The following is an analysis from the International Department of the Parti du Travail de Belgique
After the shock of the corona crisis and the shock of energy prices, the economy is facing a new shock: the interest rate shock. Central banks around the world hope to control inflation by raising their interest rates at lightning speed. Those high interest rates are a new financial policy that breaks with the recent past. How the global economy will respond is not yet clear. But what is certain is that, by doing so, central banks and governments are making ordinary people bear the consequences of inflation. What is going on and how can we avoid being the ones who are losing out again?
Those who are looking for a new home or who need to buy a car will have already noticed: borrowing money has become very expensive. The days of low interest rates and cheap loans are over. Whereas a year ago you could find mortgage loans at around one percent with a bit of luck, today you will be lucky if you can negotiate interest rates three to four times higher.
Young couples looking for a first home are falling out of favor because, meanwhile, real estate prices remain very high. Consequently, the number of new mortgage loans since the beginning of this year is almost half that of recent years. The high interest rates that consumers suddenly have to pay do not come out of the blue. They result from an active interest rate policy imposed by the European Central Bank (ECB).
Never in its history has the ECB raised its interest rates as quickly as it has in the last eight months. In July 2022, its deposit rate was still -0.5%. That is, if banks deposited capital with the ECB, they had to pay 0.5% penalty interest on it. If banks wanted to borrow money, they did so interest-free.
This exceptional situation was intended to pump as much capital as possible into the economy. It was hoped this would allow the economy to rebound after the corona lockdowns. In a matter of months, however, the ECB raised its interest rates very quickly. Banks now get 3% interest per year for capital parked at the ECB, and they must pay 3.5% on loans.
How high interest rates should be is not determined by some natural law, but it is a decision of the – unelected – bank directors who sit on the ECB’s Governing Council. They meet every six weeks, and now they have decided to set the highest interest rates in the history of the ECB. Moreover, Christine Lagarde, president of the ECB, says she does not yet plan to halt interest rate hikes anytime soon, let alone drop rates again soon.
High interest rates make the ordinary person pay for inflation
The high interest rates on consumer mortgage loans are really just a side effect of the ECB’s choice to raise interest rates. The ECB claims this is how it wants to tackle inflation. But that choice is dangerous.
Central banks’ recipes against inflation are dictated by the neoliberal dogma that inflation is always and everywhere a monetary phenomenon. However, this is a lot like the bloodletting of the Middle Ages.
The rate hikes do not change the driving force behind current inflation, as now even the financial economic press and the ECB itself must admit. Inflation has been driven mainly by excess profits of a small group of monopoly companies that took advantage of temporary shortages to raise their own prices after the economy reopened.
“Apparently many companies are able to increase their margins without losing significant market share, (…) higher input prices [make] it easier for companies to increase their margins,” the Belgian financial daily De Tijd writes. Profit margins for Eurozone companies are a quarter higher than before the corona crisis.
But the ECB doesn’t want to hear of this. The ECB says it will raise interest rates until the labour market “cools down.” This is “economist jargon” for saying that there is too little unemployment today and therefore “workers are standing up for higher wages in a tight labour market.” This, in the eyes of these bank executives, causes working people to have too much income, and that would create more demand and thus push prices, and thus inflation, upto the sky.
By raising interest rates so that companies take out fewer investment loans, they hope to slow down the economy. So that fewer new jobs are created, layoffs are made, and an economic environment is created in which working people dare not fight as hard for upward readjustment of their wages to compensate for increased prices. This perverse system has only one purpose: making the working class pay for the cost of inflation, as we explained earlier.
Belgian banks with record profits of € 7 billion
A lot of ordinary commercial banks, on the other hand, benefit very well from this new high interest rate policy. After all, the interest on our savings is barely rising along with it. Even the National Bank thinks this is unacceptable. Because while the banks today get three percent interest from the central bank, on savings they offer only a fraction. Ordinary savings accounts now offer interest rates between half a percent and one percent. No wonder Belgium’s major banks made more than seven billion euros in profits in 2022.
The consequences of abrupt central bank interest rate hikes are also playing out at a more fundamental level. They create an interest rate shock that shakes the global capitalist economic system. But we cannot yet estimate what the exact impact will be. Because that system carries with it the scars left by previous shocks.
