Interest Rates and Inflation

Elmer_BeFuddled

Nebulous2 said:

Inflation tends to benefit people in work with debt, as pay rises go up and the value of their house goes up, while their debt (mortgage) gets eroded. People with money and not in work lose out. 

that made me chuckle!!

thickasabrick

jim8888 said:

As I project forward into my retirement, I construct disaster scenarios in my head such as "What if inflation went to 10%"?
I remember mortgage interest rates being 14% at one point in the Nineties. I'd no savings or investments then but, I assume if I had, I'd have been earning 14% on those if I did have money in the bank.
I wondered, therefore, if inflation goes up by 5%, would you then assume a return on your investments would move up to, say, 9% to enable you to continue with a Safe Withdrawal Rate of 4% from your Direct Contribution pension fund? 

Came across an interview with Richard Werner on YouTube were he explains that rising interest rates follow growing productivity in the real economy. So I would expect investments to grow as well. 

Different to what we’re seeing with quantitive easing as the explanation for that has not been proven with empirical evidence.

It’s over an hour long so you might have to split viewing into smaller digestible chunks but well worth it, particularly his observations in the last 10 minutes. Can’t quite remember exactly were he described rising interest rates following growth in the real productive economy, probably about 30 minutes in.

How banks work & dictate the economy - DiMartino Booth - Down the middle with Richard Werner.

https://youtu.be/u8j51XZegsk

AlanP_2

HansOndabush said:

jim8888 said:

As I project forward into my retirement, I construct disaster scenarios in my head such as "What if inflation went to 10%"?
I remember mortgage interest rates being 14% at one point in the Nineties. I'd no savings or investments then but, I assume if I had, I'd have been earning 14% on those if I did have money in the bank.
I wondered, therefore, if inflation goes up by 5%, would you then assume a return on your investments would move up to, say, 9% to enable you to continue with a Safe Withdrawal Rate of 4% from your Direct Contribution pension fund? 

No chance. As you appear not to yet realize....the government can't afford higher interest rates so inflation will rip, wiping out savers with it while at the same time reducing the real cost of government debt. Welcome to MMT.

I can't see where your argument is supported by anything I have read about MMT, which recognises that inflation could result but does not necessarily result if the economy is managed using appropriate levers & accelerators.

thickasabrick

AlanP_2 said:

HansOndabush said:

jim8888 said:

As I project forward into my retirement, I construct disaster scenarios in my head such as "What if inflation went to 10%"?
I remember mortgage interest rates being 14% at one point in the Nineties. I'd no savings or investments then but, I assume if I had, I'd have been earning 14% on those if I did have money in the bank.
I wondered, therefore, if inflation goes up by 5%, would you then assume a return on your investments would move up to, say, 9% to enable you to continue with a Safe Withdrawal Rate of 4% from your Direct Contribution pension fund? 

No chance. As you appear not to yet realize....the government can't afford higher interest rates so inflation will rip, wiping out savers with it while at the same time reducing the real cost of government debt. Welcome to MMT.

I can't see where your argument is supported by anything I have read about MMT, which recognises that inflation could result but does not necessarily result if the economy is managed using appropriate levers & accelerators.

I had another look at that interview with Richard Werner and about 40 minutes in he explains that his theory of quantitative easing is different to the one being applied now. Basically he is saying that some of the presumptions in modern money theory are inaccurate or wrong when tested empirically.

I will try to paraphrase here.

Money being created by the central banks will cause asset inflation if sent to that area of the economy or consumer inflation if sent to the consumption side of the economy. The only time QE works if the central banks "borrow" from the banks to take all the bad debt off their books as that is a "ledger" transaction between the banks and apparently it does not affect inflation in the real economy ! 

How banks work & dictate the economy - DiMartino Booth - Down the middle with Richard Werner.

Malthusian

Elmer_BeFuddled said:

Nebulous2 said:

Inflation tends to benefit people in work with debt, as pay rises go up and the value of their house goes up, while their debt (mortgage) gets eroded. People with money and not in work lose out. 

that made me chuckle!!

People undervaluing themselves is not a socioeconomic problem you can solve at the macro level.

Many people don't get pay rises when prices go up because they are already being paid more than their marginal product due to minimum wage law, or the cost of maintaining their gold-plated pension has swallowed up any room for a pay rise.