Read or listen now | With inflation raging at 10% or more, central banks may have to raise interest rates to similar levels to keep it under control. But have they got the bottle, asks Dominic Frisby?
Here is the case against your smart mate. Infarion this time round has been driven by Ukraiinenwa driven oil prices, wheat prices, and also supply constraints in China caused by Covid lockdowns. Interested rate rises have no impack in thsee
Secondly inflation in the 1979s was fueled by wage price sprials. Unions have far less power than they did 50 years ago, and so we wio
Ts see anytging like the wage spiiral from befoure. There are big gains already being made in the stock market right now
I think you, and your friend are both right, much higher rates are required to bring inflation under control, and I don't think there is the resolve to go as high as is required. Time will tell...but I'm in your camp...nobody is willing to make the decision that will destroy their career, sometimes the treatment can hurt more than the illness.
I think we all like to think that the world of money and markets runs in cycles so we can feel comfortable about what we are seeing, the truth is that we are in virgin territory every single day.
Yes something might look similar to a previous time, but it's different, it's always different...one of the main reasons I don't believe any 'guru' who states with such confidence that the market will do this, and the market will do that.
In the lead up to 2008, house prices rose as interest rates went up because interest rates were rising in response to a strong economic situation. House prices only crashed when there was a liquidity crisis with falling interest rates once people realised that the rating agencies had been fraudulently certifying consolidated junk bonds as AAA.
Anybody who assumes that higher interest rates mean lower asset prices somehow doesn’t have any knowledge of history. Prices are rising due to shortages, which suggests higher asset prices. We aren’t building as many homes right now due to higher build costs, both from general inflation and higher developer taxation and obligations and as inflation increases with real interest rates remaining in negative territory people want to convert cash into real assets and futures contracts to lock in prices, your friend will be a rarity seeking to be in cash. If you are a grain buyer do you lock in today's grain prices and spend more on futures contracts for next year or do you sit your cash at 1% in the bank or at 0% under a mattress? What institutions do is more important than what your mate does.
What interest rates do is change the time preference for money, it is rational to have higher interest rates to have the time preference for money shifted to savings, investment and futures contracts because only that will resolve shortages.
Businesses that are unable to attract and invest this capital will go bust but an economy with shortages needs companies that can attract the capital that will be available as people like your friend shift money to cash that will be lent out to productive businesses. Pension funds will do very well as bonds begin to pay out higher yields finally, despite their asset base falling. A cynic would say that the government knew this would occur and used midazolam to ensure that inevitable higher pension fund cashflow caused by higher rates goes to shareholders rather than pensioners.
A lot of the money heading into savings accounts and pension funds will be invested in energy production due to higher energy prices. Let's just hope government doesn’t divert too much of it into failed renewables via zero carbon policies and windfall taxes, because that will only prolong the crisis causing higher interest rates overall. Britain became a net importer of energy in 2004, was this a direct effect of Tony Blair's 1997 £5bn Windfall tax?
What we are seeing is a rational market reaction to zero covid and net zero. Government is already breaking ranks allowing new North Sea gas fields so fingers crossed we can move forward now we aren’t in the EU. The more government push back with net zero, the more energy prices and interest rates will rise. Eventually governments will have to capitulate or suffer the fate of the Sri Lankan establishment, but then again isn't social unrest the dream of Klaus Shwab who can come in with global governance solutions?
Jul 27, 2022·edited Jul 27, 2022Liked by Dominic Frisby
This does not bear scrutiny.
First - there is nothing sacrosanct about positive real rates. It's not the case that without them inflation can not be constrained. Think about the many times when in Britain or abroad in the recent (<50y) past when inflation has been so high yet subsequently fell despite nominal rates being lower.
Second - the impact of moving rates from 1% to 2% is much more significant than 5% to 6%. People buy homes on floating rate mortgages (unwisely imo) and usually choose the most expensive place they can afford. The terms of the mortage are usually 30y so a very material part of the monthly/annual payment is interest. Do the numbers, you will understand the point I am getting at.
Third - not only do they not have the bottle, they would be crazy to do something so reckless. It would cause chaos. I am not an admirer of recent policy at all and believe rates are much too low but just because they have fouled things up horribly does not mean a rapid correction will be the right remedy. An obese man can not be made healthy by starving entirely for a month.
Something to ponder. The money markets (for Sterling) reckon that (short term) interest rates will peak in 2023 Q2 (at about 3%) and and then start to come down again. I am doubful we will get even that high so soon and very skeptical that that the spectre of inflation will have diminished sufficiently by then to allow such expectations to persist.
But the central bankers job isn’t to get us out of the inflation they and they alone create. They may extract their incomes from us but they certainly don’t work for us, nor for our benefit. Our job is to realise this and forever act accordingly!
