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Raising interest rates just makes things worse. You’re paying people more money which they then spend to keep up with the prices. Interest/price spirals work i

Raising interest rates just makes things worse. You’re paying people more money which they then spend to keep up with the prices. Interest/price spirals work in the same way as wage/price spirals https://new-wayland.com/blog/interest-price-spiral/ https://new-wayland.com/blog/interest-price-spiral/ Turkey is suffering from a collapse in their terms of trade. They need to stop luxury imports to make room for food and fuel. And they need to put firms with foreign borrowings through administration to get rid of the foreign debt. Ultimately though government needs to cut its spending because its capacity to tax is probably at the social limit the society can stand. It’s a mess, but neoliberalism won’t help.

nootropicat 4y ago
Well, Erdogan agrees with you and results are clear. The argument is wrong, mostly because even if deposit and borrow rates were equal (they aren't), central bank offers and charges it on MB, but borrow rate is in the end charged on all loans in existence - much larger than MB. 1. someone borrows (new) $100 from the central bank at the variable central bank rate - currently 0% 2. someone buys something for that $100 3. that $100 is loaned to yet another person at the variable rate 4. that person buys something with it, the buyer deposits $100 to the central bank At the end there's: $100 in the central bank. Loans for $200. Increasing the interest rate to 1% increases total liabilities by $2 after one year, but total base money only to $101. That's a deficit of $1. In other words demand for money has increased relative to the supply. This mechanism explains why more advanced economies can function with lower interest rates - because even a small base rate has a high multiplier, while in simple economies the multiplier is low. There are more implementation details in practice but the fundamental mechanism stays the same.
- neilwilson 4y ago
  Except that isn’t how banks work and never has been has it. The BoE debunked this nonsense years ago and yet you’re still trotting it out? Why? Bankers are people - they earn the interest and spend it with firms who then pay the banks. Bank Interest is funded by paying the interest. What that means is interest is simply the wages of bankers who are paid for making collateral discounting decisions. The central bank pays reserve holders and banks create money out of nothing. Erodogan has not cut spending nor diverted the import of gold to the import of food and fuels for his population. Or done anything I suggest. [0]: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
  - nootropicat 4y ago
    That article manages to contradict itself. In one place they state "In reality, neither are reserves a binding constraint on lending," and in another "But whether through deposits or other liabilities, the bank would need to make sure it was attracting and retaining some kind of funds in order to keep expanding lending", right after writing about running out of reserves, a direct contradiction. In general it's mostly correct but authors appear to be really confused, repeating statements from other sources without any understanding. A sign of how incompetent western establishment is becoming. The mechanism is very simple. Central banks lend money and that's how money is created. They do it by accepting various collateral. Whether they lend directly as debt or by purchasing assets via a reverse repo is a detail. Banks remain liquid by either holding money directly, or assets that are accepted as collateral by the central bank to generate new money instantly. Sometimes that liquidity runs out, which may then require a special central bank intervention (like relaxing collateral rules during a wide crisis), or even a firesale of assets, which can lead to insolvency. They remain solvent by owning more assets than liabilities. The difference between all short term liabilities (deposits) in the banking system and central bank money is the total money multiplier. Fortunately, unlike confused writers of that article, people actually making decisions in almost all central banks still know that's how it works - which is why they know that rising interest rates reduces inflation (although not instantly). Erdogan, in comparison, appears to believe that high interest rates create inflation - results are visible for everyone.
    - neilwilson 4y ago
