Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.

Increasing wages boost morale, economy

by Jerome a Paris Wed Jan 17th, 2007 at 05:40:25 AM EST

... or the headline you won't read. And yet...

An improvement in Germany’s labour market and the resulting increase in household incomes helped support the expectations indicator this month, the ZEW said.

Companies were flourishing, suggesting investment demand would remain dynamic, while the strong competitiveness of German companies should offer further support to exports.

German growth was low when wage growth was nil, and is increasing now that finally wages are going up. Time to say it: Wage increases are needed for growth.


Display:
Nah, don't be silly. The super-rich can spend enough money to keep the economy ticking over with their demand for services. There is no limit to the consumption of the rich. Honest. I mean, you might argue that most of what they do is shuttle money among themselves - buying and selling property, art and so on - and that the amount that they spend on consumption is relatively small, but that would make you a commie.
by Colman (colman at eurotrib.com) on Wed Jan 17th, 2007 at 06:01:27 AM EST
You beat me to it.

Everyone repeat after me:

Jerome is a pinko-hippy.

Ultimate happiness and economic efficiency will come only when the majority of people are so insecure they will do anything for some money.

by Metatone (metatone [a|t] gmail (dot) com) on Wed Jan 17th, 2007 at 06:13:52 AM EST
[ Parent ]
Ultimate happiness and economic efficiency will come only when the majority of people are so insecure they will do anything for some money.

Otherwise known as globalising the third-world underclass.
by Colman (colman at eurotrib.com) on Wed Jan 17th, 2007 at 06:17:48 AM EST
[ Parent ]
No, no. Wage increases cause inflation. Increases in interest rates of course do not cause inflation.

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Wed Jan 17th, 2007 at 06:13:31 AM EST
I thought it was decreases in the interest rate that caused inflation due to increases in the money supply?

"It's the statue, man, The Statue."
by Migeru (migeru at eurotrib dot com) on Wed Jan 17th, 2007 at 06:15:29 AM EST
[ Parent ]
The trouble is, if inflation is a measure of a "rise in the cost of living" and most of the country is living off debt, then in some ways, a rise in interest rates is a rise in the cost of living...
by Metatone (metatone [a|t] gmail (dot) com) on Wed Jan 17th, 2007 at 06:19:17 AM EST
[ Parent ]
Good thing the Bank of England uses the CPI (which excludes mortgage payments) instead of the RPI for its inflation targets.

If people are living off debt higher interest rates will indeed dampen demand.

"It's the statue, man, The Statue."

by Migeru (migeru at eurotrib dot com) on Wed Jan 17th, 2007 at 06:23:18 AM EST
[ Parent ]
snarking aside, the 0.25% rate increase so far seemed to be pretty meaningless. The figures I saw for what it added to a typical monthly mortgage (£60 a month) didn't seem enough to make much of a dent in a the lifestyle of someone earning enough to get that mortgage in the first place.
by Metatone (metatone [a|t] gmail (dot) com) on Wed Jan 17th, 2007 at 06:37:56 AM EST
[ Parent ]
You're assuming that the person with the mortgage could afford it. It depends how close they pushed their luck.
by Colman (colman at eurotrib.com) on Wed Jan 17th, 2007 at 06:42:20 AM EST
[ Parent ]
I was snarking, Mig. But you raise an interesting point (no pun intended).

Decreases in interest rates mean that more people borrow to buy assets.

Result - ASSET price inflation, which COULD feed through into RETAIL price inflation via equity release, although I doubt it, because IMHO increased demand for consumer goods using this released equity is unlikely to drive up prices. Ther's no shortage of supply.

However, I believe that wherever interest rates are in excess of the costs of bank administration and of borrower defaults then that excess is de facto inflationary. This is because of the deficit base of our money supply. ie there's virtually no "money's worth" backing it.

If I am wrong, I would like to know in what respect.

In simple terms - and I do not use Economic Speak here like Factor Inputs yada yada - if all else remains the same and a business's costs increase because its borrowing becomes more expensive, then this will lead to the business increasing its prices if it can, and hence to retail price inflation.

So in summary, it appears to me as a Bear of Little Economic Brain that interest increases are inflationary in respect of RETAIL prices but may operate to reduce inflation in ASSET prices.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Jan 17th, 2007 at 06:42:59 AM EST
[ Parent ]
I have a hard time distinguishing what's snark from what is accepted economic mumbo-jumbo from what is alternative economic mumbo-jumbo.

If there's no shortage of supply for consumer goods, what determines their prices?

"It's the statue, man, The Statue."

by Migeru (migeru at eurotrib dot com) on Wed Jan 17th, 2007 at 06:51:12 AM EST
[ Parent ]
Decreases in interest rates mean that more people borrow to buy assets.

Don't they also mean that more people -- the "middling sort" rather than the "masters of the universe" variety -- borrow to start/expand businesses?  (If so, which is there more of: borrowing to buy assets, or borrowing to invest in businesses?)

Truth unfolds in time through a communal process.

by marco on Wed Jan 17th, 2007 at 07:49:06 PM EST
[ Parent ]
I'd say it's a long sum of many small effects, hence probably poorly analyzed by economics.

Example: at least on effect depends on the number of outstanding fixed-rate loans vs floating-rate loans.

Simple reasoning: if you're a shop selling groceries and your monthly rent is indexed (because of borrowing or other reason) on floating rates, if rates go up you'll immediately raise prices.

On the other side, if your rent is indexed on fixed rates, you don't care directly about the interest rate rise until the next investiment decision.

by Laurent GUERBY on Wed Jan 17th, 2007 at 06:53:56 AM EST
[ Parent ]
It was funny on BBC television news, or was it (Channel 4?) yesterday the economics reporter was describing how inflation was being pushed up by the rise in interest rates and the rises in energy prices and then the presenter moved it on to "of course all this makes the prospect of increased wage pressure which could lead to dangerous increases in inflation."
by Metatone (metatone [a|t] gmail (dot) com) on Wed Jan 17th, 2007 at 06:17:50 AM EST
[ Parent ]
It's a vicious circle!

"It's the statue, man, The Statue."
by Migeru (migeru at eurotrib dot com) on Wed Jan 17th, 2007 at 06:19:08 AM EST
[ Parent ]
Funny though.. In Spain is clearly the opposite.

Given that most families have mortgages because they want to owna house,a  rise  in interest rates curtails strongly the demand. Less demand results in acooling of the economy and adjustement of prices int he production sector.

High interest rates will hopefully reduce also strongly the demand of houses and stabilize housing prices bringin asset inflation and the overheated construction sector to a more reasonable path.

HEre I rest my case that each coutnry is completley different and that in other countries increases in interest rates may cause inflation... (as in Spain in the 80 probably)

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Wed Jan 17th, 2007 at 07:09:58 AM EST
[ Parent ]
Well, assuming a market economy, it is also true that if you increase employment, wages tend to rise.

Germany has had a bit of a lackluster performance in this regard, and while captains of German industry can be criticized for much, not all of this can be laid at their feet.

There's some bankers behind the mess as well. Independent ones, accountable to no one but themselves and the shareholders for whom they work, whose interests, to be sure, often align with those of industry managers, but not always.

 

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Wed Jan 17th, 2007 at 12:48:26 PM EST
my german so, in constant touch with, and visiting regularly her heimland, informs me that the trickle-down there ain't happening...

fwiw

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Wed Jan 17th, 2007 at 02:34:32 PM EST


Display:
Go to: [ European Tribune Homepage : Top of page : Top of comments ]