Monday, 8 August 2016

Bank of England reduces interest rates: why?

On Thursday 04 August 2016, the Bank of England reduced base interest rates by a further 0.25% to 0.25%.

Obviously, the spin on this is all down to Brexit, the ultimate excuse for failing performance, even though nothing has actually happened yet.  So this spin is easy to dismiss as Project Fear.

There is the possibility that Project Fear has indeed mutated into Project Revenge or Project Sabotage.  Remainaics will do anything to prove themselves right, to engineer a situation where rational people look wrong, such is the sinister, manipulative desire of the Remainiac left-wing for control.

Or, it could be that the Bank of England has realised that the mystical aura of Brexit can be spun in such a negative light that it is worth trying to smuggle in a bit more currency devaluation.  One way of doing this is to shave interest rates.

Or, it could be that the Bank of England is just plain stupid.  The data relating to the immediate term favoured inactivity.  Far from wittering on about recession caused by Brexit, it’s valid to argue that the Bank of England should start worrying about inflation likely to flow from sudden depreciation of GBP since June 2016 (take care: that’s the referendum result, not Brexit itself).

Taking a step back, in truth, the structural state of the British economy is broadly as it was in 2010.

The underlying fundamentals remain broadly as follows:
  • Reliance on financial services;
  • No critical mass in manufacturing or other genuine value-add industries, and even less reason to invest in such industries to create critical mass;
  • A dithery UKGov in material policy matters (e.g. Hinkley Point C power station), possibly about to correct one of the most corrupt decisions its predecessor ever made (agreeing to a grossly inflated price for energy per kwh);
  • An over-indebted economy:
    • Both public and private sectors;
    • The private corporate sector gets tax benefits for being in debt (interest is an allowable expense for corporation tax, dividends are outside the scope of corporate taxation);
    • The public sector nationalised toxic debt and still doesn’t know what to do with it.  A major player in this field is the Royal Bank of Scotland, which demonstrates the typical complacency that happens in the public sector.
  • A bloated public sector;
  • A clear message from the monetary authorities that all reckless lending shall be bailed out (the “Greenspan Put” of 1989 still rings true);
  • A reluctance by consumers to spend for the sake of it, partly because:
    • They don’t need to:
      • They bought enough stuff in the 2000s and still don’t know where in the loft they should store it;
      • The kids have flown the nest, so there’s no more need to buy a new washing machine twice a year;
      • Elderly care bills are more important than luxury cruises, and it’s now starting to occur to the baby-boomer generation that they, quite literally, missed the boat.  The more shameless amongst the baby-boomers might well splurge on luxury cruises now in a hope to emotionally-blackmail local government to pay for the care home later.
    • They can’t afford to:
      • To maximise tax credits and benefits, they won’t work more than 16 hours a week, so their total disposable income is capped by a perversion of tax/credit/benefit law;
      • To avoid student debt repayment, the best brains of our youngsters have realised that they are better off doing McJobs than actually getting a career;
      • Might they still be repaying credit card interest accruing since 1992?
      • Fuel costs rose inexorably since 1992.  While RPI rose by 87% from 1992 to 2015, fuel costs rose by 146%.  Some part of this increase is going to be UKGov’s fuel price escalator for the years it applied.
    • Buying stuff online:
      • is easier and more convenient.  Ironically, for the Brexiteers, this is true largely because of product and standard harmonisation, a worldwide effort in which the European Union has a middleman role.  Retailers without High Street presence have no extortionate rent and rates of greedy landlords and governments to pay for.   
      • is generally cheaper too: retailers without High Street presence have no extortionate rent and rates from greedy landlords and governments to pay for.   And shoppers don’t need to pay “parking tax” for the privilege of just rocking up to a town to find that what they want isn’t in stock anyway.
    • They have other priorities anyway:
      • Empty-nesters still need to be in the property game.  Either they give the family home to the kids - which causes a problem if they had more than one kid - or they become ad hoc shared landlords with the kids so that kids can buy their own home.  Homes are now at unaffordable multiples of income even in the north of England.  It’s another example of how zero-percent interest rates cause English property markets to bubble.
  • The state still measures “economic growth” based upon the number of consumer spending transactions that happens, instead of a more meaningful measure.  Measuring economic growth by reference to the number of consumer transactions is akin to measuring global warming by measuring the daily temperature at Clacton-on-Sea, i.e. completely missing the point.
  • Pursuant to the above measurement of “economic growth”, a continuing policy mistake by government to think that Keynesianism still works.  The left-wing ideology of Keynesianism says that government spending magically creates economic growth.  In the real world, it doesn’t, never has and never will.  The post-world war economic story of 1945-1970 made Keynesian look right, making Keynesianism the fig-leaf behind which all sorts of policy corruption happened (it took the same role that Brexit plays today).  1945-1970 happened in spite of Keynesian, not because of it.  But, today, there are still plastic intellectuals, academic economists (the worst kind) and loud armchair-economists who insist that being wrong is being right.  And sadly, these people have too much influence in government, because they give government what government desperately wants: an excuse to meddle with ordinary people's’ lives.

So given that nothing has fundamentally changed since 2010, why change interest rates now?

Just as cutting VAT rates won’t magic up unnecessary, frivolous consumption - as it failed to do in 2009 [in link, see section 5] - cutting interest rates won’t do so either.  To the extent that cutting interest rates increases taxpayers’ disposable income, the chances are that taxpayers will use the small amounts of spare cash to keep on repaying debt, because there’s little else use for the cash.

All of which means that negative interest rates, “helicopter money”, a blatant savings tax (Cyprus-style) and all of the other failed experiments that Japan has already tried are on their way to Europe and the UK.

In other words, the “establishment” shall continue to transfer economic wealth from relatively poor, honest savers to relatively rich, reckless, feckless borrowers.

And remember who gave the greenest light to allow this to happen in the UK?  Gordon Brown in 1997.  So much for Robin Hood.  Labour became the Sheriff of Nottingham.  And UKGov has followed the same policy ever since.

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