      "In one place they state "In reality, neither are reserves a binding constraint on lending," and in another "But whether through deposits or other liabilities, the bank would need to make sure it was attracting and retaining some kind of funds in order to keep expanding lending", right after writing about running out of reserves, a direct contradiction." It isn't is it. Central bank reserves are an asset of a commercial bank. Deposits are liabilities of commercial banks. Suggesting people at the Bank of England don't know how banking and central banking works is a bit hubristic don't you think. The process they are talking about is the one that causes the central bank interest rate to bind [0] [0]: https://new-wayland.com/blog/why-banks-pay-interest-on-deposits/ https://new-wayland.com/blog/why-banks-pay-interest-on-depos... The central bank simply threatens to operate as a wholesale depositor at a particular price. "Central banks lend money and that's how money is created. " They don't. They merely threaten. Commercial banks rarely borrow from the central bank. Central banks discount assets into their own liabilities - just like every other bank. They just tend to stick to government securities. They do that reflexively at a particular price, because if they tried to do it at a quantity they would lose control of their interest rate and cause the payment system to collapse. That's what QE is - additional discounting of government securities into bank reserves. Which then requires there to be a support rate paid on reserves or the interest rate would drop to zero or thereabouts. Those reserves come from government spending more than it taxes, and that's what the central bank is discounting. In technical terms the commercial bank lends to the central bank, not the other way around. The commercial bank has the asset, and the central bank the liability. Just like a deposit at a bank lends to the bank. Hence why you are 'in credit'. Credit being the accounting term for a liability. There is no such thing as a money multiplier and never has been. Loans create deposits. Deposits which are then used, in part, to swap for bank equity and bonds which creates the 'assets > liabilities' buffer in the banks. It's back filled, not front run. Reserves have no quantity controlling power, and are merely an optimisation. You don't need them at all to do banking.
flashfaffe2 4y ago
"And they need to put firms with foreign borrowings through administration to get rid of the foreign debt." Though I totally understand the idea, I however think it is easier said than done. Turkish ( or any other country) companies have the same issue: low us interest rates and common sense applied here: they took advantage of the situation by borrowing in US dollar. There was nothing much the Turkish government could do about that.
- neilwilson 4y ago
  "There was nothing much the Turkish government could do about that." They can. They can change the "trading while insolvent" rules so that it is in all currencies the firms deals with, not just the reporting currency. Then if you can't get the forward swaps, the firm is insolvent and has to be put through administration - which will wipe out the dollar debt rather than cause a wave of Lira for dollar selling. Capitalism without bankruptcy is like Catholicism without hellfire. It stops the control system working.
  - flashfaffe2 4y ago
    My point was referring to any companies from emerging countries who need assess to finance ( exporting into the US or Europe which is the case for many Turkish company). Not only the ones being insolvent. They assesment is made at the entity level. The macro effect is not taken into account by them.
adam_arthur 4y ago
How can you MMT people exist when there are already thousands of business/credit cycles throughout history that disprove your beliefs? To be clear, raising interest rates to appropriate levels curbs inflation as evidenced by all of financial history. Turkey kept rates low exactly as you suggest, and this massive inflation is the result
- neilwilson 4y ago
  "To be clear, raising interest rates to appropriate levels curbs inflation as evidenced by all of financial history" Except for the ones analysed by the Fed. > We show that a nearly 90 percent reduction in inflation volatility is possible even without any changes in monetary policy when the economy transitions from equal shares of power between workers and firms to a new balance in which firms dominate. In addition, we show that the decline of trade union power reduces the share of monopoly rents appropriated by workers, and thus helps explain the secular decline of labor share, and the rise of profit share. We provide time series and cross sectional evidence. [0]: https://www.federalreserve.gov/econres/feds/files/2022028pap.pdf https://www.federalreserve.gov/econres/feds/files/2022028pap...
  - adam_arthur 4y ago
    Yes, fiscal factors and excess labor supply will keep inflation constrained. But to say higher interest rates lead to higher inflation is simply wrong as evidenced by a huge wealth of history/data. Every country that has tried to combat inflation with lower rates has led to an inflationary spiral. In a perfect world inflation would be controlled primarily via fiscal policy, but this is non-viable in the US political system. E.g. despite the Democrats being savaged in the polls due to inflation, they have yet to actually propose any package to help address inflation. Instead they just tried to convince people that BBB was inflation fighting, when in reality it's structured as a highly inflationary set of legislation. The Fed can't be as targeted as fiscal policy can, so their mechanism to combat inflation naturally leads to recessions. Fiscal could be much more targeted, e.g. temporary taxes on discretionary goods etc. It just so happens to be that sensible policy to curb inflation would also be highly unpopular to most

