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?

My understanding of the Don't Pay UK thing is simply stopping your direct debit. Not going so far as getting a county court judgement, and still paying the bill within the timeframe, but if a million people stop their direct debits it puts a rocket up the arse of the energy companies who complacently rely on our direct debits as guaranteed cash flow with which to support shareholders and gain interest.

I recently moved house and it took EON 6 months to pay me back credit I was owed to the tune of £1000 from rolling direct debits! All the time they were earning interest off my money.

Possibly a stupid question but could the energy companies be restricted in the raising of the standing charge at least? I understand the unit price being dictated globally and can see that the standing charge may need to rise somewhat but surely less so?

Of course they could be. But I don't know why people think we could ever come up with a solution that they have not already thought of. It's like we think 'oh you just need to cap them' yeah they know that but they don't because possibly (probably) they don't want to save this situation because maybe this situation is advantageous to the world system. If mumsnet mentions it you can bet your arse the global think tanks have thought of it too.

Money "money" is really an ethereal concept and an increasingly digital concept. It's a tool, for trade yes, but also for control. And once its outlived its usefulness in those regards it must be replaced. Social credit seems the likely answer not just from my own (admittedly catastrophising WCS style of cynical conspiratorial thinking (not least because corruption requires conspiracy and people in power are known to conspire)) observations but also because it is written about in black and white by the powers that be, (see my links above, especially the final link)

Ooooh paying your bill on time will really stick it to the man!

@JesusMaryAndJosephAndTheWeeDon

er ok 🤷‍♀️

I think another thing people need to grasp, urgently, is that international private companies are international and not beholden to do what a nation state wants them to do. We are not talking about municipal corporations, responsible to councils, or small Victorian companies built up by local-people-made-good, who might feel the urge to give back to the people and communities that enabled them.

The large international companies have more power than national states. They are accountable to no one and responsible only to shareholders. The only legal responsibility they have is to maximise profits to shareholders. They have the power to lobby to force national governments to change laws that they don’t like.

…which kind of puts another face on Johnson’s “fuck business” comment, which has been widely derided on here by so-called lefties, doesn’t it? Don’t ever expect politics or economics to be simple with our population levels.

There is no reason the government couldn't cap the standing charge at a lower level but this would mean that the suppliers would make an even bigger loss selling to UK domestic consumers than they already are.

So once again it's the lack of solid global leadership that's ultimately responsible. If we had the likes of Merkel, Obama, and Gordon Brown in charge at the moment there would have been conversations about this. Instead Biden's just focussed on not losing his control of the house, Germany on coping with the Nord stream stoppage, and in the UK we have a complete leadership vacuum right now.

Try this
[Throughline] The Mystery of Inflation #throughline

podcastaddict.com/episode/143338027 via @PodcastAddict

.

So how do we get inflation under control?

If it's a supply side issue, won't tax cuts lead to companies increasing prices and people with more money from tax cuts will be able to pay for them.

And people who don't have much money will be spending those tax cuts on energy prices and food?

The idea of energy direct debits is to even out the bills for consumers. So you get into debt with the energy company in the winter when bills are higher and then build up a credit in the summer. By cancelling the direct debit you will just make your bills less predictable. I don’t see what that will achieve.

@WaahWaahWaah neither do I but I guess it means that people have their cash available now for other things, yet come winter they'll need to find it again.

Im with Octopus and on my app its telling me I can pull out £160 if I want, but thats the point of paying DD so it taking it out defeats the object 🤣

What, all of them, including the ones not registered in the UK?

Fir one thing, they have already levied a “windfall tax” to do exactly this, but it’s rightly viewed as an incredibly dangerous thing to do. Companies don’t like to invest in a country where they are expected to shoulder their own losses but then have their profits confiscated.

BP had a nineteen billion pound loss recently; how die that fit into your “obscene profits” narrative?

