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The UK is certainly in this mess right now. Interest rates only work if the economy is rate sensitive and large amounts of fiscal spending has made developed e

by kypro 3y ago

The UK is certainly in this mess right now. Interest rates only work if the economy is rate sensitive and large amounts of fiscal spending has made developed economies today much less rate sensitive in my opinion. In the past when central bankers raised rates the vast majority of borrowing and spending occurred in the private sector so as rates rose borrowing and spending would fall. Today a huge amount of borrowing and spending is done by the government where that rate sensitivity doesn't really exist. In the UK for example something like 40% of adults are on some form of government welfare and that welfare has increased in line with inflation over the last year (~10%). So basically 40% of adults in the UK have income which is inflation hedged by the government. But worse still is that the government is now borrowing more than ever in the UK to hedge inflation for UK consumers while also paying more than ever to service its increasing debt. So this is a toxic combination of higher inflation, higher rates and ever more debt. I keep trying to explain to people here in the UK that the government are basically screwed and we need to cut spending now before the public debt burden gets any worse. Unfortunately I don't think people here really appreciate the magnitude of the hole we've dug ourselves just yet and think we can just spend our way out of this like we have in the past. Even wealth taxes won't fix the deficit we've created with debt-to-GDP in excess of 100% and government borrowing rates going to 6%+. Wealth taxes might raise $20-30b in an optimistic scenario – but our deficit is twice that and growing. It's going to be interesting to see how governments deal with over the next decade because the cost of health care and pensions are only going to continue to increase so either we'll be forced to increase tax revenue to unprecedented levels with destroying the economy, or we borrow ever more to fund all of this spending and eat the cost for it via inflation. Well that or cut government spending.

mitthrowaway2 3y ago
I don't know about the UK but Canada is quite rate-sensitive, because of high levels of private mortgage debt, virtually all of which has a duration 5 years or below, and a large part of which is floating. However, Canada has another problem in that it counts mortgage interest as consumer spending. So rising interest rates can be severely stressing individuals and detracting from the real economy while aggregate statistics paint a misleading picture of healthy consumer demand.
ta1243 3y ago
Increasing rates affects people with debt -- mortgage holders mainly, as personal loans are fixed for the life of the loan. We see calls to limit the wages of those working people as if it's their income driving commodity prices up. However we see both minimum wage and pensions increasing 10%+. Now sure those on minimum wage will spend it on something frivolous like food, but those on indexed linked pensions, who already pay far less tax per pound received than a working person, have even more money to spend. Roll NI into Income tax, it will raise money spent and take it from those who actually have money to spare and are thus driving inflation by created demand where supply can't keep up. Throw in a land value tax to encourage people to utilise land better and thus reduce the cost of housing, and pretty much remove the planning system anywhere within 2 miles of a station with a <60 minute service to a major city.
- voisin 3y ago
  > Increasing rates affects people with debt -- mortgage holders mainly, as personal loans are fixed for the life of the loan. Not just people! Companies, municipalities and other levels of government too. These rate increases mean literally every entity in our over indebted nation is going to feel pain.
  - ta1243 3y ago
    Except the consumers driving inflation -- the ones who have little debt and are spending their inflation linked income like there's no tomorrow. The ones we refuse to hit with targetted tax
- kypro 3y ago
  Forgot about the minimum wage. I'm certainly not opposed to increasing that, but forcing companies to hand out a 10% pay rise at a time when inflation is at record levels seems a little short-sighted. It probably should have been 5-6% to encourage a real decline in spending power. Not that it makes me happy to say.

by kypro 3y ago

mitthrowaway2 3y ago

I don't know about the UK but Canada is quite rate-sensitive, because of high levels of private mortgage debt, virtually all of which has a duration 5 years or below, and a large part of which is floating. However, Canada has another problem in that it counts mortgage interest as consumer spending. So rising interest rates can be severely stressing individuals and detracting from the real economy while aggregate statistics paint a misleading picture of healthy consumer demand.

ta1243 3y ago

Increasing rates affects people with debt -- mortgage holders mainly, as personal loans are fixed for the life of the loan. We see calls to limit the wages of those working people as if it's their income driving commodity prices up. However we see both minimum wage and pensions increasing 10%+. Now sure those on minimum wage will spend it on something frivolous like food, but those on indexed linked pensions, who already pay far less tax per pound received than a working person, have even more money to spend. Roll NI into Income tax, it will raise money spent and take it from those who actually have money to spare and are thus driving inflation by created demand where supply can't keep up. Throw in a land value tax to encourage people to utilise land better and thus reduce the cost of housing, and pretty much remove the planning system anywhere within 2 miles of a station with a <60 minute service to a major city.

voisin 3y ago
> Increasing rates affects people with debt -- mortgage holders mainly, as personal loans are fixed for the life of the loan. Not just people! Companies, municipalities and other levels of government too. These rate increases mean literally every entity in our over indebted nation is going to feel pain.
- ta1243 3y ago
  Except the consumers driving inflation -- the ones who have little debt and are spending their inflation linked income like there's no tomorrow. The ones we refuse to hit with targetted tax
kypro 3y ago
Forgot about the minimum wage. I'm certainly not opposed to increasing that, but forcing companies to hand out a 10% pay rise at a time when inflation is at record levels seems a little short-sighted. It probably should have been 5-6% to encourage a real decline in spending power. Not that it makes me happy to say.