Pushing string
It is hurting. But so far it isn't working.
The Bank of England has now cut interest rates from 5% to 1% since October. Savers say they are being punished for nothing - rate cuts are hitting their income, while having less and less impact on the economy at large.
They have a point. The Bank's Monetary Policy Committee clearly thought this rate cut was worth doing. In its statement it reminded us of its view that "although the transmission mechanism of monetary policy (is) impaired, the past cuts in Bank Rate (will) in due course nevertheless have a significant impact".
It's possible it will cut again before thinking further out of the box than it already has. But there is a rising clamour among some City economists for the Bank to think and act more quickly.
I said yesterday that the major accepted cause of the US Great Depression was the Federal Reserve's failure to prevent a collapse in the money supply after the stock market and financial panics of 1929-31.
For at least a year now, the Bank of England has been trying to avoid that mistake - by pumping liquidity into the banking system and slashing interest rates.
That policy has expanded the narrowest measure of the money supply - cash balances held by banks - and dramatically expanded the balance sheet of the Bank itself.
But, as Jamie Dannhauser at Lombard Street Research has pointed out, all these efforts have not had much effect on growth of the broader money supply.
That is the measure - known as M4 - that matters if you want to get money moving around the economy and prevent deflation.
Dannhauser says that, once you take account of some big distortions in the figures, the broader stock of money was actually shrinking in real terms in the second half of the year. And it's moving in the wrong direction.
By the Bank's own reckoning, M4 was growing at an annual rate of 3.7% in the third quarter of 2008. It should publish its own estimate of what happened in the last quarter of the year in next week's Inflation Report. But based on the bank deposits and lending figures released today, Dannhauser thinks the annual growth rate for the fourth quarter will be around 1.7% - negative in real terms.
Why do these arcane figures matter? Well, for starters, they help explain why the situation for British companies has deteriorated so much faster than people expected.
Survey after survey finds firms worrying about a lack of cash and working capital, and the figures bear them out.
Money balances in the non-financial corporate sector have fallen nearly 10% in real terms over the past year - despite all the efforts of the Bank.
Today's Bank figures show that the deposits of non-financial companies fell by £6.9bn in the fourth quarter, while lending was essentially flat
It brings us back to the old Keynesian phrase about "pushing on a piece of string". The money is going into the banking system but it's not getting through to the broader economy.
Until that happens, the threat of deflation will loom large over Threadneedle Street. And there'll be more calls for the Bank to bypass the banking system, with a big "unconventional" yank on the string from the other side. I'll say more about that big subject in a later post.
~RS~q~RS~~RS~z~RS~47~RS~)
I'm 
© MMXI
Comments
Sign in or register to comment.
Inflation is going to fall anyway. And continually reducing rates is not the answer - just look at Japan 1990-2008.
The banks are not going to cut the rates they charge businesses for lending in such a difficult environment.
Complain about this comment
Failed men still pursuing failed policies.
In three months they have destroyed the whole essence of money that has taken the last 300 years to build.
Most probably at this stage of the economic cycle the the problem is the lack of demand, not the lack of liquidity.
This is shown by the evidence on the Bank's inability to force the economy to recover by flooding the market with money.
We need sound money again, and quickly, otherwise the situation will go from bad to worse. (Sound money is the condition where money is again valuable to savers and costly to borrowers. )
The present situation has generated the absurd problem that some mortgages that are a percent or more below bank rates, in theory, should result in the lenders paying the borrowers to borrow!
This last change to interest rates is long after the last throw of the die - they all should go as their economic philosophy is bankrupt.
Complain about this comment
hi stephanie
I also suspect that there was little point in cutting interest rates further today. The cut to 0.25 in the US and similar in Japan has had no measurable benefit so far.
Is M4 similar to the 'velocity of money' quantity theory?
where mv=pq
m = money in system
v = speed at which money circulates
p = prices
q = economic output
As I understand it the shortage of credit means that v in this equation has dropped very fast so even though m (money) is increased p and q have to go down and we get both slump and deflation
I see in the US they are now going to try fairly desperate direct intervention ideas such as giving anyone buying a house a $15,000 tax rebate!
Complain about this comment
It's just no use! Neither businesses or individuals have the confidence to extend their credit lines.
