Why should interest rate juggling cause so much angst to some?
“Milton Friedman popularized the theory of monetarism in his 1967 address to the American Economic Association. He said that the antidote to inflation was higher interest rates, which in turn reduces the money supply. Prices then fall as people would have less money to spend” (The Balance)
Yes, but who are “people”? Those with big savings, who own their own houses outright, those with large pensions – or even professors of economics at prestigious American universities? Will they have less money to spend when there are high interest rates?
But it is true if the “people” are those with mortgages for extortionately prices houses and struggling to pay off university loans, fund the upbringing of children and yet not be able to increase their own income by increasing their fees to compensate.
It is true of those businesses who have to borrow to fund expansion – whether by interest-bearing loans or by having to tempt new shareholders with promises of higher dividends.
What is “Moneyterism”? Well, “Monetarism is a school of thought in monetary economics that emphasizes the role of governments in controlling the amount of money in circulation“ (Wikipedia)
OK. A “school of thought”. Or theory. Friedman is blunt: he does not regard his “particular proposal as a be-all and end-all of monetary management., as a rule to be somehow to be written in tablets of stone and enshrined for all future time”
It is dangerous to make theory into a god. Particularly when (as in present practice) governments hive off their responsibility by making central banks responsible for carrying out the duty what should be theirs.
For what are banks to do to enable them to follow this requirement – or indeed are they allowed to do?
They use the only tool they are authorized to use: that of the variable interest rate.
As Milton Friedman (almost) quotes “Money is too serious a matter to be left to central bankers””
But what is the effect of this?
It makes the less well off – and many of those in their middle age – poorer. While at the same time it frequently makes those not forced to borrow – and even more those who can lend – better off. It has a record of helping banks make higher profits! But dangerously it makes governments who are the largest borrowers pay for the policy by themselves having to pay higher interest charges and thus have to increase their indebtedness.
It increases the rate of exchange, making life for exporters considerably more difficult.
And – and here we come to the nub of the situation – it is the very least amoral if not frankly immoral.
It is one of the saddest historical facts that in the UK this was brought in by the “Son of the Manse”, Gordon Brown: without him (apparently) considering the morality of his actions.
But there is no alternative! Or is there?
There must be! One possible answer is surely relatively simple: control the amount of money being circulated by increasing Income and Corporation taxes. This has the effect of reducing the available money of those who can most afford the reductions and least affects those who have little to spare. Decreases government debt. Helps exports.
The danger is that it is politically difficult to bring in when so many people are persuaded that all forms of taxation are bad and thus to be reduced at all costs. It does not help when a political stance (such as Friedman’s) which is against taxation for whatever reasons and this overrides any ethical ones.
One of the apparent reasons for opposing the use of taxation is simply that fear that taxation is very short-term and governments will use any surpluses extravagantly. In effect one can trust individuals to use their own money wisely but not governments.
And yet. And yet. Those wanting “liberty” seem to think that drug barons can be trusted not to spend their gains on luxury villas and over-speedy cars? Yet elected governments, subject to voter control, cannot? [Of course there are dangers to “voter control”. But are these worse than giving power simply on the basis of obtaining wealth?]
Can this be done? Using Payroll/PAYE/tax withholding schemes the action could be effected as quickly are interest rate changes. Those on annual or bi-annual tax would surely realise that they will be affected!
I think we all know that the best off in modern prosperous countries are the retired who live very comfortably on substantial company pensions and that life is very difficult for those paying back tuition fees, paying mortgages, bringing up children etc.
And that the pensioners vote is considered more significant than those in their 30s and 40s.
The problem seems to be a fear that all politicians will be irresponsible: that should they decrease money supply by increasing taxation they will not put the resultant surplus income into reserve – or reduce national debt – but rather spend it on un-necessaries. Thereby increasing the problem of inflation.
But should voter power override morality?
There are of course powerful lobbies against this kind of action. Most of these are from those who could most afford higher taxation – if they were less addicted to money as an end to itself or to un-necessary luxuries.
But not challenging the practice of imposing high interest rates to answer economic woes is surely a huge weakness in those practicing economics. For economics is not an exact science!
[What are the effects when running this through IE modelling? Well are as far as we are aware broadly neutral: but ethics is not a parameter usually built into this consideration! In our judgement this an essential adjustment needed. Nor necessarily is the mental disturbance of those in the second quarter of their life by the effects of the interest rate tool being used… Any suggestions please?]
Maybe those economists and bankers should use a different word than “people”. Otherwise perhaps like Humpty Dumpty they perhaps must persuade us that “When I use a word it means just what I choose it to mean — neither more nor less.”