Can we have an Idiot's Guide to Economics chat about interest rates and energy prices?

[GreenQueen80]

Not sure if Chat is the right place but would really like to chat on this. I'm a pretty intelligent person but I've never understood Economics as much as I probably should. Can any Economics teachers or those in the know give me an idiots guide on some if this and in particular can we have a discussion about what actions can actually make a difference?

1. My understanding is that rising interest rates is supposed to stop inflation by encouraging retailers to lower prices, and encourage people to keep buying. Is this the gist of it?

I don't understand this theory though, since retailers are facing extortionate energy bills so how will they do this without going bust?

1. I was listening to one of the organisers of the Don't Pay UK campaign. They are basically trying to get 1million people to all stop their energy bill direct debit on the same day (1st Oct) to send a message to the energy companies. They reckon this could be a "poll tax moment".

Could this work?

1. Final question, which kind of summarises this whole thing... If energy prices are the cause of most of this, why can't the government intervene more on this one issue, given the extortionate profits the energy companies have made?

1. That's not the mechanism. Raising interest rates changes the balance between savings and consuming because it increases the rewards to saving and makes debt more expensive. If people save more/pay more to have debt, there's less money available to spend on consumption "stuff", so that's less demand for "stuff" and prices go down to stimulate demand, bringing down inflation. Or, more crudely, you propagate a recession to kill inflationary pressure (once well described as "too much money chasing too few goods")

2/3. It won't work. Yes there's pressure on energy producers to not make supernormal profits, but international energy markets are exactly that - international markets. The energy supply (gas) is being constrained by Russia shutting off supply so prices have increased. The oil (and refined products) supply has been constrained by sanctions, and supply chain uncertainties related to geopolitical events (eg Russia, China, Taiwan etc) so prices have risen. Imho the emphasis should be on protecting the most vulnerable, government constraint on supernormal profits but the reality is that everything is more expensive because there's less supply of it around, and there's pretty much fuck all we can do about it in the short term.

Your understanding of rising interest rates is wrong sorry op. If anything it's to encourage people to stop buying as they will have less free money to spend. If people are not spending then because there is no demand for goods, prices should stabilize. They won't though as the rise is not yet enough to achieve this. Or maybe I misunderstood you.

Don t pay UK won't work. As people won't want ccjs and prepayment meters.

I suppose govt thinks that with rising fuel supply limited and getting worse, energy companies need to be in a position to pay more to get it. We already have threats of blackouts and rationing in Europe.

Although all of this may well be bollocks when a real economist comes along!

My worry is that increasing interest rates won't control inflation because the inflationary pressure is mainly due to basics which people have limited choice about cutting back on - food, fuel, utilities. Plus the reasons why these have gone up will still be there whatever interest rates go up to.

People will make some choices, buy cheaper food, drive less for leisure, heat their houses less, and yes, some people could cut down wasteful behaviour like wasting food, driving short distances, having the heating on high or tumble drying when they could hang outside, but we're already in a position where an increasing amount of the population can't afford the basics or at the very least seen a massive decrease in their disposable income because essentials have gone up so much. Plus we're told not to expect a pay rise, because inflation.

Maybe they're hoping to reduce demand by killing off a few million people?

Responses make sense, thank you.

I understand the cost of fuel at source is determined internationally and impacted by geopolitics, but why can't the UK gov force the energy companies to use some of their extortionate profits to directly subsidise consumer bills?

Yes, I think that they do want more unemployed people don't they, then there will be less demand for pay rises as workers will be in a weaker position.

Rising interest rates is meant to reduce the demand to buy stuff & encourage spending. However we have greater inequality now then the 70s so some people will still spend plus people have no choice to spend on food & energy.

I think group action can work, see France but we are pretty passive so...

Part of me thinks the government are comfortable with high energy costs as it might encourage older people to downsize thus another property prop

That's a good point about the property downsizing

But does anyone know why the UK gov can't force the energy companies to use some of their extortionate profits to directly subsidise consumer bills?

The Bank of England have some pages on their website where they try to explain this stuff www.bankofengland.co.uk/knowledgebank

In terms of using the energy company profits to reduce bills, that is kind of what the government has done in levying a windfall tax on energy companies. But it is nowhere near enough to fill the gap.

part of the problem is the the profits of the energy companies are overseas but they charge people in the UK. So an international company has several 'sub-companies' in different countries (UK / USA / France / tax-haven-island). If the company makes a global profit of $50billion from customers in the UK / USA / France, it registers that profit to tax-haven-island and registers a tiny profit in the UK / USA / France. So it pays a little bit of tax to the UK government, a little bit in the USA etc. But tax-haven-island has a much lower rate of tax, so all the profits that are registered there can go straight to the shareholders. Which might pay your pension (pensions are big shareholders in big companies) but also pays for the company directors to have a nice yacht.

