2 Aug. 2006

Today's Interest Rate Rise

Like the vast majority of people I feel like I'm not entitled to speak on matters of interest rate policy, that I don't understand what's going on. I thought everyone had gone insane, but was hopeful that I might be missing something. Until I read what Evan Jones, a professional political economist posted on the subject, which essentially confirmed that I was right.

This is the argument that is being presented for the new interest rate hike: the value of petrol has gone up, therefore the value of many commodities (which are either partly made from or at least transported through burning petrol) have gone up. Therefore there is 'inflationary' pressure on prices.

So far so good. This pressure will likely make wages go up, since people need the money from their employment to pay for the increasing prices. So we see the beginnings of an inflationary spiral.

It's quite clear that there is only one mechanism which is employed in the neo-liberal order to control inflation. That is the 'interest rate', which the supposedly-politically-independent put up every time inflation rises, and are consequently called geniuses by the news media.

The rationale for this is very clearly that it is spending which causes, or at least exacerbates inflation, and raising interest rates makes loans more expensive and saving more attractive, hence discourages consumer spending.

However, this will not change the underlying cost of commodities. What it in fact does is increase the cost of living for the large proportion of the population who are in debt and thus puts pressure on wages. As Jones says, this in fact exacerbates inflation. While demand for commodities will fall in that fewer people can afford to pay for them, this is simply to fomet economic disaster, since it will simply render businesses unviable. It heralds a deflationary race to the bottom, of falling wages and destitution as the wages we have give us less and less spending power in an economy afflicted with high commodity price inflation.

Well, that's my two cents. Political economist readers are sure to chime in. Obviously, this is not the end of the Australian economy per se yet, since so much of it is based on primary production for export. Urban economies like Sydeny's however, especially the urban working class who are engaged in industries of secondary and tertiary production and who have high levels of consumer debt, are in for a rough ride.