Inflation -- an opportunity to make money!

Returning to a subject I covered a few months ago (Clarkson's Hammer), let's look at what interest rate rises will mean for the average person.

And when I say "the average person", I am, of course, excluding anyone who does not pay rent or for a mortgage.

(I suspect that means I'm excluding the people who actually decided to raise interest rates, i.e. everyone on the Bank of England's monetary policy committee. Do feel free to contact me if that's incorrect. In the meantime I'll continue assuming that they know this will cause suffering for others and they're quite comfortable with doing it anyway.)

Keep it simple

Let's think about someone who has borrowed £100,000 on their mortgage. Last time they fixed their interest rate, it was 2%. So they were paying £2000 per year in interest charges.

And now they need to remortgage, in order to avoid the dreaded 'follow-on' rate. They can either take a tracker (about 5%) or a fixed-rate (about 6%). So they will now be paying either £5000 or £6000 per year in interest charges.

The difference is between £3000 and £4000. Let's call it £3500 per year.

This year, they will be paying an additional £3500 to their bank, for nothing.

Rentals?

Anyone who is renting will be paying a landlord who could well be the person who just had to remortgage at a higher rate and is now paying an additional £3500 to their bank for nothing.

So let's assume that the annual rent will go up by £3500 to cover it. Because it will, won't it?

And where does this money go?

It's curious how difficult it is to find an answer to this online. My assumptions (again, do write in if you know better) would be that the bank has to pay a bit extra to the Bank of England for being allowed to create this loan money out of thin air, but that they keep the rest.

So let's work on the assumption that some of the extra £3500 goes to the bank, and the rest goes to the Bank.

But why?

To cure inflation, of course. In order to cure inflation, demand must reduce, which means people have to be poorer, which forces shops, businesses, etc to reduce their prices to get their customers back. Or go bankrupt, whichever happens first.

Even if we accept that (which I don't), why does the money have to go to the bank? Why can't it be gathered up by the government in a good old tax rise? Why can't it be taken as a compulsory charity donation?

Or why can't it be not taken at all? Inflation will fall anyway once the energy prices peak and (whisper it) this round of inflation wasn't actually caused by people having too much money and frittering it away. It's a mixture of gas prices, shortages because of the war and a bit of old-fashioned profiteering from companies using the current state of the world as cover for hiking prices way beyond what's necessary to cover their increased costs.

Maybe if people weren't poorer and didn't cut back on their 'discretionary spending', fewer businesses would go bust and it would actually be better for the country and prevent a recession...

But what do I know? I'm not on the monetary policy committee.

And what can we do about it?

Nothing. Pay up or get repossessed/evicted. Maybe buy some shares in your bank so at least you get some of it back in a dividend payout. (This is NOT financial advice, in case you were wondering.)