Unless different countries manage to coordinate their tax systems and crack down on avoidance via tax-haven-islands, it is very hard to fix this. Even if the government announces a windfall tax, that is only on the UK profit not the international profits.

There are several major problems with the don't pay campaign.

1. Energy companies can get a warrant to gain entry and install a pre-payment meter.

1. Often debts are sold to debt collectors so the energy company gets paid (at a lower rate to reflect the risk and cost the debt collector takes) the debt collector then goes down the CCJ and enforcement route.

1. Alternatively the energy company pays lawyers to go down the CCJ route. This costs the energy company but they get to keep what is recovered. The CCJ can be enforced in ways that mean they will get paid eventually. The costs of this will be factored into profits and affects pricing.

1. Many people will not want a CCJ and could even find it causes them professional difficulty so few will actually refuse to pay beyond the threat of a CCJ.

1. Court enforcement will be able to get payment from anyone with a job, savings, who owns their own home, or has assets worth selling.

We'd be better getting out on the streets.

Two questions:

1. Why are global energy prices set globally? Why isn't this free market/capitalism? And who is deciding how much they are? These people are those to blame for the economic crisis, surely?

2. Inflation at the moment is being cause by the increase in energy prices and the knock on effect onto everything else like food. Raising interest rates just helps make everything even more expensive. People don't need to be put off spending if they can't afford to spend anyway. So why increase the interest rate?

As PP's have said, typically, when prices rise (aka inflation) it's 'demand led', i.e. money is cheap, people are going out spending, buying lots of 'stuff' so prices rise in line with that. Many economists are currently arguing that currently, we have the 'wrong' sort of inflation to be controlled by interest rises, as inflation is not being caused by a massive consumer boom, but 'supply led', i.e. a shortage in gas/oil/energy/food in general. This is a view I personally subscribe to, however, increasing interest rates is the only tool the BoE have to try and control it.

The government have intervened to a degree with the windfall tax, but essentially, we live in a capitalist society, where it's not really considered acceptable to raid the profits of private companies. The UK government doesn't want to be considered by international firms to be the type that will spring massive tax raids on private organisations because they've had a good year, because it will make them think twice about setting up in the UK. I'm not for a minute saying I agree with this, but that's the argument.

What would actually help, is if OPEC (essentially a cartel of oil producers) would agree to increase production, which they have capacity to do, but won't, because it's not in their interests to help to lower oil prices.

www.bbc.co.uk/news/business-61188579

Answering 3 only, coz others have already covered the first two pretty well.

The government could use a windfall tax to prop up tax revenue for the state. But the current government is ideologically opposed to that.

Using a windfall tax to lower the energy price burden on consumers? Unfortunately this reflects a fundamental misunderstanding of the situation.

There is a worldwide shortage of gas. That can only be relieved by an increase in supply (which we can't do from the UK coz we don't produce much anymore) or a decrease in demand (so some people get colder or factories shut down).

In a pure communist state then we might reduce demand by a rationing system. In a pure capitalist state we have rising prices until some individuals or factories reduce their gas usage.

We're closer to the capitalist state. So bar rationing, energy prices will keep going up until usage drops to match supply.

The government subsidising energy so everybody can keep using the same amount doesn't work. We run out of energy.

Prices will keep going up until some people choose to go cold instead of paying them, and some businesses stop activities which can no longer cover their costs.

I think Don't Pay UK could work, but would have to be a combination of large (hundreds of thousands) of people doing it and the right people doing it, ie voters in key electoral marginal seats. People in Red Wall constituencies and Tory marginals have a lot of power right now, but they're also possibly exactly the demographic that wouldn't want to risk CCJs.

I'm thinking about the poll tax - lots refused to pay that back in the late '80s. That didn't in itself end the poll tax, but the associated electoral risk for the Conservative party ended Margaret thatcher and forced a policy change.

The government can't control the international cost of energy but it could, if the political heat rose enough, announce a really massive package of subsidies for household's energy bills.

The difference is that poll tax was paid to the local authority not to private companies so the government had much more of an interest in the defaults. The riots were also a factor.

Good post OP, i have the same questions!

Whilst I generally get raising interest rates to slow down consumer spending I dont understand how this will drop inflation if the cost of food and gas is the driver of the rise in inflation.

People will still need to eat / heat homes/ use petrol so how will the inflation rates drop?..... and is this a driver of recession because in order to heat and eat we stop buying everything else?.

Do you have any understanding at all of the debt-based economy or fiat currency? If not, start there . You can't understand anything until you understand that.

