Economics again

I’m sorry. Economics and interest rates again (though I would like to make the point that I’m not whining about the prospect of my mortgage payments going up; working for The Man means I can absorb anything they throw at me, and frankly my rate’s still better than fixed mortgages). I’m still confused. It’s pretty much a given that interest rates will rise again, after Mervyn ‘Merv’ King had to grovel to the Treasury after the CPI inflation figure went over 3%.

Now. Here are the things.

Inflation is, I learn this week, calculated by comparing what things cost this month with the same month the previous year. One of the things that’s pushed up prices recently is the supermarkets finally deciding to pay decent prices to dairy farmers; don’t even get me started on the evils of supermarket monopoly, but this would indicate to me that the price rise is artificial. It doesn’t imply a trend – the price of milk won’t continue to rise for the next six months. So I’m a little annoyed by the screaming headlines about dastardly inflation, especially when five out of ten financial institutions are actually predicting an initial rise in interest rates followed by a drop (in Saturday’s Money supplement in the Grauniad; doesn’t appear to be online) but what got reported? ABN Amro’s prediction of 6% by this time next year, completely out of step with the rest of the money men.

God, I hate the media.

I also keep reading that our Merv is concerned by "spiralling wage inflation" (© all the finance sections). But, right, looking at this from my point of view as the social historian… what’s the one thing that’s guaranteed to make people look for a higher wage? Increased mortgage repayments. So why the hell would putting up interest rates peg back wage inflation?

I’m trying to find some logic to economics, but it seems to be all numbers and very little common sense.

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5 responses to “Economics again

  1. Pete April 23, 2007 at 11:54 am

    I tried to answer this before, but I guess my blathering didn’t help.
    Control of base interest rates gives a very broad power to control “the price of borrowing money”. As controls go, it’s more like the brake lever on the mine cart in Indiana Jones and the Temple of Doom, but it’s all that they have. The bank can’t retroactively affect people’s decisions to borrow in the past, but raising the price of borrowing on deals made now and for the next few years will exert a braking effect on spending in the economy. There is a lot of historical data backing the link up and it’s about as sound as broad economic theory ever gets (ie/ peppered with lots of caveats about “ceteris paribus” and rational decision making – which are always invalid). The bank is holding one lever and they can choose to yank it back or forwards.
    In bringing dairy farmers into this you’re confusing macro and micro economics. The CPI is designed as a macroeconomic gauge and is built as an average of all the goods and services the average consumer needs – if a little spilt milk wrecks it then it’s really badly designed. Microeconomic trends in certain business sectors can be in complete opposition to macro trends, so you’re comparing apples with oranges. You can’t expect everything to line up and make sense there.
    If you want a more coherent macroeconomic explanation than I can give, you might enjoy Paul Krugman’s Return of Depression Economics.

  2. Rachel April 23, 2007 at 1:47 pm

    This is probably why I hate economics, and also why I’m starting to think I want finance journalists lined up and shot. It all just seems like an extremely crude way of running the economy (sorry “running” the economy) that takes no notice of the nuances of what’s happening in various sectors and the reasons behind the stack of numbers. It doesn’t help that the finance media are screaming at the tops of their lungs at the moment about imminent rises and economic crashes, whereas if you look at some of the analysis you can see it’s actually nowhere near as ‘bad’ as people make out.
    I think my main beef here is with reporting, rather than economics…

  3. Rachel April 23, 2007 at 1:48 pm

    Oh – and that might be the first time the words “enjoy” and “economics” have ever been in the same sentence 🙂

  4. Pete April 23, 2007 at 4:51 pm

    Well, it is a fairly interesting book…
    I suppose the whole point of a capitalist economy is that it’s a pretty much self organizing system. If you want someone to sit down and “run the economy” then you’re thinking of collectivism ( again ;).
    Control of money supply and interest rates allow central banks a chance at avoiding some nasty negative feedback loops that can stall economies. Governments go along for the ride, take credit where they can and blame somebody else when something goes wrong. The most prudent economic step Gordon Brown has taken has been to hand control of interest rates away from government, as election and economic cycles are invariably out of sync and cause (all) governments to make very bad decisions when setting interest rates.

  5. Rachel April 23, 2007 at 10:13 pm

    Yeah, I’ve got to say I am pleased the Bank is independent – you just know the government would capitulate to all the frothing at the mouth and raise interest rates just because of the fear of being seen to be “soft on inflation, soft on the causes of inflation”.

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