nootropicat 4y ago

Well, Erdogan agrees with you and results are clear. The argument is wrong, mostly because even if deposit and borrow rates were equal (they aren't), central bank offers and charges it on MB, but borrow rate is in the end charged on all loans in existence - much larger than MB. 1. someone borrows (new) $100 from the central bank at the variable central bank rate - currently 0% 2. someone buys something for that $100 3. that $100 is loaned to yet another person at the variable rate 4. that person buys something with it, the buyer deposits $100 to the central bank At the end there's: $100 in the central bank. Loans for $200. Increasing the interest rate to 1% increases total liabilities by $2 after one year, but total base money only to $101. That's a deficit of $1. In other words demand for money has increased relative to the supply. This mechanism explains why more advanced economies can function with lower interest rates - because even a small base rate has a high multiplier, while in simple economies the multiplier is low. There are more implementation details in practice but the fundamental mechanism stays the same.

neilwilson 4y ago
Except that isn’t how banks work and never has been has it. The BoE debunked this nonsense years ago and yet you’re still trotting it out? Why? Bankers are people - they earn the interest and spend it with firms who then pay the banks. Bank Interest is funded by paying the interest. What that means is interest is simply the wages of bankers who are paid for making collateral discounting decisions. The central bank pays reserve holders and banks create money out of nothing. Erodogan has not cut spending nor diverted the import of gold to the import of food and fuels for his population. Or done anything I suggest. [0]: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
- nootropicat 4y ago
  That article manages to contradict itself. In one place they state "In reality, neither are reserves a binding constraint on lending," and in another "But whether through deposits or other liabilities, the bank would need to make sure it was attracting and retaining some kind of funds in order to keep expanding lending", right after writing about running out of reserves, a direct contradiction. In general it's mostly correct but authors appear to be really confused, repeating statements from other sources without any understanding. A sign of how incompetent western establishment is becoming. The mechanism is very simple. Central banks lend money and that's how money is created. They do it by accepting various collateral. Whether they lend directly as debt or by purchasing assets via a reverse repo is a detail. Banks remain liquid by either holding money directly, or assets that are accepted as collateral by the central bank to generate new money instantly. Sometimes that liquidity runs out, which may then require a special central bank intervention (like relaxing collateral rules during a wide crisis), or even a firesale of assets, which can lead to insolvency. They remain solvent by owning more assets than liabilities. The difference between all short term liabilities (deposits) in the banking system and central bank money is the total money multiplier. Fortunately, unlike confused writers of that article, people actually making decisions in almost all central banks still know that's how it works - which is why they know that rising interest rates reduces inflation (although not instantly). Erdogan, in comparison, appears to believe that high interest rates create inflation - results are visible for everyone.
  - neilwilson 4y ago
    "In one place they state "In reality, neither are reserves a binding constraint on lending," and in another "But whether through deposits or other liabilities, the bank would need to make sure it was attracting and retaining some kind of funds in order to keep expanding lending", right after writing about running out of reserves, a direct contradiction." It isn't is it. Central bank reserves are an asset of a commercial bank. Deposits are liabilities of commercial banks. Suggesting people at the Bank of England don't know how banking and central banking works is a bit hubristic don't you think. The process they are talking about is the one that causes the central bank interest rate to bind [0] [0]: https://new-wayland.com/blog/why-banks-pay-interest-on-deposits/ https://new-wayland.com/blog/why-banks-pay-interest-on-depos... The central bank simply threatens to operate as a wholesale depositor at a particular price. "Central banks lend money and that's how money is created. " They don't. They merely threaten. Commercial banks rarely borrow from the central bank. Central banks discount assets into their own liabilities - just like every other bank. They just tend to stick to government securities. They do that reflexively at a particular price, because if they tried to do it at a quantity they would lose control of their interest rate and cause the payment system to collapse. That's what QE is - additional discounting of government securities into bank reserves. Which then requires there to be a support rate paid on reserves or the interest rate would drop to zero or thereabouts. Those reserves come from government spending more than it taxes, and that's what the central bank is discounting. In technical terms the commercial bank lends to the central bank, not the other way around. The commercial bank has the asset, and the central bank the liability. Just like a deposit at a bank lends to the bank. Hence why you are 'in credit'. Credit being the accounting term for a liability. There is no such thing as a money multiplier and never has been. Loans create deposits. Deposits which are then used, in part, to swap for bank equity and bonds which creates the 'assets > liabilities' buffer in the banks. It's back filled, not front run. Reserves have no quantity controlling power, and are merely an optimisation. You don't need them at all to do banking.

