'How high should interest rates be?' poll discussion

dots_thots

Occy wrote: »

Can someone explain what on earth what the link is between interest rates and reducing inflation?

Certainly :rotfl:... Interest rates are the price of money. Like any item the price is brought into balance via supply and demand. For interest rates to drop more people have to save in order to be able to lend it to someone else. With a fixed supply of money, changes in demand will cause mild inflation or deflation of certain goods depending on what the money chases or flees.

However, when there is no surplus of saving (like the indebted times we live in), interest rates are lowered by increasing the supply of money artificially - central bank open market operations - buying bonds, quantitative easing etc. When the central bank buys something the money deposited in the sellers account springs into existence. Essentially the more supply of money there is, the lower the rate of interest. Conversely when the bank wants to raise interest rates, it sells something (usually a government bond) and the money it receives is destroyed to lower the supply of money.

The problem is that the newly increased supply of money is now chasing the same amount of goods and services that existed before. This causes price inflation. The banks have essentially picked the pocket of all holders of money. It's important to note that inflation is defined as an expansion in the money stock. CPI is price inflation - the banks want you to focus on prices and not values. They can massage the CPI and RPI etc. via substitution and hedonic adjustments so it's important for them to get you focused on prices. They're hoping to gradually inflate without people noticing the cost of living rising slowly - if people have their inflationary expectations raised they will demand more wages and the velocity of money will increase (ie. people don't wish to hold money). A lot of the new money has been funnelled into derivatives - if the money ever landed on real goods and services even the CPI would go off the chart.

The effects of monetary inflation/deflation are not even right across the board. It all depends on what the money is chasing and that depends a lot on public sentiment. When a central bank adds new money to the system as reserves, commericial banks can expand the supply even further via the magic of fractional reserve banking. With a reserve ratio of 10%, if the banks choose to be "fully loaned up", they can expand the supply of new money 10 fold!! When Alan Greenspan lowered interest rates to 1% and banks were allowed to leverage to extraordinary levels, the new money went into housing because the commericial banks were lending like mad - hence the housing bubble. The lending institutions were emboldened by moral hazard because governments had shown they weren't going to let large corporations fail (eg. long term capital management blowing up and being rescued)

However, this is why there are busts. If reserves or savings are withdrawn or loans are defaulted on the situation starts to unwind. Banks have to shrink the loan books enormously which causes a huge decrease in the money supply. In normal circumstances this would cause interest rates to rise. Because this time around most mortgages are variable, people would start defaulting on them. The increased supply of homes and lack of demand cause house prices to reduce, more people walk away from mortgages and the situation could snowball. Which is why central banks step into the breach to fill the liquidity gap and to attempt to prop the prices up. That's all well and good but the effect is you destroy your currency in the process and that is disastrous for everybody.

Also, in terms of the "exit strategy" we keep hearing about the problem is like a hippo in a swimming pool. If the hippo gets out, modern economists would diagnose the problem as a lack of water and proceed to fill up the pool. When the hippo gets back in the pool (aka. the banks start lending again) what do you think will happen?

Recently the quantitative easing is flowing into stocks which the following chart simply screams at you...



What will happen if the central banks stop creating money?

As Milton Friedman said...

"Inflation is always and everywhere a monetary phenomenon."

That's how interest rates and inflation are related... it's when the supply of money has to be increased to push interest rates lower than the market wishes them to be - causing inflation, or lowering the supply of money to raise interest rates further than the market wishes them to be - causing deflation. This latter situation almost never happens - central banks since 1971 have held interest rates at levels much lower than free market rates would probably allow (with the exception of Paul Volcker in the 80s). This enormous expansion of money has gotten us into this terrible mess. They have two choices - default honestly, unwind they credit bubble and hurt debtors or steal from everyone and default disingenuously through a currency collapse of some sort. Oh, and just to make it worse, they bailed out the private bankers so it's you and me on the hook either way... Thanks! They're just praying we'll not notice or other events will give them something to blame instead. Well, I've noticed and I'm telling everyone I can! :mad:

In my opinion, there's nothing more important as understanding this fraud. It is the source of so many of our problems and we need to learn from history - it's happened so many times before. As the former Governer of the BofE Sir Josiah Stamp said...

"Banking was conceived in iniquity and was born in sin. The Bankers own the earth. Take it away from them, but leave them the power to create deposits, and with the flick of the pen they will create enough deposits to buy it back again. However, take it away from them, and all the great fortunes like mine will disappear and they ought to disappear, for this would be a happier and better world to live in. But, if you wish to remain the slaves of Bankers and pay the cost of your own slavery, let them continue to create deposits."

dots_thots

icklepeach wrote: »

Sorry - WHAT?!I'd love to know who these borrowers are that are "getting it easy"!?

