For the second time this week I’m replicating a column by tax specialist and modern monetary theorist Richard Murphy. Here (lightly edited) is what he wrote yesterday.
I have been suggesting interest rate rises are fuelling inflation.
That idea might shock the Bank of England. They seem to think inflation is down to excessive pay increases but I have news for them. Employees do not set price increases. Companies do that. So let me put forward a model of a company that is largely service-based to explore my suggestion. This is the starting point:
The figures are for purely representational purposes (thousands, tens of thousands, or millions: it makes no difference). The proportion of wages suggests it is service orientated, as most companies are. 1
Then I suggest that adjustments for inflation be taken into account, as follows:
Bought-in costs have increased by 10% – roughly the rate of inflation in the last year.
Wage increases have been kept to 6% – which will be tough on many staff.
The big increase is in interest costs. The company pays interest at 3% over bank base rate. So, the rate has grown from near enough 3% to 8%, or a growth of about 160%.
In comparison, profits have only been targeted to increase at the same rate as wages.
The resulting overall cost increase is 15.3%, with more than half of that being due to interest, which imposes a bigger cost increase than external costs and the wage settlement combined.
Let’s presume the company realises that the market will not accept a 15.3% price increase, and it keeps it to 10%. This is the result:
Profits have now been eliminated. The company’s future is, then, in doubt.
I stress that this is a model but the assumptions seem fair, as does the cost structure, although these (of course) vary widely.
My points are threefold. First, it is not wages that are driving up inflation.
Second, it is interest rate rises that are driving up prices.
Third, interest rate rises are now so extreme that many businesses face the threat of failure.
The Bank of England is welcome to use this model and think about the consequences of what they have created. I suspect they will not. What it makes clear is that we face a crisis created in Threadneedle Street, but they have no understanding of that.
And that’s why we face desperate economic times.
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- The professor makes no comment on most (Western) companies being service oriented. This points to a greater flaw in his understanding. On the nail as his takes often are, they remain painfully constrained by his failure to grasp the nature of imperialism. Most firms are service oriented because Western capital, of necessity ‘unpatriotic’, has exported manufacturing to the Global South. (My post of six years ago, Economics of imperialism, focuses on the implications for imperialised nations. More recently, thanks in large part to the analyses of political economist Michael Hudson, I have switched my attention to the implications for the FIRE-led economies of the imperialist West – and for whatever future humankind may have.) Richard combines a sharp mind with a pithy style. He has access, via modern monetary theory, to truths – on the relationship between a national economy with a fiat currency, and its monetary and fiscal policies – beyond the ken of mainstream economists of monetarist or Keynesian stripe. But his failure to factor in the exploitative relations between West and Global South leads him to misread the nature of current tensions between the US and Eurasia. This in turn misinforms his superficial and grossly wide of the mark grasp of what is happening in Ukraine, and of why European and Antipodean leaders – in effect compradors – act against the interests of their own peoples and businesses as they seek dutifully to advance those of Washington and Wall Street. More to the point here, Professor Murphy – an intelligent and compassionate man – frequently shows signs of awareness of the class war Britain’s rulers are waging in the name of ‘austerity’. (And will continue to wage under a Labour government, as he has in other posts acknowledged even if he avoids that precise formulation.) In due course his integrity may lead him to a fuller critique of capital in the age of imperialism. Until then I say his insights – which I’ll continue to promote on this site – must be weighed alongside those of economists au fait with a bigger picture.