flashfaffe2 4y ago

"And they need to put firms with foreign borrowings through administration to get rid of the foreign debt." Though I totally understand the idea, I however think it is easier said than done. Turkish ( or any other country) companies have the same issue: low us interest rates and common sense applied here: they took advantage of the situation by borrowing in US dollar. There was nothing much the Turkish government could do about that.

neilwilson 4y ago
"There was nothing much the Turkish government could do about that." They can. They can change the "trading while insolvent" rules so that it is in all currencies the firms deals with, not just the reporting currency. Then if you can't get the forward swaps, the firm is insolvent and has to be put through administration - which will wipe out the dollar debt rather than cause a wave of Lira for dollar selling. Capitalism without bankruptcy is like Catholicism without hellfire. It stops the control system working.
- flashfaffe2 4y ago
  My point was referring to any companies from emerging countries who need assess to finance ( exporting into the US or Europe which is the case for many Turkish company). Not only the ones being insolvent. They assesment is made at the entity level. The macro effect is not taken into account by them.

adam_arthur 4y ago

How can you MMT people exist when there are already thousands of business/credit cycles throughout history that disprove your beliefs? To be clear, raising interest rates to appropriate levels curbs inflation as evidenced by all of financial history. Turkey kept rates low exactly as you suggest, and this massive inflation is the result

neilwilson 4y ago
"To be clear, raising interest rates to appropriate levels curbs inflation as evidenced by all of financial history" Except for the ones analysed by the Fed. > We show that a nearly 90 percent reduction in inflation volatility is possible even without any changes in monetary policy when the economy transitions from equal shares of power between workers and firms to a new balance in which firms dominate. In addition, we show that the decline of trade union power reduces the share of monopoly rents appropriated by workers, and thus helps explain the secular decline of labor share, and the rise of profit share. We provide time series and cross sectional evidence. [0]: https://www.federalreserve.gov/econres/feds/files/2022028pap.pdf https://www.federalreserve.gov/econres/feds/files/2022028pap...
- adam_arthur 4y ago
  Yes, fiscal factors and excess labor supply will keep inflation constrained. But to say higher interest rates lead to higher inflation is simply wrong as evidenced by a huge wealth of history/data. Every country that has tried to combat inflation with lower rates has led to an inflationary spiral. In a perfect world inflation would be controlled primarily via fiscal policy, but this is non-viable in the US political system. E.g. despite the Democrats being savaged in the polls due to inflation, they have yet to actually propose any package to help address inflation. Instead they just tried to convince people that BBB was inflation fighting, when in reality it's structured as a highly inflationary set of legislation. The Fed can't be as targeted as fiscal policy can, so their mechanism to combat inflation naturally leads to recessions. Fiscal could be much more targeted, e.g. temporary taxes on discretionary goods etc. It just so happens to be that sensible policy to curb inflation would also be highly unpopular to most