The European Central Bank interest rate has been set as high as 4% which is a record interest rate since the 2007/8 credit crisis. The premise justifying this high interest rate is that the previous practice of setting the interest rate at zero, if not negative, rates caused a massive influx of funds into the financial market, thus causing inflation, so in order to reverse this inflation, a deflationary strategy is to be applied via the now higher interest rate.
You may wonder how this is supposed to work. In theory, when a central bank raises the interest, basically it raises it on government treasury bonds, meaning it gives higher interest on government debt which in turn competes with businesses seeking funding for their operations, since a government can always issue new currency so technically it has a much lesser risk of defaulting on its debts. Whereas businesses have an inherent risk of defaulting and not being able to pay the principal debt, let alone interest. Therefore a business must offer a premium atop of what is now “risk-free” interest offered by a government.
This premium in turn increases the cost of financing a business, and if this is increased beyond the overall yield it can actually result in losses rather than profits as it eats away at business margins. Hence, a business has to downsize its operation leading to the economic slow-down phenomenon currently rearing its head.
This manifests in assets such as real estate devaluing, unemployment and, supposedly, a decrease in prices of goods and services. All of this is centrally planned by “central” banks. The officials of central banks are seldom elected; they are appointed to their lofty positions where they rarely suffer the consequences of their actions. Actually on the contrary, as there have been several scandals of insider trading where information on future interest rates has been used to manipulate the market.
Capitalists would love to use this as an argument for a free market, if it wasn’t the case that central banks in most governments are controlled by politicians on the payroll of the same capitalists. In a nutshell, they have dug themselves into a problem of their own making.
Capitalists always argue against central planning and government control of the market in general, until they control the same market via oligopolistic tactics of market consolidation and lobbying and end up actually centrally planning the market, and yet, it still crashes every once in a while.
This phenomenon of market booms and busts, with central banks stepping in trying to deflate the situation by controlling interest rates, proves that the “free market” is a fairy tale. Because as a consequence of raising interest rates, Small and Medium Enterprises (SMEs) usually end up with no place to go, being unable to “downsize”.
So you end up with even more market consolidation at a discount, where small businesses get swallowed up by large enterprises via acquisitions stifling any form of competition in the process. Then you get this intriguing situation where the market is slowing down, yet prices are going up! Because simply, no one can compete with an oligarchy of companies controlling basically every possible good and service.
This cycle is self-perpetuating, as the more that an oligopoly controls the market, the more they control the government; so very little control if any is applied by the state, and they get to control the market even more.
Such control over the government is self-evident in the form of low corporate tax, while workers are taxed heavily to compensate for the lost state revenue, lax employment protection laws, while new laws are put against unions, making union-busting easier, to mention a few.
In the end, you might wonder if there is any point to this bourgeois democracy which gives an illusion of choice, but you end up earning your wages in a currency that loses its value every day due to inflation, while you pay more to live due to price increases, while being double taxed by the government on your earnings and spendings in the same time. Rendering your life a modern form of slavery where you work more and get less.
All of this while corporations get to pay very little tax, if any, thanks to the many loopholes left in place by the government, while fixing both the prices and the wages to effectively enslave populations. They say it’s a democracy but in reality it’s a plutocracy, and historically speaking, it doesn’t usually end well for all involved parties.