Are you taking the piss? Merkel shut down Germany’s nuclear power plants, switching to coal and Russian gas, Gordon Brown said he’d abandoned boom and bust, and then sold the country down the river on PFI spending, and Obama treated the energy companies about the same as Bush did.

Higher interest rates also make people less inclined to borrow for large ticket items. Car financing, home improvements, holidays. A lot of sectors are run on debt.

If we buy fewer driveways, the salesman, designer, ground worker, materials supplier etc get less money. Building in recession. So I guess they are hoping a few short sharp shocks on interest rates will be enough, and not induce a recession free fall.

You would imagine that increased energy bills and fuel bills are going to make people less inclined to borrow for large ticket items!

Only for some. A great many households are not going to have any issues paying their energy bills.

But the point is that if higher interest rates are supposed to reduce people borrowing money to fund big ticket items, then won't increased energy bills do the same?

Unless people will be able to afford increased energy bills but will be deterred from borrowing money to fund big ticket items because they are spending their money on energy bills?

They're talking about a windfall profits tax in the US. Which is stupid. I'm old enough to remember when they tried all these gimmicks in the 1970s. I've also taken econ courses at the undergraduate and graduate levels.

The people who benefit from oil company profits are the stockholders, and I guarantee that if you have a pension plan then you are invested in oil company stock. Are you willing to have a smaller pension payout in the future because the government essentially double-taxed your investments? Not to mention that oil companies lost huge amounts of money during covid that they are only now recouping.

Worldwide demand for oil is up. I say again, demand is up, everywhere. The supply, mainly due to green policies, is down. The law of supply and demand is called a law because it applies always, everywhere, in every circumstance. Demand is up, supply is constrained, prices go up. It's always worked that way.

Governments can only do a few things to fix this. One is listening less to the green types and working to increase supply. Green energy and alternative sources of energy are great, and we need to keep researching them, but the technology we currently have is not developed enough to replace fossil fuels for an earth with 8 billion people. We will get there in time, but making arbitrary decisions like "ending fossil fuels by 2030" has as much chance of happening as harnessing unicorn farts to power the world. Put more simply, what can't happen won't happen.

So if governments won't increase the supply, the only other alternative is to reduce demand, which they are doing by raising interest rates to cause a recession. In a recession income goes down, and with it demand. Problem solved, but it is a painful solution that hurts the vulnerable in society the most.

Right now there is sky high demand for everything from prescriptions to perfume to park benches. Anything that requires an appointment takes twice as long as it did before.

And because people built up wealth in the pandemic by now travelling or buying lunches etc, we were all trying to hurl money at the problem, and prices rose. With elastic demand, we could choose to pay more depending on stuff we wanted and how much we wanted it. Prices could rise and this stoked inflation. The Bank of England can affect this by increasing interest rates to encourage people to save, and discourage people to spend. This takes the heat out of the system and reduces prices.

Now there is price pressure on stuff we can’t choose to have eg light and heat. This is inelastic, we absolutely need it at a certain level but energy is global and the Bank of England can’t control this. Unfortunately, we need to solve supply (more energy needs to come to market) or reduce consumption globally. That means the world produces less - and becomes poorer as a result. Fewer people shopping and prices drop.

If people have built up savings, then reduced taxes will mean people have more money to spend?

So unless supply increases, doesn't that just mean that goods will increase in price?

I'm an experienced career economist.

Theoretically raising interest rates make people think twice about buying things, and decide instead to save. This stops demand led inflation (I.e. price rises when there are more customers than there are items to buy).

However this inflation as the author rightly says is supply side inflation I.e. price rises due to increases in the price of inputs to production.

So yes, any Government in this situation should be focusing on maintaining the price cap on fuel. This stops supply side inflation.

It's a bit more complicated than this, as you can see by all the answers above (and theres reasons why bank of England increased interest rates despite harming mortgage payers, to do with maintaining the value of the pound). But that's the jist.

If people have built up savings, then reduced taxes will mean people have more money to spend?

only if they are paying tax to start with