The rise in interest rates today has been accompanied by the usual chorus of complaints from those with vested interests the financial sector- and the retail industry – that interest rates are too high. Banks and building societies continue to tell us that house price inflation is not a danger; 10 – 20% rises each year, year after year, are okay.
Sorry? Why, when wages are increasing at less than four percent per annum, is it alright for houses to rise at more than 10 percent? The current “average” situation in the UK is that people sitting in the “average” £200,000 house, appreciating at the “average” 10% each year are making £384 per week, just by owning a house. But where is that cash – higher than the minimum wage by the way – coming from?
In the old days, it would have been the printing presses at the Royal Mint, working flat out to print ever more money. Today, however, it’s created by computer keystroke.
The Bank of England has looked at the money supply and noticed that it’s currently rising at 14 percent each year. Sensibly, it has concluded that the British economy is awash with inflationary money – money that’s continually being created because interest rates are too low to restrain our greed for “cheap money”. So the Bank has done what it needed to do to slow down the supply of money – it has made it more expensive for people to borrow it.
Jens O. Parsson wrote tellingly about the effects of inflation:
“Everyone loves an early inflation, the effects at the beginning of the inflation are all good, there is steepened money expansion, rising government spending, increased government budget deficits, booming stock markets and spectacular general prosperity, all in the midst of temporary stable prices. Everyone benefits and no one pays.
That is the early part of the cycle, in later inflation on the other hand the effects are all bad.
The government may steadily increase the money inflation in order to stave off the latter effects, but the latter effects patiently wait in the terminal inflation. There is faltering prosperity, tightness of money, falling stock markets, rising taxes, still larger government deficits, and still roaring money expansion. Now, however, accompanied by soaring prices and ineffectiveness of a traditional remedy. Everyone pays and no one benefits. That is the full cycle of every inflation.”
These are the effects the Bank of England is currently trying to spare us the worst of.