It seems to me that the "great and the good" no longer have any idea which levers to pull or what the effects of pulling that lever will be. Just one great cockup as the system fails.
Complain about this comment
Stephanie wrote:
"I said yesterday that the major accepted cause of the US Great Depression was the Federal Reserve's failure to prevent a collapse in the money supply after the stock market and financial panics of 1929-31."
It may be the "major accepted cause" - 'accepted' by the failed economists that is - those whose skill and understanding gave us this present economic 'correction'!
At some point no matter how much money you have to spend you do not spend it because your fear of the future is greater than your confidence and this leads to a lack of demand - continual bank interest rates cut generate more fear than they do confidence and thus are totally counter-productive. This happened last November, but the Bank does not understand.
Complain about this comment
Many commentators start by asking why the BoE is reducing rates and skip very quickly on to what else they could or should be doing. Some economic observers are now asking how much damage the BoE is doing in reducing the rates. Millions of the older population who rely on savings income, income they spend, are now franticly cutting back. This impact will more than cancel any benefit.
I believe the Bank pushed by a government desperate for a quick fix because of impending elections are getting it very badly wrong.
The cut will further reduce demand, reduce confidence and in a year or two result in importing inflation. This is likely to extend the recession into a depression.
Complain about this comment
Actually the Bank may be doing worse than pushing on that piece of string.
The money supply is contracting because of reduced lending and borrowing. The question is whether the reduction is caused by reluctance by lenders to lend, or by reluctance by borrowers to borrow.
If it is caused by reluctance to lend (and the evidence does indicate this) then reducing rates will REDUCE lending and make the money supply contract faster.
The Building Societies Association certainly agrees with me - they have been warning that further reductions in rates to savers will cause funds for mortgage lending to be even more scarce. "Following the rate cut Paul Broadhead of the Building Societies Association (BSA) told the BBC that savers were being "punished", arguing that the move could hinder the funds available to societies to lend as mortgages."
The authorities, like military generals fighting the last war over again, seem to be fighting the last recession over again, when this one really is different.
Complain about this comment
It seams to me we are just marking time till the inevitable phase of printing money. Why wait?. Just get on with it now instead of waiting for things to get even worse which everyone knows it will. Show some political guts.
Complain about this comment
Hello BBC
The point is that money supply would have been even more constrained had the interest rates not been cut. Moreover, the Government is able to borrow the cash needed to recapitalise the banks at v low rates. With that cash, the people have now bought huge bank assets for a small fraction of their market values 18 months ago. Which is the sort of coup Buffett can only dream about!
And another two things:
1. Where does High Pym get his numbers from? I ask because my long-term tracker mortgage will now cost us £292:50 pcm per £100k and not the £400+ Hugh claims I’ll be paying. How’re Hugh’s numbers calculated?
2. Crucial benefits of international trade include the closer and warmer human relationships that are an integral part of trade. Protectionist measures reverse that peacemaking as the 1930s amply demonstrated. Which is maybe why the EU is so accurately described as the most effective peace-process the world has ever known.
Peacemaking allows all sorts of wealth to accumulate. War is the opposite and often rooted in embargoes and blockades. That is a big lesson from economic history along with the utility gains from specialisation and competition. As I presume you're aware.
Complain about this comment
Interestingly, Britain is facing asset price deflation and consumer price inflation, both at the same time.
The fall in the value of sterling will add to consumer price inflation when importers' currency hedges run out around July to September 2009. Ford and Vauxhall have already announced price increases of between 4% and 5% due to the weak pound.
Having both deflation and inflation at the same time will make it difficult for the BoE to estimate the inherent risks of employing the much heralded "unconventional measures". If the BoE gets the mix or dosage wrong, then any doses of printing money/ quantitative easing/ helicopter drops could make the economic situation worse.
Who said it was going to be easy....
Ironically, the USA will be able to withstand any negative side effects from unconventional measures much better than Britain, given the dollar's status of world reserve currency.
Complain about this comment
If my recollection of the definition of M4 is correct, it comes as no surprise to find that M4 might have decreased in the 4th quarter.
Based on the plummet in interest rates and the value of sterling, international investors have probably moved money from UK deposits to something more attractive thus reducing the deposits here in blighty. Or perhaps they have taken money from deposits to pay down debt.
