Interest rates & the 1%

Nick Rowe says some of the answers to Paul Krugman's question - why do some of the 1% want to raise interest rates? - are daft conspiracy theories. I'm in two minds here.

Let's start by sharpening Krugman's puzzle. Since the mid-80s, the income share of the 1% has risen at the same time as real interest rates have fallen. This tells us that low rates are compatible with the 1% doing well. And there are good reasons why this might be so. Easy money is good for asset prices, and low rates allow banks to borrow cheaply, to the benefit of senior bankers.

Hence the force of the question: why do some of the 1% want higher rates?

One big reason is an empirical claim - that a small rate rise now would nip inflation in the bud and so prevent bigger rises later. In this way, a rate rise now is consistent with low rates over the long-term. This "stitch in time" reason for a rate rise was expressed by Andrew Lilico of the shadow MPC, who favours (pdf) a rate rise as "a chosen small step to normalisation rather than the first forced step in a series of rapid rises."

In this sense, I sympathise with Nick. We don't need a conspiracy theory. Those who want higher rates are making a reasonable (though I think dubious) intellectual point.

However, there is a political undertow here. It's about the balance of risks. In particular, the 1% are more inflation-phobic and less unemployment-phobic than the rest of us.

I agree with Steve that the rich hate inflation not least because it creates uncertainty. (There's also the historical point that the inflationary 70s also saw the nadir of the fortunes of the 1%: this might be just coincidence, but why risk it?)

This alone creates a bias to tighten. What amplifies this bias is that the rich can tolerate mass unemployment. Nick's parallel with the 1930s is, I think, irrelevant. Back in the 30s, mass unemployment was a threat to the rich because workers could see a plausible alternative to the existing order in communism. Today, by contrast, there are no big feasible alternatives to capitalism and so unemployment is not a political danger - which means it is more tolerable.

This answers Peter's question: why has the Keynesian coalition vanished from modern politics? It's because it is no longer politically necessary. It was not Keynes who convinced capitalists of the need for full employment but Lenin.

That said, it's not necessarily in the interests of the rich to have really high unemployment, because this could weaken aggregate demand sufficiently to depress share prices and increase default risk. However, the extent to which this is the case depends upon whether growth is wage-led or profit-led: a low wage share might depress consumer spending and hence growth, but on the other hand, a high profit share might embolden capitalists to invest. Reasonable people can disagree on the extent to which this is the case and thus the extent to which unemployment is good for the 1%.

On balance, then, I sympathize with both sides. On the one hand, Nick's right to say the call for higher rates is the sort idea that people reasonably disagree about. But on the other hand, an understanding of economic policy surely requires us to ask: what is in the interests of the 1%?

Comments

[Boffy]

Inflation is generally in the interests of the rich. They borrow larger sums, the capital value of which then gets inflated away. Inflation automatically tends to raise share prices, because nominal prices, and, therefore, profits rise as prices rise.

On the other hand, workers have to try to catch up with rising prices, and tend to increasingly fail to do so, so profits rise. Moreover, whatever amounts of savings workers have accrued, which usually take the form of money funds of one sort or another, or worse still pension funds under the control of the capitalist state, which may not only be cut in real terms, but even cut in nominal terms, as has happened with the requirement that workers work long before they can claim their pension, are devalued by inflation, representing a direct transfer from labour to capital.

The actions of central banks via money printing and low official interest rates are not geared to create higher employment, but to hide the fact that the banks are bankrupt, and their balance sheets are a fiction based on astronomically inflated prices of shares, bonds and property. By encouraging speculation in this fictitious capital, they undermine the need for investment of money-capital in productive activity, and that is one reason a section of the 1%, those connected with productive-capital rather than the banks are expressing concern.

[Socialism In One Bedroom]

I tend to agree with Boffy, inflation is not good for workers who have savings. If you look at many of the political revolutions in the Middle East they were triggered by rising prices of essentials. Mubarak was wheeled into a courtroom on a hospital trolley due to inflation! Let the tyrants beware!

"Today, by contrast, there are no big feasible alternatives to capitalism and so unemployment is not a political danger - which means it is more tolerable."

Mass unemployment has a way of creating feasible alternatives.

[foosion]

>>Inflation is generally in the interests of the rich. They borrow larger sums, the capital value of which then gets inflated away. >>

The rich are net creditors. They have more assets than the poor. That's what makes them rich.

>>On the other hand, workers have to try to catch up with rising prices, and tend to increasingly fail to do so, so profits rise. >>

On an aggregate level, spending equals income. If someone if pay more, someone is earning more. Inflation increases total income.

The issue is distribution, but that's a different issue than inflation.

[foosion]

>>I agree with Steve that the rich hate inflation not least because it creates uncertainty. >>

Nick's response when I made this comment to one of his posts was that if the problem was uncertainty the rich would hate the possibility of lower inflation as much as the possibility of higher inflation.

