The Broken Lever: Why Interest Rates Can't Fix What Wealth Inequality Breaks
I’ve been mulling over a theory about inflation that’s been doing the rounds online, and it’s kept me awake at night more than the humidity we’ve been having lately. The core idea is simple but deeply unsettling: our main tool for fighting inflation – interest rate hikes – might be fundamentally broken because of how wealth has concentrated in our economy.
Picture this scenario: A 25-year-old takes out a $950k mortgage with a 5% deposit. That’s nearly a million dollars of new credit, created essentially from thin air, transferred to a 55-year-old investor who’s just cashed out $700k in property profit. That older investor? They’re not sitting on that money. They’re buying a new car, doing renovations, booking overseas trips. They’re spending like there’s no tomorrow, because for them, there basically isn’t – they’ve already won the game.
Then the RBA raises interest rates to combat inflation. What happens? The 25-year-old gets absolutely crushed. Their mortgage repayments jump from manageable to barely survivable. Meanwhile, the 55-year-old with $4 million in the bank? They’re completely insulated. In fact, they’re actually benefiting from higher interest rates on their savings.
The cruel mathematics of it is staggering. We’ve essentially given someone ten years’ worth of income creation immediately, while the rate increase forces the young person to reduce their spending only slightly – and that’s assuming they don’t lose their home entirely. The wealth transfer is complete, and our only policy lever does nothing to the person who’s actually driving the spending.
Look at the data from the US: the top 10% account for almost 50% of consumer spending. You really think rate hikes make those folks count their pennies? They’re the ones driving inflation, and our traditional monetary policy tools don’t touch them. Worse, we’re accelerating this process with schemes like the 5% deposit loans, pumping more newly created money directly into the hands of people who are immune to rate hikes.
Someone in the discussion mentioned their best mate’s mother-in-law – a part-time nurse throughout most of her career, sitting on a main property worth $1.5 million, who’d sold two other investment properties in recent years for a $700k profit. Now she’s got money in the bank collecting interest, spending her time lecturing younger people about how hard life was at 18% interest rates. The cognitive dissonance is remarkable.
Here’s what really gets under my skin about that 18% interest rate argument: yes, rates were high, but they were high on properties that cost $50k, not $950k. They were high for maybe a few years at most before dropping back down. Someone earning a typical wage could service that debt. Today? Even with lower rates, the sheer size of the loans required has made home ownership nearly impossible for many without significant family assistance or extraordinary circumstances.
Working in IT, I see this playing out in my own field too. We’re told the economy needs to keep growing, that GDP must always increase, that we need endless consumption. But why? The population can’t grow forever. Why are we pretending the economy needs to? Making enough of everything for everyone should be the goal, not ensuring everyone needs enough stuff to force them into earning a wage to buy it.
The frightening part is what this means for monetary policy going forward. If rate hikes primarily punish young people and those with recent mortgages while leaving the wealthy untouched, then we’re essentially using a tool that hurts the already vulnerable to address a problem created by the comfortable. It’s like trying to stop a flood by punching holes in the bottom of the dam while ignoring the overflow at the top.
Some people pointed out that the broader economy is more than just residential mortgages – that business credit costs also increase, causing companies to defer expansion and reduce spending. That’s true, but here’s the thing: in Australia, somewhere between 65-70% of all lending is for residential mortgages. That’s an absolutely massive chunk of our money creation tied up in housing. When the wealth created by these mortgages flows primarily to older, already-wealthy individuals who then spend it without concern for interest rates, the traditional feedback loops that monetary policy relies on simply don’t function.
We’ve built a system where early “investors” extract wealth from those who arrive late to the party, over-leveraged and desperate. Someone compared it to a Ponzi scheme, and while that’s perhaps a bit dramatic, the structural similarities are uncomfortable. The music will stop eventually – it always does. But because governments worldwide are backstopping this system, instead of a sudden collapse we’re seeing currencies debased through quantitative easing and endless money printing.
The environmental implications bother me too. All this wealth concentration and endless growth mentality is fundamentally unsustainable on a finite planet. We’re not just creating economic instability; we’re accelerating climate change and environmental destruction in the process. The wealthy aren’t going to stop consuming voluntarily, and our policy tools don’t touch them.
What frustrates me most is the sense of inevitability about it all. We know this is happening. We can see the wealth concentration accelerating. We understand that traditional monetary policy is increasingly ineffective. Yet we keep doing the same thing, expecting different results. That’s pretty much the definition of madness, isn’t it?
Maybe it’s time we admitted that interest rates alone can’t solve this problem. Perhaps we need to look at other policy options: wealth taxes, land value taxes, proper inheritance taxes, restrictions on property investment, better wage growth mechanisms. These are all tools that could actually address wealth concentration and inflation at its source, rather than just punishing those least able to bear the burden.
The current path leads somewhere dark – increasing inequality, social instability, and economic stagnation for the majority while a small percentage live extraordinarily well. We’ve seen this pattern throughout history, and it never ends peacefully.
I’m not suggesting we have easy answers here. These are complex problems that don’t have simple solutions. But the first step is acknowledging that what we’re doing isn’t working, and that the people it’s hurting the most are the ones who can least afford it. Until we’re willing to have that honest conversation, we’re just rearranging deck chairs while the ship takes on water.
Maybe it’s time for a different approach. Because right now, we’re not taming inflation – we’re just shifting who pays the price for it, and that price is increasingly falling on those who can’t afford it while those who could don’t even feel it. That’s not just bad economics; it’s morally indefensible.
User: Too many uses of “rate hikes” in the beginning, make it less repetitive and more engaging to read.