It just might be more productive to increase interest rates to increase the supply of money via increased deposits
If I am way off beam, please tell me, someone.....
Complain about this comment
In normal times, a small movement in base rate can be effective, with upwards moves pressuring inflation, and cuts helping to boost economic activity.
But we are no longer living in anything approaching normal times. The evidence suggests that, as Japan found, cutting interest rates has a limited effect, at best, under these circumstances.
And there is the severe impact on savers to consider. Savers out-number borrowers by 7 to 1, are often elderly people dependent on interest income, and have seen their incomes fall by eighty percent since the autumn. What is happening is that the prudent (savers) are being penalised to bail out the 'imprudent (borrowers).
So interest rate cuts are not working, punish the prudent and send the wrong signals to society.
This blog correctly identifies the weakness of the interest rate lever and the need to expand M4. I hope those in authority are listening!
Complain about this comment
I am watching with interest (or lack of - no pun intended) at yet another interest rate cut by the Bank of England. Yes, fortunately for me, my mortgage lender continues to reduce my monthly payments as I'm on a standard variable rate.
Whether this last cut to 1% will be passed on, who knows, however for those in our country who are coming or have
come to the end of their fixed rate mortgage, the picture isn't quite so rosy, as their standard rate is often higher than their current payments - all stuff we already know!. With repossessions at their peak and worsening at a rate of knots as job losses increase due to reduction in consumer demand for, well pretty much anything, we're in quite a desperate position.
For those trying to enter into a mortgage arrangement, there is still no apparent affordable rate available for house buyers, as the rates are still held relatively high - I believe as a result of inter-bank lending rates.
What I am struggling to understand, is that the tax payer will continue to to fund the billions of pounds that has been dropped into the black hole that is the banking system for many years into the future, whilst also seeing their savings dwindle, and their day to day expenses increase (I cite train fair increases of 6% as an example, the cost of fuel and its knock on effects on food prices, etc. etc..), anyone trying to get a loan will be meeting interest rates for borrowing that are higher than they were 4 years ago. The interest rates appear to me anyway, to be having a detrimental effect on the economy at grass roots level.
Surely a simple and immediately effective answer would be to reduce income tax rates by a considerable percentage and return interest rates and VAT to their respective levels as of last October. This gives the average man more spending power immediately, creating demand and fuelling growth. The idea that popping billions of pounds in to the top of the financial system will naturally fall out to the man on the street is I believe short sighted.
Put money in at the bottom (income tax reduction) and let it filter upwards through disposable income, generating need for products and services. Can we stop relying on the vain hope that reducing interest rates is having any effect on convincing people to spend, as put simply, people can't spend what they don't have.....
Complain about this comment
every saver in the uk banks should withdraw all their savings within the next 3 weeks,the thrifty and sensible people are being ruined by this imcompetant goverment, mpc, call it what you like, dont help them ,hit them where it hurts. this country is a total shambles.
Complain about this comment
Availability and price of credit are only particularly relevant where there is a substantial demand for that credit. At present, it seems to me, the majority of demand is not for new credit, it is for refinancing existing loans (both corporate and private). Where loans were previously provided by foreign banks, at rollover, these facilities are being withdrawn and to be fair, the British banks are doing their best to fill the gap. Inevitably, the terms of those loans will change and often the sums offered do not match the existing debt, hence where additional equity is not available, firms go bust, or houses get repossessed.
However, where terms can be agreed, the new loans are generally cheaper than the old loans, so cashflow is certainly improved (or at least compensates for reduced income). To this extent, the reductions in base rate are helping.
On the wider question of how this helps the economy recover, it doesn't, because it doesn't result in increasing demand. The government needs to employ targetted initiatives to get business spending, employing people so that they have money to spend themselves. The most efficient, and possibly quickest way of doing this is via the construction sector, specifically housebuilders.
If government wants to get money moving around the system, it must offer incentives to get houses built, either for sale at realistic prices, or for let through the public sector.
There are thousands of house plots with existing planning consent that could start within a few weeks if finance was available to fund construction and the developers knew that sales were likely to pick up. Offer local councils and housing associations money to pre-purchase developments and if they can't then be sold on, they are leased until values pick up.