[An Alien Visitor]

"The rich are net creditors. They have more assets than the poor. That's what makes them rich."

I would advise you to read this:

http://realfare.wordpress.com/2014/01/22/interest-rate-apartheid-max-keiser/

[Nick Rowe]

Chris: a sensible post.

But I can't help remembering that in the 1980's I kept hearing the argument that high interest rates were good for the rich, because they had all the money to lend. And now I keep hearing the argument that low interest rates are good for the rich, because low interest rates cause high asset prices, and the rich own all the assets.

Personally, I blame the lawyers: http://worthwhile.typepad.com/worthwhile_canadian_initi/2014/09/why-are-lawyers-against-higher-inflation.html

[Socialism In One Bedroom]

"I kept hearing the argument that high interest rates were good for the rich, because they had all the money to lend. And now I keep hearing the argument that low interest rates are good for the rich"

I think the lesson of this is that capitalism is good for the rich!

[Peter K.]

The rich will do fine with either high or low interest rates.

But I do believe they'd rather have high interest rates. Low interest rates is the government trying to keep the labor market tighter, same as fiscal spending. It is also the euthanasia of the rentier. With so much liquidity there isn't much need for liquidity specialists.

[Luis Enrique]

People observe right wing commentators calling for higher rates, and conclude its in the interest if the rich. But the right wing is more than a coherent pro rich set of policies. Do we actually know if a majority of rich people favour higher rates? Perhaps dislike of inflation and easy money is part of the right wing mindset without really being in the interest of the rich.

I have some savings but I don't worry about inflation because I figure nominal interest rates will roughly track inflation. Why should the rich think differently?

[Magpie]

Prof. Rowe's post teaches us a valuable lesson: after reading something that irritates you, the best idea is to breath deeply, relax and collect our thoughts before writing.

Frankly, I'd sympathize more with him if he had provided evidence he understood what he is criticising, before criticising it.

Take Wren-Lewis as an example (although the same applies to Waldman, Dorman, Krugman, and all the others). The subject of Wren-Lewis's argument is the "1%". Rowe even includes some verbatim quotes showing that: "The reason for this is that the aftermath of financial crisis is extremely threatening to the neoliberal political consensus and the position of the 1%."

However, the subject of Rowe's post is not the "1%" (which he doesn't mention once!!!) but the "neoliberal consensus":

"I say: Right. So the aftermath of the financial crisis is an especially dangerous time for the "neoliberal consensus". OK. So to save the neoliberal consensus, let's make unemployment temporarily even higher to make it even more dangerous for the neoliberal consensus??? < /sarc "

QED.

[Keith]

Keynes tended to think "the rich" were a bit thick, just like most other people. He maintained that as Inflation is a nominal process but wealth is about real value which depends on productivity the rich have nothing to fear from inflation. So long as his kind of policies increase real wealth the rich gain on balance. All the rich need to do is grasp portfolio theory. Or employ advisers who do understand the theory of asset allocation. Providing you adjust the balance of your asset holding all is well. You keep getting richer.

The working class gain from higher demand and growth engineered by Keynesian policy. If their savings are eroded by inflation it is not a great problem as they gain far more than they lose on balance. He would no doubt also argue that if the financial markets work and are innovative workers should be able to achieve a more balanced portfolio as well and have a share in higher real growth from investment. Providing the market creates the required investment products.

As no one has found a way to abolish uncertainty in the technical sense of risks that cannot be removed by a prudential set of before the event precautions it is pointless to use uncertainty as a argument against any set of economic policies. All conceivable policy by the state, central banks, or private firms and individual people are characterised by a context of uncertainty.

When some one argues against policy x as it involves uncertainty but for policy y while refusing to admit that policy y also suffers from uncertainty they are engaging in logical slight of hand. Trying to defeat one policy argument by creating a irrational fear of uncertainty is not getting us any where useful. Being unable to see the uncertainty connected with your favourite policy is an admission of prejudice.

[Luis Enrique]

magpie,

doctor cure thyself. Although perhaps unstated, ain't the neoliberal consensus in the interests of the 1%?

[Stevenclarkesblog.wordpress.com]

I'm skeptical about relevant this is.

- Aren't interest rate decisions reasonably insulated from the democratic process and the hectoring of interest groups?

- As far as politics does impinge on the central bank, wouldn't it be through their mandate? Some economists think we should adopt a higher inflation target - but this seems to be outside the Overton window. Is it really the 1% behind this?

- When politicians do talk about interest rates, Osborne will say something like:

"Nothing would be more damaging for Britain at this fragile moment for the world's economy than an increase in mortgage rates for families and an increase in the cost of borrowing for businesses."

This suggests he's more concerned with Middle England homeowners than the 1%. (Whether being in hock to this group is any healthier for our economy is open to debate).

