of equal protection (EPUL) under law in favor of the richer.

          ** with no “lending” since that also violates EPUL.

    2. Yves Smith Post author

      The Fed is not in the business of retail banking. And as one reader pointed out, it already has a series of savings bonds that do pay a high rate of interest.

      Offering a bond as a digital currency is a gimmick and requires other features that result in fees to middlemen, like digital wallets.

        1. tegnost

          is the fed in the biz of retail banking?
          Citation please, I’ll take yves view at face value based on past experience
          you are 3 letters on a screen. Why should I take your word on anything?

          Adding: basic income is a stupid idea made up by tech bros who want more gov’t money.
          It doesn’t help society in any way, but it keeps the sh!tshow running…

  10. RockHard

    There’s the point that the very wealthy and large corporations also benefit from lower rates because they can borrow much more cheaply. While your average schmuck is paying 13-25% on a credit card, or maybe do a 12 month teaser rate at 3-5%, people with the right access can borrow for near zero, because that’s where the effective rate is. Raise the rates and the rich lose their discount.

    1. eg

      The rich own most of the debt instruments, starting with T-bills. Raise rates and you are giving them even MORE money.

      And all rates are priced off the “risk free” Fed rate, so they’ll all rise accordingly.

      Why do you think bankers are always keen on higher rates? Do you think that they have YOUR interests in mind? Pull the other one …

      1. jimmy cc

        when interest rates rise, eveey bond owned by a bank decreases in value.

        banks have given 30 year loans at a low rate. that rate is locked in and as rates rise the bank pays more in new savings deposits but their old loans are still paying the bank the low rate.

  11. rsm

    Doesn’t it worry all the “little person” rate hawks in the comments that hedge fund CEOs are making the same case, because they are shorting bonds and stand to gain enormously from rate hikes?

    1. MonkeyBusiness

      Hedge fund CEOs? Yes there are bonds only funds out there, but most hedge funds invest in both bonds and stocks. Rate hikes will hurt some of their stock positions.

      The thing is you can’t evaluate hedge funds’ positions in isolation. The entire book is meant to work together.

  12. Mildred Montana

    From the article: “…bankers look after bankers, and low interest rates make it very hard for banks to make any profit from conventional deposit taking. So, whenever they have opportunity, bankers will seek to increase rates to in turn increase bank profits.”

    “Bankers look after bankers.” I’m sure this is true.

    “…low interest rates make it very hard for banks to make any profit…” I’m almost as sure this is false, for two reasons:

    1. Central banks seem in no hurry to raise rates to help out their banking buddies. Therefore the statement is likely false.
    2. I read many years ago that banks make money on the interest-rate spread, that is, the cost of deposits vs. the lending rate, and low interest rates were beneficial to banks because it allowed them to increase their spread. It’s a lot easier to lend at 3% when deposit rates are near zero (a spread of 3%) than to lend at 8% when they’re 5% (still a 3% spread, but borrower reluctance kicks in at that level and the number of borrowers declines.)

    Overall, I think the article is a little disingenuous.

    1. deplorado

      Some, like Prof. Richard Werner, say that low interest rates kill small and community banks.
      The stats for the last 20 years in Europe and US are unequivocal that small banks are dying out.
      The claim is that this is a policy objective – to eliminate small banks and centralize credit in the CBs.

      Personally, I find that very plausible. Also the CBDC (Central Bank digital currencies) that are being put in place are testing concepts such as money becoming non-fungible – i.e. if you want to buy too much toilet paper you may only get 20 earmarked digital USD a month for that, and no more. And on the other hand, if you don’t buy your toilet paper rolls for the month and you want to save that earmarked $20, it will expire and disappear from your account. So you will be made to spend exactly how much and exactly on what our benevolent CBDC overlords allow. I hope I got that wrong because I can hardly imagine something scarier and more insidious than that (and for the philosophically inclined, it definitely doesn’t resemble a free market).

      And somehow I am convinced that the looming non-fungibility of money via CBDC will be targeted at the regular Joe Shmoe and his spending habits, rather than, say, a massive business tycoon buying a national newspaper with his ever so impeccably fungible money.