The public sector could possibly make money out of such a scheme in due course, but in the meantime, construction sector employment increases and the knock on effects to suppliers, professional services and retail services are obvious.
If the government wants banks to lend, it has to create an environment whereby it creates demand for that credit, and the quickest way to do that is through the housing market.
Complain about this comment
when rates get to 0 what then?we get get that miserable thing thats goes for a pm, saying"we have the lowest interest rates in history" brown makes me sick and all that he stands for.
Complain about this comment
I'd like a definition of deflation.
If its a general reduction in the level of prices below zero percent annual inflation then there are plenty of reasons why CPI or RPI might go below 0% over the next few months. These include
a) reductions in the cost of anything made from oil
b) reductions in costs because of VAT
c) reductions in other energy costs
d) reductions in mortgage payments
e) reductions in retail prices caused by retailers and suppliers wishing to retain market share
f) gradual dropping out of price rises in rice and wheat etc
I can't seen how reducing interest rates will actually increase CPI or RPI and prevent deflationary stats for a period of several months.
If the definition is a reduction in M4 then how do reductions in interest rates encourage deposits
If the definition is a reduction in the demand for goods and credit then perhaps reductions in interest rates will stimulate domestic demand but I can't see that happening for a while. Perhaps overseas demand will increase as a result of a weak pound but this too takes time to work through and won't be evident for a while yet
Complain about this comment
I took all my savings out of the bank several months ago - an amount that easily equates to them being able to lend one less mortgage with the fractional reserve system. So, what happens if everyone does the same? This country is now finished for the next two decades because of this ridiculous policy of dropping rates to try and reinflate the asset bubble. It simply cannot work and willl lead to more misery in the long run. At a time when banks desperately need to rebuild their capital and lend against sensibly valued secured assets, the MPC is trying to encourage everyone to remove their savings and reinflate the bubble. Insane. I genuinely hope they are tried for treason. Everything the BoE MPC has done over the last decade was aimed at re-inflating the housing bubble by dropping rates every time there was a wobble - they now look like just what they are - bankrupt, desperate criminals.
Complain about this comment
Colour me simple but...
If the man on the Clapham omnibus is paying (significantly) less in interest on his mortgage and notes that saving "Isn't worthwhile just now," isn't he going to spend more?
Isn't he going to spend more in the UK as it's too expensive to go to Nice this year?
I know that a lot of people are on fixed rate mortgages, but a lot aren't so eventually the extra money will be in their pockets. They will spend it - that is the British way.
I am no fan of Gordon Brown and I'm sure the B of E were too slow to start cutting rates following the oil price increase but nothing in your blog has convinced me that cutting interest rates will not increase spending.
Forget Keynes and his bit of string - put yourself inside the punters' head! Have money, will spend!
Complain about this comment
Snow day for the moderator?
Complain about this comment
"It brings us back to the old Keynesian phrase about "pushing on a piece of string". The money is going into the banking system but it's not getting through to the broader economy."
One of the main reasons banks are not lending is that interest rates are too low.
The banks would like to hold on to money in uncertain times, and they need a good incentive to lend it instead. The best incentive would be high interest rates, as they would then earn a good return on the money lent.
The current policy of ever lower interest rates isn't just not working - it is actually making the problem even worse.
Complain about this comment
So product push v demand pull. Only there's very little pull at the moment.
To use another analogy - stop digging.
The MPC don't have a clue
Complain about this comment
Deflation is only a real threat for those with debt and no cash flow, i.e. the people and companies that thought that asset prices would increase indefinitely.
Deflation need not be so much of a problem for a society that lives within its means. Sometimes you need to accept a slightly lower salary when the going gets tough. The consumer electronics industry has shown for decades that falling prices combined with improved quality can be managed.
Deflation is used by the government now to ramp up huge deficits and make everyone forget that Brown was running an almost 3% deficit in 2005-6 when the going still seemed good.
The Bernanke helicopter speech by the way indicates that reflation through quantitative easing is not a one-way bet when balance sheets are impaired, as they are in the UK and the US.
You can find the Bernanke speech on the Fed website and type Bernanke deflation 2002 in the search engine (links tend to get deleted by BBC moderators I experience).