Like the economic shock of the corona lockdowns and the very quick reopening afterwards. First, almost the entire world economy was shut down in a matter of weeks, only to reopen as quickly as possible and everywhere at once. That, in turn, triggered another economic shock: that of exploding energy prices.
Those energy prices cause price increases throughout the system, resulting in a purchasing power crisis for the working class on the one hand and large excess profits for a few multinationals on the other. Interest rate shock is now the response of the financial establishment that manages central banks.
And that response is completely different from how it has handled monetary policy for the last 15 years. Because since 2008, the ECB has lowered interest rates step by step. Moreover, in 2015, then ECB President Mario Draghi inserted a program whereby thousands of billions of euros worth of “free money” would be pumped into the economy through quantitative easing.
During the corona crisis, the same free-money taps were once again opened wide in Europe, as well as in the United States. This was invariably intended to stimulate the revival of the economy, but in practice little came of it. However, the money did flow to a small group of wealthy shareholders who saw the price of their shares skyrocket.
The scars of this policy are becoming clear step by step
These 15 years of low interest rates and almost free money have left their mark throughout the global economy. Because it was very cheap to borrow, governments, businesses and families went deep into debt. During the corona pandemic alone, $45,000 billion in debt was added worldwide. Higher interest rates now make it increasingly expensive to maintain those high debts. In the past, when loans expired, they could often be prolonged with a new loan, but today those new loans have become much more expensive.
The first victims of this are countries in the Global South that can no longer repay their loans. Like Sri Lanka, which went bankrupt in May last year. But that country is not alone. Meanwhile, as a result of higher interest rates, developing countries pay more in interest on their loans than they pay in health care costs.
In Europe, too, the debate over the debt ratio of member States has returned. The European Commission requires governments to make savings to repay their debts. The higher interest rates rise, the harder we will fall victim to these new rounds of austerity measures.
The additional cost the Belgian state now has to pay for its debts has already risen from eight to ten billion euros in five years. That’s why people are already starting to talk about the return of the austerity policies we saw in the 1980s and the 2010s.
Speculators render our energy bills more expensive
Not only did low interest rates leave their mark, but free money changed the financial world. All that money mostly did not find its way into productive investments in the real economy, but it did give room for large investment funds to speculate en masse.
Thus, this free money has encouraged speculation on energy prices. During the corona crisis, savvy traders used it to buy up all gas supply contracts dirt cheap. The gas companies were grateful to still find buyers at a time when large parts of the economy, and thus demand for gas, were at a standstill. When the economy rebounded after the lockdowns, and there was more demand for gas, these speculative traders were able to resell their contracts with large profits. This further pushed up the price of gas.
These are all factors that send our energy bills skyrocketing. This is extremely ironic since the loose monetary policy has thus also bolstered inflation, leaving the central banks now tightening their monetary policy again.
Another favorite place for speculation were technology companies. For years, the sky was the limit in Silicon Valley. One technology start-up after another was showered by venture capitalists with money they could borrow almost for free. Once such fast-growing start-ups went public, the venture capitalists could cash in thanks to high stock prices.
But ordinary companies also took advantage of it to take out bargain loans to buy up their own shares. These are gifts to shareholders, because they bought the shares at much higher prices than they initially traded, and it ensures that dividends had to be divided among fewer shares. In this way, ubiquitous money has driven stock markets upward for years.
As central banks have scaled back their free money policies, shares of U.S. technology companies have been in free fall for a while. In a year and a half, a third of the value of the U.S. technology stock market Nasdaq has gone up in smoke.
Now the free money has dried up
For several months now, these technology companies have been laying off employees en masse because the venture capitalists have also run out of free money and have thus turned off the money tap. Already more than 300,000 jobs have been cut to make the companies more profitable. Since the industry has grown so much thanks to free money, it is not out of the question that some of them will go belly up for lack of free money. But not before they have gone out of their way to pass the cost on to their employees, of course.
In March 2023, the U.S. government had to step in with $300 billion to deal with the second and third largest banking crashes in its history.
In what way the financial system has wallowed in this loose monetary policy is still unclear, but there is no question that the longer high interest rates will persist, the more the scars will be exposed. For years, speculators have made big money with new financial structures whose exact shape is unclear.