[SK]

Lower rates only worsen the situation for low/middle incomes by making housing costs unaffordable.
The current status of PRS/SRS tenants in UK is ridiculous. Their savings are getting no return (they have no assets) while their major outgoings in rent are constantly increased by the BoE policy.

Thus low rates do not help them. Higher rates would help much more.

The 1% has assets and can buy assets, therefore they want lower rates and Central Banks pushing the asset prices higher and higher..

And then you have economists supporting low rates so the 1% is getting richer...

[Boffy]

"The rich are net creditors. They have more assets than the poor. That's what makes them rich."

Being a net creditor is not the same as not being large borrowers. If I borrow a large amount to buy a house to live in, or as a landlord to rent out, inflation devalues the capital sum I have to repay, whilst the rents I receive increase in line with inflation.

But, the rich do not hold their wealth in the form of money savings, nor do they lend normally in on the basis of nominal returns. Where they do the latter it is nomrally only at high nominal rates, i.e. the Pay Day Lenders, Credit Card companies and so on.

The lending that the rich do is in the form of the provision of money-capital to companies, i.e. buying shares, and bonds, and the return to these rises with inflation in nominal terms.

"On an aggregate level, spending equals income. If someone if pay more, someone is earning more. Inflation increases total income."

No it doesn't. That is Say's Law, which Marx showed only applies under systems of barter. Moreover, your further point,

"The issue is distribution, but that's a different issue than inflation."

is not a different issue, but the whole point, how does inflation affect the distribution!

Marx demonstrated that the most effective means of increasing profits is by relative surplus value, i.e. reducing the value of labour-power, by reducing the cost of wage goods for workers, by continually raising productivity. However, as Marx describes in relation to workers resistance to reductions in piece rates in response to increased productivity due to the introduction of more efficient machines etc., this can only work, if workers wages are reduced.

Henry Ford recognised the same thing. Continually rising productivity could bring about both higher profits and higher real wages. But workers would resist the concomitant fall in nominal wages, even as their real wages rose. So, the answer was simple. Keynes recognised that the answer to this downward stickiness of wages, was to rely on money illusion.

Simply build inflation into the system, which is what the introduction of the Federal Reserve in 1913, was created to do, and workers can be fooled into believing that their wages have risen, because in nominal terms they will have done. But, prices will also have risen, so that real wages will then have fallen by an equivalent amount. But, then higher productivity means that real wages can rise, and yet profits too can rise, provided wages rise by less than the increase in productivity.

That is the basis of Fordism, Keynesianism and Social Democracy, and as Engels described it started back in the 19th century, long before capitalists began to be worried by Lenin.

[Boffy]

There is, of course, another more important point here. The state can manipulate some interest rates to a degree, i.e. it can print money to buy certain types of bonds, and thereby reduce the yield on them. But, this only means that other interest rates rise, because putting a base under one bond, draws money to it, and away from others. It also means that to the extent it doesn't just result in a reduced velocity of circulation, the increased money in circulation causes inflation to rise, and thereby causes interest rates to rise in response.

That may not occur in the country where the money printing occurs, but it will occur somewhere. For example, US money printing expanding the circulation in China.

But, ultimately, interest rates as the price of money-capital, as Marx describes can no more be set by the state than can any other price for any other commodity. In the end the price of money-capital as a commodity, as Marx sets out in Capital III, is determined by the demand and supply for money-capital.

We have had very low interest rates for the last 30 years, not because of money printing by states, but because the supply of money-capital expanded massively, as the global rate of profit rocketed in the late 1980's and through to the last few years. The rate and mass of profit rose so massively that it even exceeded the huge rise in the demand for money-capital required for the creation of masses of productive-capital in China and elsewhere. It then accumulated as money hoards in the form of sovereign wealth funds of surplus economies, and on the balance sheets of big global corporations, as these expanding profits were realised, and now standing at trillions of dollars.

The same process of a massive rise in global productivity, which brought about this rise in the rate and mass of profit, also raised the rate of turnover of capital, thereby releasing further masses of money-capital. The same rise in productivity also slashed the values of global commodities, which is why despite all the money printing commodity price inflation has been constrained.

[Boffy]

I've described these processes in detail in my book - http://www.amazon.co.uk/gp/product/B00MNHZCLU?*Version*=1&*entries*=0.

[Magpie]

Luis Enrique,

Rightly or wrongly, Paul Krugman et al are talking about the rich, about their behaviour and preferences: they are talking about people.

Rowe is talking about theories: ideas.

One exists in the world, the other only exists in people's minds.

You do see the difference, don't you?

[Luis Enrique]

Magpie,

i see that difference, but I think Rowe was asking for people to make consistent arguments, and complaining about people who simultaneously want to have it that the 'neoliberal consensus' serves the interests of the 1pct and that the 1pct want to imperil that consensus by having high unemployment. So I still think you reacted hastily to his post.