What about interest rates?

One of the most interesting assessments of the course of inflation, interest rates, and the trend toward reduced globalisation was made last November: "The retreat from globalisation has not limited the uncontrolled inequalities in the distribution of income and wealth, as had been hoped. This is because, in addition to the war in Ukraine and the sanctions against Russia, which have been devastating for the West, a strange form of inflation has invaded the globe, combined with rising interest rates. This combination overturned the favourable redistributive effects of the "helicopter money" measures implemented to combat the pandemic. Profits thus took on more than one form, which together attacked the purchasing power of wage earners.

My goal is not to argue with the author. Far from it. I am simply taking advantage of an excellent opportunity to begin my own argument with references to biases, cognitive errors, blind spots, and rose-colored nostalgia. The text, or the author, assumes that globalization is the root cause of uncontrolled inequalities in the distribution of income and wealth. Indeed, its decline could have a positive effect, but the war in Ukraine, the sanctions against Russia, which are destructive for the West (interesting...), and "unexpected" inflation have overturned the benefits that printing money can offer in terms of income distribution. I won't bore you, but I think this is how a large percentage of Greeks feel. This is due to limited knowledge of economics, biases and prejudices surrounding various economic and social phenomena, and, of course, the "certainty" we all have about the correctness of our opinions. Myself included.

Authorities and other magicians

So I continue the text with the intention of presenting only my own opinions. Granted, I have spent over thirty years learning from my mistakes, many of which I have paid for as an investor, and I have several years of higher education under my belt, but that does not make me an authority. To be honest, I don't want it either.

After a long period of very low inflation and, consequently, zero or even negative interest rates, the situation changed last summer. For those more knowledgeable about economics, the phenomenon was expected and a consequence of a series of events and data. The course of events since the outbreak of the pandemic has been, and to a large extent remains, a series of chaotic behaviours of nonlinear dynamic systems that are particularly sensitive to initial conditions. This last sentence is particularly relevant to my position. Sensitivity to initial conditions is inherent in human behaviour. What are the initial conditions? They are the ones that apply today. The ones we are used to. The ones we take for granted in order to be able to regulate the rest of our lives. Thus, the rapid rise in inflation, which led central banks almost everywhere in the world to raise "interventional" interest rates, brought a new imbalance to the economic system. Where we had things in order, they collapsed.

But zero?

Interest quickly focused on the cost of new and older loans, but there was also in-depth discussion of how high interest rates could go. However, lending rates did not follow the expected course, in my opinion because there is sufficient liquidity in the system, but deposit rates remained at zero. Thus, a new field of glory was found. Why aren't interest rates going up? Before I try to answer that, I'd like to remind you that for over ten years, banks had more loans than deposits. But since 2020, that trend has reversed. In other words, today, deposits exceed loans by almost 40%. There is a strong financial surplus that can be interpreted in many ways. Also, on average, 80% of deposits are in small or very small accounts. This means that the pressure that the "customer" can exert is quite limited. You might say that I have almost answered the question. Correct. An accurate description of the environment helps us understand behaviours.

However, there are many factors that influence the maintenance of deposit rates at zero. For example, the structure of the banking system and the costs it faces and must manage are important. We must also not forget that the central banks themselves, as supervisory bodies of the banks, are pushing for increased capital adequacy (fortunately), and this leads to a need for enhanced profitability or share capital increases, which again require profitability. In addition, in order to be able to provide loans on better terms, which is another demand of society, the supply and demand of capital must be balanced with the general economic environment. It is not my intention to exaggerate my argument, but let us note that when there are strong expectations of an imminent reduction in interest rates in the near future and the rate of increase in central bank interest rates is high, the general policy seems to be one of waiting. This is where I make my favourite reference that economics is more of a social science than a mathematical determination.

The facts...

If the above sounds reasonable, if you are willing to recall the data from five or ten years ago, if you are not looking for someone to blame for the sudden instability, then I suggest you look for the facts. Base your desires on what is feasible, not on what is convenient. Consider the possibility that pleasant news may be a positive short-term interpretation of a medium-term phenomenon that is, as we said above, chaotic. For my current position, I could have chosen an easy, quick, and rather popular path, but it would certainly have been false. I could have remained silent, which would certainly have been useless. I leave my decision to your judgment. Happy New Year!