For example, in September 2022 in the United Kingdom, the financial market of government bonds had to be rescued by the Bank of England. Then again in March 2023, the U.S. government had to step in with $300 billion to deal with the second and third largest banking crashes in its history. It immediately threw its entire financial system upside down with this because it made it clear that when you have enough money, risk no longer exists. With this policy, the government will come to your rescue if you have taken too much risk, provided you have enough money. “Socialism for the rich,” U.S. Senator Bernie Sanders called it.
The establishment wants to make the working class pay again
Fifteen years of loose monetary policy is now being tightened at a rapid pace. The parts of the global economy that have made themselves dependent on this cheap money are waking up to a world where things are not running as they used to. Now that the free money has dried up, they will have to find new sources to sustain their old profits. And that, of course, takes them to those who create the real value in the economy: the working class.
The battle raging today at the Belgian supermarket chain Delhaize is also connected to this. For years, the large capital funds that are shareholders in the mother holding Ahold Delhaize were able to enjoy sharply rising stock prices as the company bought billions of its own shares. It’s a practice that large shareholders now require by default, but because capital for this is now less available, Delhaize employees have to foot this bill. The company wants to save one billion euros to use that same amount to buy back its own shares. To do this, management wants 9,000 Delhaize employees to forgo pay and working conditions by selling its stores with staff and all to independent operators.
Moreover, these are easier to pressure to work more cheaply than the well-organized Delhaize employees. This guarantees long-term savings. But, fortunately, they had forgotten about the employees themselves, who did not simply comply but opposed these plans.
But the establishment is also indirectly trying to shift the costs of the crisis onto us. Because during the corona crisis, European countries went into massive debt to keep the economy going with all kinds of support mechanisms to companies. These could continue to make record profits as a result.
But now that the corona crisis is over, the sounds of European austerity politics are once again ringing louder. The mountain of debt must now be reduced as quickly as possible. The European Commission is even linking the disbursement of the recovery funds, which were intended for projects to reboot the economy, to the implementation of fiscal reforms such as the pension cut the Belgian government just implemented.
And this is far from enough for liberals and right-wing nationalists. They speak again of “debt,” a “derailed budget” and “monetary discipline”. All words to prepare people for even more cuts to pensions, social security, public services and more. It is the same language we heard after the 2008 crisis. These right-wing forces want to go further to ensure that in times of high interest rates, debt is used as an excuse to tear down social rights.
How do we avoid this dangerous new crisis?
Crashing banks, mass layoffs, savings and social struggles, it is only the beginning of a new financial regime that central banks are rigging. They are deliberately provoking a crisis. But this is by no means the only way to curb inflation.
Let’s start by skimming off the massive excess profits that large corporations are now making, by exploiting the economic situation and their strong position, as well as prohibiting speculation on essential commodities. Massive profits are being made in the energy, oil and food sectors, which only deepen the crisis and further drive inflation.
In this way, we can also block the prices of basic products as economist Isabella Weber, among others, has been proposing for some time.
At the same time, our wages should be able to rise faster than inflation. All over the world, wage increases are the subject of social struggles. The goal is to offset inflation, but also for wages to rise more than inflation. Otherwise, we lose anyway. The fight against the wage freeze law therefore remains very much relevant even in times of inflation.
This way we protect our purchasing power as well as our savings by holding back further inflation without increasing interest rates. This will allow governments, instead of having to make savings, to finally be able to reinvest. And this is necessary because non-effective monetary policy has made us stand still for years and our infrastructure is hopelessly outdated in many areas.
This needlessly exposes us to the huge price fluctuations in the international gas market in the event of an energy crisis. But it also highlighted the need for investment in home insulation. And in efficient and inexpensive public transportation.
These are three examples of investments that are desperately needed to meet the climate challenges. These proposals also protect us from price increases and thus inflation. And that has an immediate effect, as proved by last summer’s successful German initiative that used cheap public transportation to reduce inflation by nearly ten percent.
But high inflation also shows that it is high time again for a truly public banking sector. With banks where your savings are safe and protected from inflation. Banks that invest in the real economy and give citizens and governments room to safely invest in the future. And banks, therefore, that do not expose themselves to speculation and short-term returns, but that we can count on as a society in the long term.
And finally, this also requires a change at the cornerstone of this story: the European Central Bank. It is no longer acceptable for the Eurozone’s main monetary institution to be almost completely detached from any democratic control. This institution invariably sides with the large capital groups, rather than the European citizens. We need a thoroughly transparent and democratic policy that can provide the necessary funds to finally make the much-needed social investments possible.