For those that already have, Mark Carney is the gift that keeps on giving. Borrowed imprudently and struggling to make those interest payments ? Worry not; the Bank of England has your back. For those that don’t have, the Bank of England is taking away your chance of ever realistically saving anything, now that interest rates have been driven down to new historic lows of 0.25%, and may go lower yet. For the asset-rich, for the 1%, for property speculators, and for zombie companies and banks, Carney is your man. For the asset poor, or for savers, or pensioners, or insurance companies, or pension funds, the Bank of England has morphed from being anti-inflationary fireman to monetary arsonist.
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Samizdata quote of the daySamizdata Illuminatus (Arkham, Massachusetts) · Economics, Business & Globalization · Slogans & Quotations · UK affairs August 10th, 2016 |
 25 comments to Samizdata quote of the day |
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Indeed. It seems to me that by the time these people have finished with their deficits, debts, bailouts and money printing there will be nothing left. You just have to imagine what would happen if interest rates even vaguely approached market rates. Instantly, hundreds of thousands – if not millions – of people would be unable to pay their mortgages. And what do you do then? Repossess hundreds of thousands of properties? Impossible.
And this is to protect large debtors, not least of which is the government – look at the yield on gov bonds. Of course the Corbynnite economic illiterates are saying “wahay lets borrow more, without ever acknowledging it will never be paid back, and interest rates cant stay at 0.25% for ever.
The “interest rates” may no longer represent the “time” value of money (or credit).
Those real values are now to be found elsewhere in transaction costs, time delays and he pricing mechanisms.
There was an interesting article in the Wall Street Journal Tuesday (I’m not going to link it because it’s behind a paywall, but subscribers can find it easily) to the effect that the zero- to negative interest rates which are all the rage among central bankers today is, perversely, having the opposite effect among consumers than that intended. It was supposed to encourage consumption, enticing consumers to go into debt, thereby providing stimulus to the economy. After all, isn’t that what doctrinaire Keynesianism says?
Unfortunately, a lot of ordinary folks are taking it as a sign of weakness (which, of course, it is) and rather than spending more are actually saving more. The economists are baffled; three generations of steady inculcation into Keynesianism has left the entire profession incapable of recognizing the obvious fact that Keynesianism is an utter failure, or conceiving that there could be any other approach. I’m afraid only a complete collapse of the monetary system will permit the economics profession to hit the reset button.
Laird – great comment.
The Central Bank monetarists and neo-Keynsians are a strange bunch: on the one hand, they justify many of their actions and monetary tools on the assumption of “rational expectations”, resulting in ever looser and looser monetary policy. Yet they ignore the signaling effects of their actions (as your comment points out) which flow from the same theory. They also completely ignore another result of rational expectations, the Permanent Income Hypothesis – and if one follows that through, and assume that people save now in order to reach a goal of a certain income at a later stage in life then if the rate on those savings diminish they must save more. Hence, less consumption.
It really is hard to understand what is going on in their minds.
In Singapore, the savings interest rate actually went down to a criminal 0.05%. You read it right.
http://blog.moneysmart.sg/saving/your-savings-account-sucks-here-are-some-that-dont-2015-edition/
0.05%.
The thinking is that low interest rates would encourage entrepreneurs to start businesses.
It’s only recently they started to realise something is wrong, so there’s been a bit of a ‘surge’ in saving interest rates.
RRS
OK, I’ll bite, what do you mean, in English?
I think that what RRS means is that “time(/credit) is money”, a fact that normally is expressed in interest rates – but with the latter having been rigged beyond all recognition, is now expressed through different (albeit largely unofficial) indicators.
Josh B. wrote:
‘They also completely ignore another result of rational expectations, the Permanent Income Hypothesis – and if one follows that through, and assume that people save now in order to reach a goal of a certain income at a later stage in life then if the rate on those savings diminish they must save more. Hence, less consumption.’
Hammer, meet nail. That is exactly the corner that I and many in my cohort are now trapped in.
Even after decades of cautiously stacking away money in 401ks and other savings, interest rates and growth on those savings are so pitiful that planning for enough income in retirement, as well as provision for the unexpected or long-term care, is only getting more difficult. Couple that with the ever-increasing cost of health insurance, and millions of middle-class people are trapped in a corner. Encourage consumption, my ass. So, while I want a new Ducati, I’m not getting one – that money is going into retirement savings, along with every other spare nickel I can scrounge up through side jobs and other economies.
As Laird says, interest rates that are deliberately forced down by central bankers are a sign of weakness. You can’t manufacture economic strength by moving the levers of the economy by force, any more than you can manufacture physical strength by putting on a Gold’s Gym T-shirt. Voters are not as dumb as Keynes believed – they know that artificially-low interest rates are being paid for somewhere, either by debt or by their own reduced income, and they’re not buying the Keynsian crap even though they probably can’t put a name to it.
Don’t get me wrong – nobody’s starving at casa llamas, we have a wonderful life and we know it – but there’s no consumption being encouraged here. Quite the opposite.
llater,
llamas
Low interest rates are letting many middle class people know that they were never as clever and affluent as they thought they were.
Destruction of private property- in this case, the value of money- is a feature, not a bug from the perspective of the government. The ultimate goal of every government, everywhere and always, is to encourage dependency upon it.
The underlying issue that never seems to be articulated, is that for interest to essentially be non-existent, soon to be NEGATIVE, can only be accomplished in an economic environment that is so far beyond “mixed” it is deeply dyed-in-the-wool fascist. People, even libertarian/minarchic, seem to still believe that we (the West in general) have mixed economies that can be tweaked a little bit to get back on the right path. The reality, with massive debt loads that dwarf individually held wealth and/or attach to a huge portion of future labor of workers, is that we are in economies as deeply collectivist as communist Russia or fascist Germany. The acknowledgement of this reality is not far off, even in “the street”. The reaction to this understanding of reality, and the suppression there of, is our lot to deal with over the next two decades. I can’t imagine it’s going to be in any way pleasant.
