According to traditional financial monetary policy of fiat money, raising interest rate is the method to reduce inflation.
At what point does an interest rate increase make no sense to beat inflation? At what point do you change the monetary policy and raise the flag of “I just don’t know what to do” and then do something different?
According to Bloombeg, the International Monetary Fund (IMF) has requested for interest rates in Argentina to increase to exceed the annual rate of inflation. Argentina’s annual rate of inflation is currently at 51%. Argentina’s government owes the IMF $40bn in outstanding debt and as part of a program to help Argentina pay this debt, IMF has called for Argentina’s central bank to raise interest rates.
Therefore, on Thursday, Argentina’s central bank raised its benchmark interest rate by 250 basis points to 42.5%. This increase is a further act to tighten the monetary policy to align with goals set out in the government’s conversation with IMF.
This 42.5% hike is Argentina’s central bank’s second rate increase this year. Argentina’s central bank plans to continue increasing interest rates this year until it exceeds the 51% annual rate of inflation.
The borrowing costs still remain below inflation in Argentina. But this rate increase will take the effective annual interest rate to 51.9% from 48.3% in Argentina.
The central bank policy makers consider that the effective annual interest rate that takes into account compound interest is the one that needs to exceed inflation to comply with the IMF goals.
The IMF is an organization that was established in 1945 in the aftermath of The Great Depression. This organization was founded by 44 countries. The United States was founding member and became a part of the IMF on December 27, 1945. IMF has 190 countries as part of its membership today.
The IMF is funded mainly from monies that countries pay as part of their capital subscription. Quotas they call it. Essentially these quotas are like membership dues. Each country-member is assigned a quota based on its relative position in the world economy. The United States is the largest quota contributor. Then, based on this position, country-members can borrow from the pool of funds when that country run into financial difficulty. The IMF is headquartered in Washington, DC.
The goal of IMF is to help country-members rebuild their international reserves, stabilize their currency, continue timely payment of their imports, and restoring conditions within that country for strong economic growth while correcting underlying problems.
The IMF is empowered to monitor the international monetary system and global economic developments to identify risks and make recommendations for growth and financial stability to each of its member-countries.
The IMF teaches and provides technical assistance and training to the country-members’ central banks, finance ministers, revenue administrations and financial sector supervisory agencies.
As of January 2021, the largest borrowers of the IMF are Argentina, Ukraine, Greece and Egypt.
The IMF’s purpose during the Bretton-Woods era, was to oversee a system of fixed exchanges pegged to the United States dollar, which the dollar was at that time convertible to gold. But when the United States didn’t have the gold to give back to other countries who wanted to convert their dollars back into gold, the IMF was tasked to provide short-term financing to cover temporary hard currency shortfalls.
But as we know, the Bretton Woods system of fixed exchange rates in 1971 collapsed. As a result, the IMF members reformed the purpose of IMF. The IMF transformed from being an organization focused exclusively on issues of foreign exchange convertibility of currency and stability to one with broader mandate. The IMF now can lend for a range of financial crisis, including debt, currency instability, banking crisis, financial regulation and surveillance of the global economy.
In 2020, the global debt rose to $226 trillion which is the greatest one-year debt surge since WWII. Borrowing by governments accounted for more than half of the increase. Private debt from non-financial corporations and households also reached new highs.
Is it the United States’ central bank intent to raise interest rates to 8% to exceed inflation?
What will a rate hike like this in the United States do to your ability to borrow?
When the central bank raise interest rates, it has an immediate effect of elevating short-term borrowing costs of financial institutions. This then dominos onto all borrowing costs for companies and consumers. This means companies have higher borrowing costs to do business, which can in turn lead to job cuts and higher cost of economic goods. This means consumers have higher borrowing costs for basic necessities such as shelter and transportation and basic food costs increase, which in turn can take a middle class family barely making it and push that family down into poverty. This means the white-picket fence house dreams many of us have will go up in smoke for the average American because the cost of borrowing for an already over-priced house in a nice middle class neighborhood has just become out of financial reach. And it will be out of reach until the market become so depressed, that home sellers and builders reduce the cost of the home. Currently some homebuilders (in Texas) intend to increase new home prices by $20,000 each month for the rest of 2022. RIDICULOUS!
In 1981, interest rates on mortgages reached almost 17% according to Freddie Mac. So basically, on a 200,000 house (which in Houston is almost impossible to find in a decent middle class neighborhood), a mortgage at 17% would cost you $2851 per month. If you add in property taxes, insurance and other fees, and put $50,000 down, your monthly mortgage would be $3184 per month.
I am beginning to think that our entire monetary policy in America (in the world) is an SCAM and we as human beings have been scammed by our fears and our need to have leaders. Our ability to create wealth is being siphoned by every monetary decision these elected and appointed officials are making.
The United States poverty rate is increasing. If we keep going in this direction with the cost of everything being so high and basically unaffordable, poverty numbers will continue to increase and many of us will find ourselves sleeping on the streets.
ABOUT THE BLOGGER
La Shon Y. Fleming Bruce a/k/a SHONSPEAKS is a blogger, speaker, and lead creator of freeyourthinkingmind.com. I am also a lawyer and managing member of The Fleming-Bruce Law Firm, P.L.L.C. If you want to check out more of my writings that may not be released on this site, go over to my website at freeyourthinkingmind.com
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