      But this may be a digression from the ancient topic of interest rates.

  13. deplorado

    The problem is that interest rates are an extremely crude tool for steering the economy. To put it in benign terms, it’s like overwatering your garden regardless of what the plants need — some plants will thrive, others may die, and you will have undesired side effects like runoff, disease, mosquitos and rank smell (from experience).

    Tax policy is like not even trying to mop up the runoff.


    1. rsm

      Does your analogy fail because plants don’t make leveraged bets on rising rates using financial markets?

    2. deplorado

      On second thought, I think interest rate policy should be just as detailed as tax policy, if it were to have any reasonably targeted effect that elevates it above the analogy with a garden hose.

      But, we have Congress set taxes and Fed set interest rates. Hmmm. Aren’t they two sides of the same coin, pun unintended. But we have one side to this equation being unaccountable to the public (not that Congress is perfectly so, but at least on paper). Makes you wonder.

  14. BrianM

    I wonder if there is a different reason, though more a 1a than a 4. The BoE wants to be seen as being on top of inflation. By pre-emptively raising rates, they signal that they will take whatever measures to control inflation. This prevents sustained inflation expectations becoming embedded and stopping the feedback loops before they start. In theory a small increase now could prevent a larger one later. In theory.. Doesn’t negate the other effects though.

    In answer to Yves question (apologies if I’ve missed this elsewhere in comments), here most new mortgages now have a fixed rate period of 1-5 years before reverting to a floating rate. Many people remortgage at that point. I don’t know the current fixed/floating proportion, but it does mean a slightly delayed feed through from base rate increases into increased mortagage rates.

    1. flora

      Thanks for an interesting question. What is the difference? In the US the late 1970’s rise in interest rates was to choke off inflation which was then seen (or presented) as coming from rising wages in the then primarily unionized working class, which at that time was tied to rising inflation costs via union contracts. Inflation now cannot be tied to the working class. It can only be tied, imo, to the financial class. Is the financial class to be held harmless ( because Markets) where the earlier working class was held blameworthy? How to central banks square this circle?

      1. skippy

        What are the similarities between cold war inflation w/a side of John Birch Society spanner thrown in gotta do with a global trade shock set off due to best practices tripwires meets covid.

        Seriously its like everything is geared like a build on progress payments, whilst all staff attendant are getting covid in cycles, thus exposing the inherent vulnerability in the system. Better yet it means various groups working on the build will cut corners or fob off events onto other groups just to invoice.

        Ugh saw the writing on the wall in the early 2000s doing a Bechtel for an expansion of a coal port facility here in Oz. Stuff from all over the world with high QC fail rates, heaps of mate on mate back scratching, independent inspectors with perverse income incentives, thrown together engineering mobs for a one off, and best of all the CAD monkeys in the Bahamas getting payed 20 Bucks hr and being charged out at 100 bucks hr and then wonder why I was up to Rev 22 blueprints before I left …

        Hallowed be the niche market …. stuff long lines of information …

        1. flora

          ye-gads, skippy. You’re surely not suggesting there’s an “earthly” element (profits) to this modern cultural/political division of people into the the “saved” and the “damned” are you? /heh (Bechtel, oh yeah.)

  15. Mason

    This leaves me so conflicted.

    In housing, I’ve watched top prices go for new construction being around 400,000$ in my neck of the woods five years ago to a record 1,200,000$. The endlessly dropping interest rates have goosed the numbers and made every land speculator wealthy. No one will sell land. Housing prices only going up, up, up by around 15% every year.

    Combine that with strict single-family zoning and I would call that extreme class warfare. The neighborhood is getting tear-downs with McMansions as replacements. Corner lots that would of been good for a small apartment or townhouses getting replaced with McMansions.

    No new supply, just a more expensive home. Yeah, I waited to buy land and I got slammed for it by Mr. Market.

    A dark part of me wants to see a repeat of ’08 but all that will happen is another round of looting. Yet how are these housing prices even vaguely sustainable?

