“ The purpose of raising interest rates is to "cool the economy," a euphemism for increasing unemployment and reducing wages.”
My suspicion is wages are already below the market clearing rates. Ie if they were raised more people would be willing to work. That’s easiest to see as a minimum wage consideration, but it’s true of more market industries than that.
I don’t see a way where raising interest rates causes labor to be paid more. If it works to lower wages then peoples propensity to work for those wages will go even lower. At some point possibly externals to the traditional labor market start emerging. Ie despite having paid for your BigMac the laborer won’t actually make you a decent BigMac until they see a tip in the jar. (Just to illustrate the mechanism not as an actual example.)
I honestly don’t know. But it’s clear we’re in odd territory.
If wage pressure is too high you get an inflationary spiral as companies keep having to pay more for workers. This will eventually cool the economy anyway. Better to step in before that happens and reduce the amount of damage done.
5.5% unemployment, the Fed target, isn't crushing workers. Its the natural unemployment rate.
Inflation destroys wealth. Nobody will be able to retire with inflation high, it erodes savings, and will force governments to cut benefits as they get too costly.
2009 - 2022 was a wild ride of free money, and we became addicted to it, but its well past time to get back to moderate interest rates, moderate unemployment, and low inflation.
What a simplistic analysis. But there will always be readers who will like the story that rich get richer and the poor get poorer, not matter if the evidence really point is that direction or not.
The vast majority of the announced layoffs were white collar jobs, people getting $100k, $200k or more per year. That does not fit the story of rich getting richer, does it?
The Fed raising rates results in bonds losing value. Equities too. Real estate too. Other less liquid assets too. The vast majority of the rich in the US have lost money. Not so much the poor, because the poor don't have a lot of financial assets. It does not mean the rich have become poor and the poor rich, it just means this is not one of the times when the gap between rich and the poor has increased, or that the Fed is working diligently towards increasing this gap.
> The vast majority of the announced layoffs were white collar jobs, people getting $100k, $200k or more per year. That does not fit the story of rich getting richer, does it?
This is a relatively minor quibble, but I would say that the discussion of what happens to people making 100k or 200k a year says absolutely nothing about what is happening to either the rich OR the poor.
While someone making that much money might be considered rich compared to the global average, the prices they need to pay for necessities are not the global averages. They may be paying much more for housing, in particular, if they’re based in the Bay Area or Seattle environs.
If one is working for the bulk of their money for wages or salary rather than making it on investments then I would suggest one is not rich.
The price of assets like stock, real estate, and bonds is a function of the risk-free rate of return. So, while the nominal value of assets goes down as the interest rate goes up, this change is temporary. When the interest rate goes down, the prices will go back up. And of course, this is just a change to the nominal value. Shareholders still own their companies. Bond holders still have their cash flow, etc.
The Fed has expressly stated that the goal of rising rates is to increase unemployment, or using JP’s words “bring the labor market back into balance.” These jobs aren’t going to magically come back when the interest rate goes down. Gains in union membership are going to be wiped out, and union membership is a form of wealth for labor.
And the messed up part is, the ultimate goal is to decrease demand. There are other ways to decrease demand, like raising taxes, for instance. But that is not suitable for the railing class. The poor must suffer (literally JP said that many people must suffer to tame inflation, and he wasn’t talking about the wealthy).
13 comments
[ 0.16 ms ] story [ 41.0 ms ] threadClass system needs a steerage class or the elites are just like everyone else. Tale as old as time.
My suspicion is wages are already below the market clearing rates. Ie if they were raised more people would be willing to work. That’s easiest to see as a minimum wage consideration, but it’s true of more market industries than that.
I don’t see a way where raising interest rates causes labor to be paid more. If it works to lower wages then peoples propensity to work for those wages will go even lower. At some point possibly externals to the traditional labor market start emerging. Ie despite having paid for your BigMac the laborer won’t actually make you a decent BigMac until they see a tip in the jar. (Just to illustrate the mechanism not as an actual example.)
I honestly don’t know. But it’s clear we’re in odd territory.
If wage pressure is too high you get an inflationary spiral as companies keep having to pay more for workers. This will eventually cool the economy anyway. Better to step in before that happens and reduce the amount of damage done.
Inflation destroys wealth. Nobody will be able to retire with inflation high, it erodes savings, and will force governments to cut benefits as they get too costly.
2009 - 2022 was a wild ride of free money, and we became addicted to it, but its well past time to get back to moderate interest rates, moderate unemployment, and low inflation.
The vast majority of the announced layoffs were white collar jobs, people getting $100k, $200k or more per year. That does not fit the story of rich getting richer, does it?
The Fed raising rates results in bonds losing value. Equities too. Real estate too. Other less liquid assets too. The vast majority of the rich in the US have lost money. Not so much the poor, because the poor don't have a lot of financial assets. It does not mean the rich have become poor and the poor rich, it just means this is not one of the times when the gap between rich and the poor has increased, or that the Fed is working diligently towards increasing this gap.
This is a relatively minor quibble, but I would say that the discussion of what happens to people making 100k or 200k a year says absolutely nothing about what is happening to either the rich OR the poor.
While someone making that much money might be considered rich compared to the global average, the prices they need to pay for necessities are not the global averages. They may be paying much more for housing, in particular, if they’re based in the Bay Area or Seattle environs.
If one is working for the bulk of their money for wages or salary rather than making it on investments then I would suggest one is not rich.
The Fed has expressly stated that the goal of rising rates is to increase unemployment, or using JP’s words “bring the labor market back into balance.” These jobs aren’t going to magically come back when the interest rate goes down. Gains in union membership are going to be wiped out, and union membership is a form of wealth for labor.
And the messed up part is, the ultimate goal is to decrease demand. There are other ways to decrease demand, like raising taxes, for instance. But that is not suitable for the railing class. The poor must suffer (literally JP said that many people must suffer to tame inflation, and he wasn’t talking about the wealthy).