As for what the lack of interest means, at least here in the US, is that people’s only choice is the shove their money to Wall Street if they want any kind of real return, and that has jacked up the stock valued beyond all recognition. There’s not a management team assembled in any of these “public” entities capable enough to back up the “value over hard assets” that stocks are being traded at. Of course there’s always real estate, and that has shown it’s own artificial boom/bust cycles. But those boom/bust cycles don’t hold a candle to what’s going to happen when the Wall Street bubble finally busts. That’s part of that “reality” I alluded to above. They’ll be good times, for sure.
Brad’s point about the artificial inflation of stock prices (note: prices, not “values”) is absolutely correct, and the inevitable correction will make the “dot com” bursting bubble look like a minor dip. I would argue that real estate is also in a bubble due to the artificially low interest rates; when those rates start to move up (as they must, sooner or later, whether the government wants them to or not) the resulting price decline will be a shock to many (most?). Investing today is a difficult problem: financial assets are a mug’s game; real estate is a bubble; what’s left? The obvious answer is tangible assets, but that’s tricky, too. You might find a piece of undervalued farmland somewhere which will hold its value in a crash, and of course there’s gold and silver (cue the gold cynics here), but art and collectibles are dicey at best; where is the market for those after a crash? Best case that’s a very long hold. Personally I think gold is the best play, as it’s nowhere near its highs, but of course that has risks, too. But the one argument against gold which no longer applies is that it doesn’t produce any current yield. Guess what? Your savings account doesn’t either.
Why should the mere act of saving be richly rewarded?
Successful risk taking deserves a much greater reward, because any idiot can save, and does.
Because you have to save to have something to risk.
The point being made here is not about saving vs investing, but about saving vs consuming.
Pro tip:If the rate for “borrowing” your money for “their” interest bearing investments is lower than the projected rate of inflation, use your “extra” converted labor/cash into gold (or “other” non-rotting commodity)
But where to keep it?
Oddly, if you’re reliant on gub’mint for your every need, the options are slim.
Alisa, “richly”, I wrote, my point beig that savings RoRs ought to be low-ish.
As I’ve commented before, the incredibly low rates are illusory for many, if not most, non-rich would-be borrowers.
It’s much harder to qualify for a loan in these days of low rates. I just had to co-sign for my son’s vehicle loan – which was at a surprisingly low interest rate – even though his income would have easily qualified for the same loan himself a few years ago.
I’m fortunate to have loaded the 401k’s up with equities years ago, before the artificial stimuli wreaked such havoc on their pricing. I’d hate to be contributing to those same 401k’s today, when stock prices are so unrealistically inflated.
Once again, the haves do well, the almost-haves struggle, and the don’t-haves are screwed. Not a good model for stability.
Fred: sorry, I was focused on the second part of your comment. Regarding the first one (now that you stressed it), saving in and of itself is not and cannot be rewarded. It is only when the saver turns it into investment – either directly, or by lending the saved funds to an investor – that he is potentially rewarded. That is also the moment when he undertakes the risk.
Laird’s point has already been made by the economist Robert Barro. I can’t recall the name of the article but he is famous for it.
I also saw that the Japanese have had a zero interest rate for 20+ years, but are still struggling. It has not helped them one iota. The best place for Carney is Canada, far north and without his big payoff. I had hoped for a change after being rid of Cameron but I fear the worst as opposed to an improvement.
The present government of Chancellor Philip Hammond and First Lord of the Treasury (Prime Minister) Mrs May – know that Governor Mark Carney of the Bank of England is a disaster.
They have been told this repeatedly – by many members of their own party in the House of Commons (including my own M.P.) – yet Mr Hammond and Mrs May do not move against Mark Carney, in fact they support his (demented) Credit Bubble policies.
It is hard not to draw the conclusion that Mr Carney, Mr Hammond and Mrs May (all “Remain” people) are deliberately trying to wreak British independence. Deliberately creating a Credit Bubble bust – that they will then blame on independence.
Paul, they may or may not be “deliberately trying to wreak (sic) British independence”; I don’t know. But I think the roots of the problem are twofold: First, professional economists, such as Carney and his acolytes and advisors, are so rooted in Keynesian doctrine that they can’t conceive of any other approach to the problem of a weak economy. So they “double down” on those failed nostrums simply because they don’t know anything else to do; maybe it will work this time. Second, professional politicians, such as Ms. May, who aren’t economists and have only a vague idea what the words “Keynesian doctrine” even mean, nonetheless find those policies to be extremely useful, as they expand government power while appealing to the ignorant (and the pseudo-educated). So even if Carney were to be replaced (and it could be that May has to offer up someone’s head to appease the crowd), the odds are that it would be with someone just like him, who would embrace the same or similar policies. No one else would be acceptable to the political and academic elite. The same thing happened in the US when Bernanke retired; he was replaced by Janet Yellen, who is simply Bernanke-lite. Why would you think anything different would occur in the UK?
You may well be correct Laird – which means I am wrong about them doing it on purpose.
I was watching Japanese English language television news a few hours ago – and the people on it said that “some economists” were worried about the government “stimulus” scheme (yet more wild government spending and Credit Bubble ism) “not being enough”.
The idea that the basic policy (which has been tried 25 times before in Japan – and failed 25 times) might be wrong – never occurred to anyone. It was either “it is correct” or “it is not enough”.
Those were the terms of any possible debate – no other position mentally possible.
In which case we are dealing with a demented Cult that has the leadership (academic and political) of the world in its grip.