    Raise mortgage rates by a few percent and let’s see what happens…

    1. skippy

      Sadly banks found a workaround IR before the GFC and Friedman’s Shareholder Value meme killed any notion of a social contract, better yet, any RE stress to primary house or small holdings will just be scooped up by the likes of Blackwater et al. Sorta like Trump trying to punish China for not bending the knee with tariffs only to stuff the small/middle business community.

      From another perspective its like here in Oz when live goat export was stopped on a dime or the greyhound racing industry was shut down for a wee bit, without anything to offset or replace those flow of funds, and the reverberations throughout the economy. Not to mention what happened in the last federal election when the ALP threatened the coal industry here in Queensland gave us Morrison and his band of merry men.

      BTW remember the GFC was a credit risk event and not driven by RE, but prime was bought up for pennies on the dollar and helped achieve price setter dynamics for those businesses, not to mention how fast the RE price recovered. Sister in AZ got pole whacked whilst developing a few high end properties, assisting in a divorce, recovered and remarried, and now is having a hard time buying a primary residence because the prices are so high in AZ …. its almost like Jefferson’s slaves … eh … or crypto … look maw no hands [toil] …

    2. deplorado

      I fully agree with your sentiment, but as to how it is sustainable, look at 3rd world countries and Eastern Europe, to understand how this kind of lopsidedness can be sustained: a small stratum on top of society sets real estate prices (top 1 to 5, max 1 to 10 percent) even for basic homes, and the rest of the population is forever locked into renting and subservient class status, with home prices being 10x, 15x, or 20x yearly income.

      That’s where the US is going. And sadly, I have not seen proof that it is not sustainable. People just take it, because, where are they going to go??

    3. chris

      The housing situation is bizarre. We bought our current home in 2015 just as prices in our area were starting to “heal” to their pre-GFC levels. What struck me then still strikes me now as a massive market failure.

      I have a safe home, 4 bedrooms/3 baths, well built, on 1 acre, with multiple forms of energy available for me to use, some of it stored on site in the form of wood/propane/heating oil, I have a well with a proven water level good to another 75 ft below the bottom that currently produces 3-5 gal per minute, I have land to put gardens on, my lot backs down to a creek, we have good schools, and broadband access…and you only charged me 500k$? But my friend a couple miles away has a well that hardly produces atacres, on half an acre, is reliant on an aging grid connection, and his house is worth 1.2 million$? I have no idea why the things that go into comps aren’t the things that people need to actually live in the house on the property they’re buying.

      1. eg

        The “value” of property has less to do with its structural features than its location, full stop. You’re paying for prized location dirt, and it’s worth whatever a bank is willing to lend a buyer for it.

  16. Sound of the Suburbs

    What should a central bank do?
    Ensure the economy has stable money supply that it needs.
    This seems to have been forgotten somewhere along the way.
    It was last sighted in Japan before the 1980s.

    Rolling neoliberalism out globally has been a great opportunity to find out how the monetary system actually works.
    The financial crises are actually the time when the big advances can be made, and there have been plenty of those. These are the keys to unlock the secrets of the monetary system.

    The Japanese financial crisis in 1991 was a very useful key.
    Richard Werner and Richard Koo turned the key.
    A successful, stable economy was turned into a financial disaster area.
    What on earth had they done wrong?

    They both opened different doors into understanding what had happened.
    Richard Werner looked into what had happened to cause the financial crisis.
    Richard Koo looked into what had happened after the financial crisis.

    It was Richard Werner that proved banks create money, and this got central banks to reveal the truth starting in 2014.
    Richard Werner went back to find out how the BoJ had successfully managed the Japanese money supply before the 1980s. We know how it should be done.
    Ideas of financial liberalisation took hold and everything went off the rails.

    Private banks create the money supply.
    Money and debt come into existence together and disappear together like matter and anti-matter.
    Bank loans create money and debt repayments to banks destroy money.
    Bank loans create 97% of the money supply
    The money supply ≈ public debt + private debt
    Money and debt are like opposite sides of the same coin.