Here is the case against your smart mate. Infarion this time round has been driven by Ukraiinenwa driven oil prices, wheat prices, and also supply constraints in China caused by Covid lockdowns. Interested rate rises have no impack in thsee
Secondly inflation in the 1979s was fueled by wage price sprials. Unions have far less power than they did 50 years ago, and so we wio
Ts see anytging like the wage spiiral from befoure. There are big gains already being made in the stock market right now
I think you, and your friend are both right, much higher rates are required to bring inflation under control, and I don't think there is the resolve to go as high as is required. Time will tell...but I'm in your camp...nobody is willing to make the decision that will destroy their career, sometimes the treatment can hurt more than the illness.
I think we all like to think that the world of money and markets runs in cycles so we can feel comfortable about what we are seeing, the truth is that we are in virgin territory every single day.
Yes something might look similar to a previous time, but it's different, it's always different...one of the main reasons I don't believe any 'guru' who states with such confidence that the market will do this, and the market will do that.
In the lead up to 2008, house prices rose as interest rates went up because interest rates were rising in response to a strong economic situation. House prices only crashed when there was a liquidity crisis with falling interest rates once people realised that the rating agencies had been fraudulently certifying consolidated junk bonds as AAA.
Anybody who assumes that higher interest rates mean lower asset prices somehow doesn’t have any knowledge of history. Prices are rising due to shortages, which suggests higher asset prices. We aren’t building as many homes right now due to higher build costs, both from general inflation and higher developer taxation and obligations and as inflation increases with real interest rates remaining in negative territory people want to convert cash into real assets and futures contracts to lock in prices, your friend will be a rarity seeking to be in cash. If you are a grain buyer do you lock in today's grain prices and spend more on futures contracts for next year or do you sit your cash at 1% in the bank or at 0% under a mattress? What institutions do is more important than what your mate does.
What interest rates do is change the time preference for money, it is rational to have higher interest rates to have the time preference for money shifted to savings, investment and futures contracts because only that will resolve shortages.
Businesses that are unable to attract and invest this capital will go bust but an economy with shortages needs companies that can attract the capital that will be available as people like your friend shift money to cash that will be lent out to productive businesses. Pension funds will do very well as bonds begin to pay out higher yields finally, despite their asset base falling. A cynic would say that the government knew this would occur and used midazolam to ensure that inevitable higher pension fund cashflow caused by higher rates goes to shareholders rather than pensioners.
A lot of the money heading into savings accounts and pension funds will be invested in energy production due to higher energy prices. Let's just hope government doesn’t divert too much of it into failed renewables via zero carbon policies and windfall taxes, because that will only prolong the crisis causing higher interest rates overall. Britain became a net importer of energy in 2004, was this a direct effect of Tony Blair's 1997 £5bn Windfall tax?
What we are seeing is a rational market reaction to zero covid and net zero. Government is already breaking ranks allowing new North Sea gas fields so fingers crossed we can move forward now we aren’t in the EU. The more government push back with net zero, the more energy prices and interest rates will rise. Eventually governments will have to capitulate or suffer the fate of the Sri Lankan establishment, but then again isn't social unrest the dream of Klaus Shwab who can come in with global governance solutions?
This does not bear scrutiny.
First - there is nothing sacrosanct about positive real rates. It's not the case that without them inflation can not be constrained. Think about the many times when in Britain or abroad in the recent (<50y) past when inflation has been so high yet subsequently fell despite nominal rates being lower.
Second - the impact of moving rates from 1% to 2% is much more significant than 5% to 6%. People buy homes on floating rate mortgages (unwisely imo) and usually choose the most expensive place they can afford. The terms of the mortage are usually 30y so a very material part of the monthly/annual payment is interest. Do the numbers, you will understand the point I am getting at.
Third - not only do they not have the bottle, they would be crazy to do something so reckless. It would cause chaos. I am not an admirer of recent policy at all and believe rates are much too low but just because they have fouled things up horribly does not mean a rapid correction will be the right remedy. An obese man can not be made healthy by starving entirely for a month.
Something to ponder. The money markets (for Sterling) reckon that (short term) interest rates will peak in 2023 Q2 (at about 3%) and and then start to come down again. I am doubful we will get even that high so soon and very skeptical that that the spectre of inflation will have diminished sufficiently by then to allow such expectations to persist.
https://www.barchart.com/futures/quotes/J8*0/futures-prices
Thanks. I think they will do one or a combo of the following:
1. Inflation definition will change (CPI, PPI)
2. Cap rates (YCC) like Japan
3. Keep going as is with negative real rates
4. Something else I haven't thought about (via the energy markets or SDR global agreement/accord)
I think the risk is huge if the rates go to 10% compared to any of the above.
I am curious about your thoughts Mr. Frisby? :)
But the central bankers job isn’t to get us out of the inflation they and they alone create. They may extract their incomes from us but they certainly don’t work for us, nor for our benefit. Our job is to realise this and forever act accordingly!