The borrowers getting it easier are the banks who borrow from the BofE at 0.5-1% and lend it out at 6+%.

One of the most shocking things was when the BofE lent money at 1% but paid interest of 4% on the lent money to stop it being lent to the public. Free money!!! This made the banks look healthy, sterilised the loan because it prevented it being expanded via fractional reserve banking and gave the banks a true windfall to repair their balance sheets. And we're paying for it silently through currency debasement :mad:

One borrower getting it easier is the government because we borrow in our own currency. But that isn't good in my opinion because all it does is encourage yet more deficit spending.

Stopping this status quo rests on Money Savers. You're all excellent at fiscal responsibility - the country desperately needs you to study up on macroeconomics before the monkeys in the front seat drive us into a brick wall.

Sisyphean_Task

It's simple maths.

If the interest rate available from savings is below the RPI rate then savers are having their money stolen every night when interest is added to their bank account.

Each day your saving rate is below RPI your money will buy you less the next day. If you believe RPI is 5.1% then interest rates should be at least 6.4% for basic rate taxpayers 6.4% - 20% = 5.12% Anything less and your wealth is being stolen because your money is losing purchasing power.

If RPI falls to 4% next year it doesn't mean that prices have gone down - it just means they aren't rising as quickly. In two years if prices rise 5% then 4% something £100 costs £105 after year one then £109.20 after year two. Meanwhile your £100 plus 0.5% over two years is only worth £101.03 - anyone who has done the right thing and saved for their future is currently being robbed blind.

Currently the BANK of England (a private business with the shareholder's identities protected by the Official Secrets Act) is stealing saver's wealth and giving it to bankers via low saving rates and high mortgage/gilt rates - so they have a free arbitrage. There is no skill in bankers currently earning bonuses - it is blatant THEFT.

LittlePiglet

Keep up the good work dots_thots.

(Insert icon of a central banker being spanked here)

Yogibear

Makey wrote: »

I totally agree with everyone who thinks rates have been far too low for far too long. Yes, the banks are laughing - as they always do.

I think the rate should be at least the same as inflation (i.e. present day 5%). I too had a mortgage when the rates were around 15-17% yet I tried to do what they encourage everyone to do - save money for old my age.

Now, my life savings are not much help to my State Pension.

Why is it that the least responsible in our society get the most help. Once again it's the banks who were responsible for encouraging the ridiculously high amounts of borrowing - look where that's got us!

The Bank of England is taking the wrong side - but then, it's a bank!

100% agree all this stuff about low rates helping people to pay their mortgage,if they gave up one of their cars stopped going so many holidays,drank less,smoked less they would all be `loaded` the majority in here are not affected by recession in my opinion,its us pensioners who saved for our retirement now because we saved we are suffering no child benefit for us we were in London recently porsches,audis,bentleys,rollers how does the recession affect them and beside the parked cars in a doorway a young man sleeping rough:mad: we dont smoke drink or go out as we cant afford it.:eek:

stevemcol

Regarding preceeding posts containing the words 'us pensioners'. Many current pensioners fall into the 'baby boomer' category. This particular section of society is widely acknowledged to have significantly contributed to the mess we are currently in.

Ch4rlieB

To the savers moaning about the interest rate there getting.. Please try harder.. there are multiple products out there offering decent rates at the minute.

I don't have any debts other my mortgage but like most if the mortgage rates were to go up to 5-6% discussed I could not afford my current mortgage. We don't go on fancy flash holidays, we have cars only because we need them to get to work.. Thankfully I earn a decent wage so we are able to save an amount each month.

But why exactly should the younger generation be punished by higher interest rates just so you can get a slightly higher interest rate on your savings!. You should be moaning at the banks for not giving you a decent rate not the bank of england of not raising interest rates... you could moan at the BoE if interest rates truly were interest rates that we paid and received.

icklepeach

Yogibear wrote: »

,if they gave up one of their cars stopped going so many holidays,drank less,smoked less they would all be `loaded` the majority in here are not affected by recession in my opinion

What utter tripe. Total tosh.

I fall into several categories often "finger-pointed-at" in these sorts of debates. I am a fairly young wife and mother to one daughter of 11 years old and one of 2 years old. We haven't gone on holiday other than to visit family in the 12 years of our marriage. We only have one car (who can afford more than one??! see last week's debate!!) neither of us adults smoke, nor do we drink more than a couple of bottles of wine a month - nor do most people I encounter on an average day!