    It’s a debt based monetary system.
    It’s always a delicate balance between the money being destroyed by debt repayments to banks, and the money being created by new bank loans being taken out.
    You don’t want the debt to rise to a level where it starts to hold back the economy.

    The UK was once the great financial superpower, and it looks as though we understood this in the past.
    The economy needs to be able to manage the debt contained within it, which is why debt should grow with GDP.
    We used to do this; bank credit was directed into areas that grew GDP.
    As soon as the neoliberals get in things start going wrong.
    The UK eliminated corset controls on banking in 1979, the banks invaded the mortgage market and this is where the problem starts.
    The transfer of existing assets, like real estate, doesn’t add to GDP.

    This is what went wrong in Japan.
    They had directed bank credit into productive areas of the economy so debt grew with GDP.
    In the 1980s they let bank credit flow into real estate, which is where it all went wrong.

    You wouldn’t want to raise interest rates with all that debt in the economy.
    Japan has had the same problem since 1991, and they haven’t really been able to raise interest rates since. They left the debt in place after their financial crisis too.
    This is why the BoE haven’t really tightened since 2008, and nothing has changed.

    Let’s have a look at the US.
    The Americans have never really had any idea how the monetary system works.
    Luckily the Americans had the Great Depression
    At 18 mins.
    It cleared the slate, and allowed them to continue in the usual haphazard manner to which they have become accustomed.
    They’ve let the debt build up again, and really could do with another Great Depression to clear the slate.
    You wouldn’t want to raise interest rates with all that debt in the economy.

    1. Sound of the Suburbs

      The Japanese financial crisis in 1991 was a very useful key.
      A successful, stable economy was turned into a financial disaster area.
      What on earth had they done wrong?

      In the 1980s, it looked as if Japan would take over the world, but bad financial practices have seen their economy flat-lining ever since.
      Japanese companies found they could make more money from their financial arms (Zai Tech) than they could from their traditional businesses, for a while anyway.
      House prices always go up and their real estate boom would never end, until it did.
      Jusen were nonbank institutions formed in the 1970s by consortia of banks to make household mortgages since banks had mortgage limitations. The shadow banks were just an intermediary put in place to get around regulations.
      Japan has never recovered.

      Look familiar?

    2. skippy

      “Ideas of financial liberalisation took hold and everything went off the rails.” = Contracts = Laws which regulate quality thereof.

      Seems even China let her rip for a bit, but then again had no commerce law infrastructure as a hangover from the Marxist period, albeit has gone sovereign of late on those that think themselves tall poppies …

  17. chris

    General question because the textbook learning I recall with respect to inflation is bumping up against the reality I’m observing. People talk about inflation helping debtors because inflation forces wages to rise and money becomes cheaper, such that the debt owed in past dollars becomes easier to pay, right?

    But what we’ve seen for decades now is no wage increase for most people. And what we’re seeing in the news now are owners who would rather fire their staff than give in to demands for increased pay. For example, John Deere for instance is willing to sacrifice the lives of their white collar employees and millions of dollars in profits this quarter rather than give into union demands. Ditto with Blackrock and Warrior Met.

    What I’m seeing personally are people around me who are miserably wedged in between all the costs of the things they need increasing year over year, while their wages never keep up. They don’t care that they can buy a 60 inch flat screen TV for less than they could in 1999. They care that their real wages haven’t increased much since 1999. They care that several recessions have destroyed their savings. They care that the cost of medical care and energy and education have been going up and up and up for years but a “generous” cost of living increased was considered 2%. As if Healthcare, education, and a warm house weren’t associated with the cost of living.

    So…when are we going to see this vaunted wage price inflation I keep hearing about from my elders who survived the 60’s and 70’s? Because otherwise all we’re going to see are people who are forced to accept that the ruling class will never pay them a living wage, and if they go into the black or grey market to make their living, Joe Biden will track every cent that goes into their bank accounts to force them to recognize it and pay taxes. Probably for future legal action too. I’m just not seeing the reason why people in power are so scared of what we’re going through right now. These workers aren’t even asking for large raises in most cases. So where’s the wage inflation we’re supposed to be worried about?

