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Rising interest rates fuel inflation

Emil Bjarnason is an economist at the Trade Union
Research Bureau in Vancouver. In the first of this three-
fal Series he discussed the bag Lae pores en

anada is largely directed. The series looks a
high interest rates, and how they could be reduced. This

is Part Il.

The nub of the matter, as many economists have
noted, is that rising interest rates are themselves in-
flationary. They increase the cost and therefore the price

of commodities. In addition, it would appear that they

feed the inflationary expectations which lead people to
do the very things that promote the inflation. .

Consider, for example, a person who is contemplating
buying a car. Let us say that at the moment he can get a
cheap car for $5,000 and finance it at 20% interest. Re-
cent experience, and indeed, the movement of the

- gOVernment consumer price index tell him that if he

delays his purchase for a year, the price is likely to rise to
$6,000, and he may have to finance it at a still higher rate

Analysis

of interest. He is therefore faced with a choice as
follows:

1. Buy the car now. This means financing a $5,000
loan at 20%. If the payment period is three years, the
monthly payment will be $181.70.

2. Wait a year. Then it will be necessary to borrow
$6,000. If the payment period is the same and interest
rates have not risen, the monthly payment will be
$218.04. On the other hand, if, in keeping with recent
experience, interest rates have continued to rise, say to
24%, the monthly payment will be $228.24. Thus even
though the price of the car has risen only 20%, the cost of

buying it will have risen more than 25%.

At best, assuming no rise in interest, his monthly
payments will have increased 20%. Any increase in in-
terest rates means it increases more. Hence the rise in
interest rates; and the resulting prospect of further in-
creases, will surely lead people to accelerate, rather than

British trade unionists march against Thatcher's monetarists’ policies. In her first year of office inflation and interest
rates rose to unheard of levels while unemploymment was the highest since the great depression.

to reduce, their expenditures, always supposing it is in
their power to do so.

Interest on Public Debt

Rising interest rates also have other undesirable ef-
fects. For one thing, by raising the interest requirement
on the public debt, they lead to an increase, rather than a
reduction of government spending, and therefore will
tend to produce the opposite of the monetarists’ desire
for reduced printing of money.

Another very serious effect of high interest rates, and
curtailment of the money supply is that, if it actually
works, it creates unemployment. Margaret Thatcher,

whose enthusiams for allowing Irish revolutionaries to
die in prison is exceeded only by her monetarist zeal, has
perhaps carried the monetarist policy further than any-
one else. For the first year of her tenure of government,
this had the effect of raising both interest and inflation

‘Yates to unheard of levels. In the succeeding year, in-

flation and interest rates have moderated somewhat,
although they are still higher than when she took office.

The side effect has been the highest rate of
unemployment since the great depression, falling indus-
trial production and severely depressed conditions just
at the time when Britain should be realizing the results of
the North Sea oil bonanza.

Ld

Pity all those poor bankers

Pity the poor bankers. They are not
happy to see their clients’ financial
Strength eroded.’ This is so even though
the earnings of the Bank of Montreal for
the second quarter of 1981 were $85.4-
million, up by 36.4% over the same quar-
ter last year.

* * *

The B of M’s concern over their

Clients’ financial welfare was elaborated

Alfred Dewhurst

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1
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a 2 Marxism-Leninism Today

purchases, and ther rates such as taxes.
* * *

The B of M’s ad informs us, in conclu-
sion that, ‘‘No banker is happy to see his
clients’ financial strength eroded by high
debt burdens, much less to see them fail.
When a business or agricultural enter-
prise fails, its bank loses too.’’ Such
tongue-in-cheek sentiment conjures up a
vision of bankers weeping all the way to

in a full page advertisement in the To-
Tonto Globe and Mail, Monday, June 8
under the banner: ‘‘Lower interest rates,
accompanied by lower inflation, are in
€verybody’s interest, including your
Bank’s.”’
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In addition to the disclosure in respect
to second quarter profits, the ad notes
that the Bank’s assets (mostly loans) dur-
Ing the said quarter were up 34.2% over
the same quarter last year, namely
$54.3-billion as compared to $40.4-bil-
lion, for a dollar increase of $ 13.9-billion.
That means almost an additional $14-bil-
lion Working for the bank, drawing inter-

_ st hovering around the 18-20% rate.

The B of M’s ad went on to inform the
Public that ‘Banking is high-volume,
Ow-margin business.’’ It demonstrates
this by pointing out, that in the first quar-
ter of this year their total earnings aver~
aged out to 70 cents on each $100 of total
assets. In the second quarter this average
dropped to 63 cents on each $100 of total
assets. We emphasize the word total be-
Sause while the ad notes that assets are
Mostly loans’, this is somewhat mis-

leading. For the banks have many more

assets than loans, including real estate
and industrial properties, sinking funds,
contingency funds and: many other
mechanisms other than loans, to keep

their money working.
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The business of banks is the mer- ©
_chandizing of money. And like all mer-

chants they buy as cheaply as possible

and sell at the highest possible price they
can get in accordance with demand. This:

is so, with one exception which favors
the banks over other merchants. They
retail a product — money or credit note
— that most everybody wants or needs.

The B of M’s ad tells us that *‘the gross
earnings of banks come largely from the
difference — or spread — between lend-
ing rates and deposit rates.’ It goes on to
say that: ‘‘During the past three years the
Bank of Montreal’s prime lending rate
has varied between 8.25% and 20%;
average spread has varied within a fairly
narrow range, 2.76% and 3.32%. In the
second quarter (of this year) spread was
2.78%.

There is an old saying ‘‘that figures
don’t lie, but liars sure can figure’. In

He RE OR

other words, figures are used to either

- dazzle the beholder or to cover up the

truth. For instance, it should be noted
that the three-year spread given is not an
average rate. Just noting the spread,
covers up the duration of the lower figure
as compared with the higher figure given.
It also covers up the volume of money or
credit notes turned over in any given
quarter. Such volume certainly affects
the volume of interest earned in any
given period, regardless of the spread in
the rate paid by the banks for the use of
your deposit money, and the rate
charged by the bank for the money it
charges me for using your money.

But most importantly it does not take
into account the volume of money
(paper) created by inflation. In other
words the devaluation of the dollar. The
rate of inflation presently is reckoned in
two-digit figures. And this rate is
pyramided by one increase upon the
other. This means that thé actual or real
devaluation of the dollar is hidden, taken

over longer periods of time, say 5, 10 or’

20 years. This is easily tested by buying a
new house, car or household appliance,
not to speak about everyday household

their vaults, staggering under the load of
their inflated profits.

What they are concerned about, how-
ever, is the wide-spread volume of pro-
test now evident from all comers of the
country over usurious interest rates.
Businessmen, farmers, small and
medium industrial and manufacturing
firms are on the warpath over high inter-
est rates, not to speak of ordinary people
who need mortgages in order to purchase
a roof over their heads.

* * *

All these segments of the population
are suffering under the double burden of
inflation and scandalously high interest
rates. But the hardest hit of all are the
working people who, in the final analysis,
are compelled to carry the main burden,
as the costs of bank and mortgage rates
are folded into the prices they are forced
to pay for the necessities of life.

The answer is clear. Keep up the pro-
test. Take the advice of the Bank of
Montreal at face value. Demand that in-
flation and interest rates be returned to
normal levels. Not the banks’ under-
standing of ‘‘normal’’. But yours, your _
neighbors and workmates. ;

PACIFIC TRIBUNE— JUNE 19, 1981—Page 5