In terms of our finances - we're average according to the recent BBC class thing anywayr! I'm a stay at home mum mostly - working the odd evening (self employed) to help make ends meet - this is a privilege I know I am paying for in terms of the lack of savings we have, in terms of the not-yet-paying-into-a-pension, in terms of my student loan* not yet starting to be repaid.

But I do not accept that because some people paid double figure interest rates on their mortgage for a period that it qualifies them as some great high financial guru - a great great many people also did that and have continued to take out credit over and over again during the recent "boom" years.

And for those of you complaining your savings aren't much of a boost to your state pensions I really really really struggle to feel sympathetic - Not because I don't know what it is to struggle, but because you have a state pension (odds of that existing when I am finally allowed to retire at 75 in 2055 anyone?) and that there is some evidence that the Baby Boomers aren't paying their share (http://www.guardian.co.uk/business/2011/mar/15/babyboomers-welfare-politics-tax?INTCMP=ILCNETTXT3487)

The younger generation that some are keen to see punished for our debt to teach us a lesson (the same lesson that the 1980s didn't teach our parents) are also struggling to pay our student loans off, start private pensions, buy our first homes (with inflated prices thanks to the buy-to-let-for-our-pension generation) save for our children's education and get any sort of savings behind us in case we're made redundant in times of record young persons unemployment!

Please don't think I'm utterly unsympathetic - I just don't find this "we've done our bit make them *pointy finger* pay" attitude helps anyone. I don't think you'd find many people under 30 who would see cuts to the state pension, or pension credit to that matter.

Yes, raising the base rate would help close the gap for those with savings, but I think there are a great great many complex ways it might widen the gap for others.

Thought this was quite interesting though http://www.bbc.co.uk/blogs/thereporters/stephanieflanders/2011/03/the_shrinking_pound_in_your_po.html And yes, I saw the bit about the impact on pensioners in that article.

Just my (rather long winded) thoughts.

iPeach


*My understanding of the student loan interest rate is that it is charged at the RPI rate OR 1% about BofE base rate. So it is currently capped at 1.5% until the BofE rate reaches 3.5% in which case it will revert to RPI of 4.4% BUT my basic grasp of economics says that the RPI is likely to rise if base rate goes up anyway?!
Although the student loan is still a very cheap debt the way the minimum payments are being constantly jiggled and thresholds changed is truly stomach churningly terrifying. If the threshold goes up to 21k (as is being proposed in line with the higher borrowing needed for top up fees) If interest rates go up to 3%, it will mean the loans would be charged at 4% (RPI allowing) and I would need to be earning over £31k pa to even break even at that rate without touching the capital as it were - David Willetts couldn't have been more wrong when he said "The burden of the monthly repayment is what really matters to people." (http://www.bbc.co.uk/news/business-your-money-12794863)

rickbonar

All this was started by Mr Brown who was up re election and told us there was zero inflation. Like nearly everything the man said this was a lie.

Now even this figure of 4.4 % has been manipulated so much as to be about as relevant to someone living in the real UK as Narnia.

Importantly anyone with capital has seen their money ebb away with the very poor interest rates available in order to prop up a vastly overpriced housing market. I did tick the 5.75 box but perhaps they ought to do more, people are still hanging out for house prices that are at least double what they should be in fact some say as much 5 x times their relative historic value.

I think the government are eroding the value of the £ to sneakily do the same but for people that have worked and saved all their lives they are facing the prospect of having less in the pot than when they started. Certainly this is true for at least the last 2 years and doesnt appear to be changing. So it will set a bad example and you think what's the point? We might as well be on social security!

rickbonar

Ch4rlieB wrote: »

To the savers moaning about the interest rate there getting.. Please try harder.. there are multiple products out there offering decent rates at the minute.

I don't have any debts other my mortgage but like most if the mortgage rates were to go up to 5-6% discussed I could not afford my current mortgage. We don't go on fancy flash holidays, we have cars only because we need them to get to work.. Thankfully I earn a decent wage so we are able to save an amount each month.

But why exactly should the younger generation be punished by higher interest rates just so you can get a slightly higher interest rate on your savings!. You should be moaning at the banks for not giving you a decent rate not the bank of england of not raising interest rates... you could moan at the BoE if interest rates truly were interest rates that we paid and received.

Since when have products all paying less than inflation been decent?