    1. cnchal

      > So…when are we going to see this vaunted wage price inflation I keep hearing about from my elders who survived the 60’s and 70’s?

      You won’t see wage -> price inflation. Even during the 70’s wages trailed prices so your elders are misremembering or sold on the narrative beamed down from above.

      > Because otherwise all we’re going to see are people who are forced to accept that the ruling class will never pay them a living wage . . .

      The ruling class, throughout history and everywhere, never wants to pay a living wage. The difference between the 70’s and the last couple of decades is globalization and massive immigration, both legal and illegal so now the elite have several extra pain points to inflict on the peasant. Get too uppity and your jawb gets sent to a slaveocracy or lose it to a desperate immigrant willing to work for less than you can afford to live because the living conditions in their home country are magnitudes worse than here due to the US plowing their country under to make it safe for giant corporations to exploit that country.

      My belief is that the so called golden era for workers, the 50’s and 60’s was due to the elite being severely chastened and somewhat introspective after the mayhem of WWII.

      There is none of that today. Greed is God.

  18. John Beech

    Low interest rates have hosed my mother during her retirement. Low rates have hosed all elderly savers who did the right thing by saving to augment their social security only to see interest rate repression put them between the rock and the hard spot at a point in advanced years where they couldn’t re-enter the workforce.

    And then came COVID19 and small landlords got hosed as deadbeats took advantage of the situation to not pay rent. All whilst at the same time collecting government largess to tide them over. That’s right, not paying rent and buying big screen TVs to twist the dagger in the side of retires with a rental or two.

    People who did the right thing to play the Monopoly game of life. Sure, maybe not buying Boardwalk but Baltic Avenue, instead. You know, as they made modest real estate purchases to follow the American dream . . . only to end up getting their teeth kicked in for their effort.

    So a rise in interest couldn’t come too soon. Except then the national debt, all $30T would crush the nation. Sure, let’s add on another $8T, it’s only Monopoly Money, right?

    1. tegnost

      Low interest rates have hosed my mother during her retirement. Low rates have hosed all elderly savers who did the right thing by saving to augment their social security only to see interest rate repression put them between the rock and the hard spot at a point in advanced years where they couldn’t re-enter the workforce.

      infuriating indeed

    2. eg

      The national debt IS the sum total of net private assets denominated in USD.

      Get yourself to an explanation of Wynne Godley’s sectoral balances, stat.

      Also, the US Federal government is monetarily sovereign and is not currency constrained — it cannot be “crushed” by debts denominated in the currency over which it (and its Federally regulated agents, the banks) exercises a jealous monopoly of issue.

  19. Harry

    Multifamily commercial is typically a five year fix, 30 year amortization, with a reset to the next 5 year fix.

  20. vlade

    Don’t know now and can’t find any statistics quickly, but the UK used to like floating loans for a long time, but as the rates went down in early 2010s, many people started to fix. In the securitisation pools I saw at the time the number of fixes was going up quite a bit.

    Also, there are/were still fixes available, but I guess one difference from the US market is that the fixes are relatively short – 2-5 years most of them. There are almost no fixes for >10 years, and those that are are quite expensive (compared to say 10 year fixes).

    Also, there’s no penalty for switching a floating mortgage, so any UK households that want to fix, could have fixed, and still can – although the banks have put up fixed mortgages already I believe.

    Murphy is correct that rich can, poor have to borrow. But there is also another difference – when rich can borrow at low rates against crappy or no collateral, they can lever way above their eyeballs, and with the asset prices being continuously supported because “wealth effect”, it’s basically costs and risk free profit. Even BoE has accepted – years ago – that QE benefited those with assets (and abilities to borrow a lot, cheaply).

    And so the wealth disparity gets bigger and bigger. Higher interest rates IMO are way, way overdue.

    Bettering the lot of poor should be via higher wages rather than lower interest rates.

  21. Bob

    Remember the FIXED interest rates of 4-1/4% on passbook savings ? 1960s !!

    The economy still seemed to work

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