Complain about this comment
We are in a Credit Crunch, not a Savers Crunch. It began with greed of the few but it will end in prudence for more of us. Savers are not a priority right now. Individuals with mortgages and small-medium businessess are. 5% to 1% in rapid time. It will probably go to half a percent next time may be even zero percent. These are the lengths we will need to go to restore sanity of the insanity of the cycle of credit distrust. Trust is earned by behaving our way back into sober and prudent behaviors, not thinking. Plan plans for sure but give credit where it is rightfully due and it will return itself in time; one mortgage at a time by one lender at a time at one time...like now!
Complain about this comment
"Pushing string" is getting on a bit, I suggest the more up-todate and hip "frobbing".
Complain about this comment
Do they now think they were wrong to not be worried about high M4 growth previously? If it was high for a while doesn't seem that surprising if it is going be low for a while.
Complain about this comment
I feel sceptical about all the action taken, I find it hard to see how its going to help us at all!
Has it not come to a stage now, where we are all starting to realise that we cannot continue to buy a new car every 2/3 years or, splash out on that 52" flat panel TV...because lets face it, most of us could never really afford it anyway!
Problem is, its those people that were reckless that were supporting the years of unsustainable growth... along with the high-flyers in the city raking in obscene amounts of cash on the back of gambling, that have ruined it for the sensible of us...
Are the banks now just using the money they have, as we are, to pay off our debts? Or reward their exec team for keeping their institution running - when really its us, the tax payer, that has kept it going!
These bankers, the ones that have been siphoning money from the economy into their own bank accounts, justified as 'bonuses' or even in some cases 'wages', or the people gambling (I don't care what they call it, its actually not all that different to going into a casino and playing poker) on the value of some other 'money' with money that never actually existed, or wasn't theirs in the first place. Is this not fraud on some kind of grand scale?
I mean taking tax payers money and paying out huge bonuses! That has to be fraudulent, doesn't it? Either they lied to us, or they just don't care - have no idea of morality or responsibility... I would bet that they are now gambling with this 'new' money!
Its inevitable, if you play for long enough, you win for a bit... then you have to loose - and in most cases you loose everything you've won, plus your stake. But here, many have taken their winnings (because they actually weren't gambling - someone else was on their behalf) and run... So when the 'loose time' comes around, they are bound to loose more than they have.
Complain about this comment
They should be increasing M0... Ideally to 100% of the money supply.
Fractional Reserve Banking has to go.
Complain about this comment
The basic mistake being made by all the banks, monetary authorities, and governments, internationally - and which is making matters worse, not better, every time they try a new fix - is their unquestioned assumption that at some point "things will get back to normal" i.e, rampant house price inflation, wild lending and borrowing, consumer madness, and the same people running things as before.
Things will NOT be "getting back to normal" and there will simply not be an "upturn". What's needed is a comprehensive restructuring of the entire economic system. But the people who can do this are not going to be the people the media keep asking "what's wrong".
Everything needs to change, including the people you're talking to.
Complain about this comment
There's no point making it ever-cheaper to borrow. If people don't have the confidence in the future they aren't going to borrow for discretionary items anyway.
As it stands credit card interest rates remain very high by comparison so most people are being stung. Fixed rate loans aren't coming down (the clue is in that term "fixed rate"), so those struggling with debts are still struggling with debts. Those unsure about the future are still unsure about the future.
Those of us with cash on hand are being stung, which makes us less likely to spend because we don't have the passive income from savings we used to have.
Just for good measure if my savings are going to earn 0% and be exposed to the risk of the bank failing I might as well withdraw them and keep cash under the mattress, which further erodes the availability of capital to the banks.
So it's clear that the government has no idea what it is doing and is simply clutching at straws in a desperate attempt to salvage something before the next election. Heaven help us all if Gordy et al haven't bailed out before 2010.
Complain about this comment
"It is hurting. But so far it isn't working."
Too true.
Reminds me of the old joke about two Central Bankers, er, farmers...
Farmer Giles: Aargh, my 'orse has got pneumonia.
Farmer Brown: Ooh aargh.
Farmer Giles: Farmer Brown, your 'orse got pneumonia, didn't it?
Farmer Brown: Ooh aargh.