Genuine question. I heard an interview on Radio 4 back in 2008 and it was an economist saying that he found a book by Michael Robatham on the shelf and thought 'this is in the wrong place?' it was called The Grip of Death and all about money creation, out of nothing, just numbers on a screen rising exponentially in a system that is unsustainable because there is always more debt than there ever is money.

He read it and did the interview saying that this stuff is not taught on economics degrees, leaving all professional economists with a gap in the basic understanding of money creation and thus unable to comprehend what is really going on.

I had already been interested in this so listened with intent. So when they did the "quantative easing" to aid the crisis in 2007 that was the BoE printing extra money because we lacked the cash to ever pay back the loans, which are digital.
I'm probably explaining it badly but if you read that book you'll be on the right path.

So the BoE works on frational reserve banking which means they can lend out (digitally) a certain percentage more than is ever in their vaults in cash. Even this is whack, it should be gold but this country has no gold reserves. So then' what is the cash even based on? It should be a token that entitles the holder to some gold that they now essentially own. But there is none so what do they own? The paper money itself has no intrinsic value. (not really paper but brevity), it's just paper, it's meaningless.

So then what is the fractional reserve/ How much over and above the cash reserve (cash in itself being meaningless at this point) can they lend out?

Unless things have changed since I learned about all this it's whatever they like. There is no set percentage.

Therefore, there will always inevitably be a massive crash. The cash will outweigh the digital loan amounts to such a degree that those loans become impossible, unfathomable to pay back, because what do you pay them back with when the cash does not exist?

So what happens? What happened then was the bank bail out and quantative easing but it was a patchup job. Then it happened again, but bigger.

That was what I gleaned from the academic works but I haven't read anything in a while but have information on which to form opinions on what's going on now. Forcing people into more debt would seem like a solution, maybe by forcing more bank loans and more cash spending. Gaining back assets by the government, repossessions (many of which occurred during the first crisis) because mortgages (death grips) are a way to generate debt for the banks, and force people who now have a huge financial liability to a bank to go and work for the cash.

How you'd force those things through I don't know. Something huge though, something that would be global and bring fast results. In the past banks, namely Lloyds, were able to repossess massive amounts of businesses by loan sharking, essentially, to the business, encouraging bigger loans that they knew the business would not be able to pay back, thus gaining back the business to the bank for its use once again. Again I heard this on a Radio 4 programme, that was in around 2013.

But on a massive scale would be a bit harder, you'd need to cause lots of businesses to fail which isn't achievable on that scale without a massive project.

How would you gain back massive amounts of stock and force people to take more debts or do more work? Basically kick-start the economy. And how would you get the people to not be suspicious about it?

Some kind of financial reset and replacement of the system seems to be on the cards. It seems to me like there are some desperate attempts to save something dying. Read all of the last link; if fiat currency is about to die out, I do believe this is what it will be replaced with. It has many benefits over money for population control. If we had a smaller population it would work even better. We're witnessing a huge turning point in humanity and it's absolutely fascinating.

www.amazon.co.uk/Grip-Death-Slavery-Destructive-Economics/dp/1897766408

positivemoney.org/2011/12/debt-based-monetary-system-world-debt/

www.monetary.org/

www.ft.com/content/39c53b9f-f443-4dde-9cdb-07e8999ec783

en.wikipedia.org/wiki/Social_Credit_System

assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/927547/GOS_The_Future_of_Citizen_Data_Systems_Report__2_.pdf

They don't want to?

I also suspect it would make far less of a difference than people think.

The energy retailers have pretty thin margins, but the producers (e.g. BP) are doing much better especially right now thanks to the sky high bidding on the commodity they produce.

What France has done is nationalise EDF and basically force it to eat an enormous loss, which will still have to be paid back via general taxation. But simply preventing, say, Centrica or Ovo from making profits wouldn't touch the sides of this problem.

but why can't the UK gov force the energy companies to use some of their extortionate profits to directly subsidise consumer bills?

EDF is French and whilst the UK government has often set the cap at around 54% the French government has set the cap at 4%

so although they are making profits here - they may well be using those profits to offset the French cap on energy prices

often set the cap here on the highest rate of energy prices and not an average, so the energy companies will have purchased masses of energy but will top this up with fuel brought he day before at higher prices - this higher prices on the day before are what often set the cap

it has been muted that it'd be cheaper to buy the energy companies back to national companies for the uk government - but its a tory government which believes in free trade

Just came back to add this, as I just came across it, which is coincidental twitter.com/AMBULLDOG249/status/1555416564719144961?s=20&t=zVCevg-AR-XilzS1dTU1cQ

The government can't control the international cost of energy

it could cap the energy at a lower figure and not have the cap taken at the highest day before price, but an average - this is why the companies are making large profits

the bank also has to attempt to protect the pound therefore it has to raise rates

Really interesting- thank you.