Interest(ing)

[Workingman]

The BoE has raised the interest rate by 025% to 1%, the highest since 2009.

Unfortunately the BoE is caught between the Devil and the deep blue sea.

It can do nothing about global pressures - energy and shipping costs and other economies raising their prices to contain the same. Yet if it goes too high the housing market collapses due to repossessions - property ceases to be an asset.

1% helps virtually nobody yet 5%, which is where it would be under historical conditions, would kill the economy that is now based on debt and quantitative easing. It is long past the time when easy credit for all was abolished and we were forced to live within our means.

Forwards to the past is the way to go, but it will hurt, boy will it hurt, but it will have to be done sooner rather than later. We cannot live on credit for much longer.

[Suff]

I see the £ has dropped with both the US $ and the €.

Apparently the markets were looking for a bigger move like the Fed. I suppose it will move in time.

Already the shrieking and beard tearing has started about how we are already in a recession and we need to stop breaking the economy. It has been so long the new guard don't even know what a hyperinflative economy looks like.

[Workingman]

It has been so long the new guard don't even know what a hyperinflative economy looks like.

Never mind hyper, many have lived for so long, from the mid 90s, without any meaningful inflation - 2 or3%ish or lower. Some of us remember the high double digit inflation of the 70s and 80s. If / when things go up we wrinklies will know how to adjust and cope. Generation Z and the millennials have no chance.

There is no easy way out of where we are.

[cromwell]

The government racked up over £400 billion debt by shutting the country down and paying millions of people to stay at home.
When the interest rates go up it means that the government has to pay billions more to service the debt that they incurred.
So they won't want high inflation. Whether they can prevent it is another matter.

[Suff]

When the interest rates go up it means that the government has to pay billions more to service the debt that they incurred.

It does, but it also depreciates the debt in real terms. I was discussing this with an ex FD from the NHS and he was not understanding. Till I asked "If you take out debt which matures in 10 years and you run 10% inflation for those 10 years, only paying the interest each year, how much will you pay back, in real terms, on year 10". He was quick and did the numbers in his head, 9% he said. Because your currency and budget grow 10% with inflation, but your sum you are paying back is fixed.

Equally, the interest paid is on the fixed principle. So long as you pay the interest every year, the interest you pay, in real terms, depreciates by 10% each year.

If your interest is fixed and you run 10% inflation, you just got rid of most of your debt in a decade by only paying the interest.

I used Greece as an example when I asked this question. It worked in reverse. Greece, for 40 years, had borrowed huge sums of money and run inflation of 10%. Then they joined the Euro, inflation dropped to 3% and they continued to borrow at the same rate. We all know what happened to Greece.

Therefore do not be so sure the government doesn't want to run 5% or more inflation. It will help balance the budget.

[Workingman]

What if your currency crashes over those ten years, as ours is doing?

The economic theory only works on growth and that cannot go on forever. There will be payback day and it's our children who will b paying. I, for one, am not comfortable with that.

It's OK for me, but not for my kids.

[Suff]

If your debt is denominated in your own currency, then if it crashes the whole thing is even faster. Say we devalued by 50%, we also devalued our debt. OK "things" would become twice the price, but then again wages would also grow to cover it. Of course if your debt is denominated in some other currency, US$ say, then you are in the crapper. Our sovereign debt is in pounds sterling. Because they don't expect us to act like Argentina.

You are right, not OK for our kids. But expect some level of "wish" to keep inflation higher.