Farmer Giles: Farmer Brown, when your 'orse got pneumonia, what did 'ee do?
Farmer Brown: I gave it paraffin, I did. Ooh aargh.
Two weeks later...
Farmer Giles: 'allo farmer Brown
Farmer Brown: Ooh aargh.
Farmer Giles: Farmer Brown, remember you said that when your 'orse got pneumonia, 'ee gave it paraffin?
Farmer Brown: Ooh aargh.
Farmer Giles: Well my 'orse has died.
Farmer Brown: Ooh aargh, so did mine.
Complain about this comment
i am currently trying to save a large enough deposit to buy a house, can someone please advise me what the effect on the banking system will be if all the depositors withdraw their savings, as i am now giving this some serious thought.
I suspect it will be one of those "unintended consequences", and i further suspect it wont be a good effect.
Complain about this comment
This must be nonsense.
Who thinks that anyone will spend money under present economic circumstances?
The figures speak for themselves.
So all this 'must do something' is pointless until a real bottom of all the markets is reached, otherwise it is only a mini bubble.
Anyone who thinks that savers will spend money just because they get low returns or even zero returns are fooling themselves, as sadly is HMG again.
Complain about this comment
". At 1:35pm on 05 Feb 2009, John_from_Hendon wrote:
Failed men still pursuing failed policies.
In three months they have destroyed the whole essence of money that has taken the last 300 years to build."
What a load of rubbish...
They did nothing of the sort. The problem is built into the monetary system.
You go to a bank. You take out a loan. The instant you do that, the bank does 2 things.
1: They create N amount of credit, and type it into your account.
2: They create N+interest amount of Debt and type it into your account.
Because there is interest created on debt, there is always, ALWAYS more debt than credit, and the debt grows every year.
The only way to pay the debt is to borrow more and create more credit in future years. The problem with that is the amount of credit has to increase exponentially to keep up with the interest payments on the debt.
Take a look at the money supply curves sometime. Exponential.
You have to continue increasing the amount of credit and debt out there forever for the system to work.
Well... Guess what, eventually you run out of people to lend to.
The Ponzi scheme which is our monetary system then had to collapse, because it can't grow further.
The solution is replace the credit with real money; Notes and coins. Notes and coins don't require infinite exponential growth to work.
Complain about this comment
REALITY
John_from_Hendon (#5) "It may be the "major accepted cause" - 'accepted' by the failed economists that is - those whose skill and understanding gave us this present economic 'correction'!"
I've tried making similar points in recent blogs but they appear to have infringed House Rules. When the entire economic system was encouraged to grow on the basis of irresponsible, predatory, lending justfied by diversification of risk via securitization, it had to hit the buffers sooner once enough people in the loop couldn't bear the uncertainty/anxiety any longer. This was obviously going to happen once more folk became aware of the dramatic changes happening to Liberal-Democracies' demographics ageing at one end, and growing 'skill' poverty at the other).
Why would banks continue lending now they can't get rid of their exhaust? Education is no panacea - all the 'enrichment' programmes fail - so why the Oz act?
Complain about this comment
Eventually people will say to themselves ... '"Look, the sky has'nt fallen in."
Unfortunately for the NL Government, that realisation will come too late to save them, as political and economic cycles co-incide to start the next upswing.
Life goes on.
Complain about this comment
Come on all you 4 million, or so, who have tracker mortgages.
You are the only ones with more money to spend so get out there and spend it to save us all!
A new Jag or Land Rover maybe, or a new collection of CD's from Zavvi? or why not buy Hamleys (the whole store) for your kids?
Complain about this comment
BIG BAD BANK
there's an interesting analysis piece about the US administration's next moves; see today's Globe and Mail
http://www.theglobeandmail.com/servlet/story/RTGAM.20090204.wbanks_obama05/BNStory/Front
it's suggesting that something very big is in the works for next week over there; might involve the setting up of a giant ($3-4 trillion) bad bank, the winding up of some zombie banks, possible nationalisation of others, huge direct tax breaks to house buyers etc etc
I guess this represents a fairly desperate attempt to reach the bottom of the housing market, which they say still has 10% further to fall
What I'm wondering is: can the US/Wall St bring in a BAD BANK without the UK/City of London doing the same thing as a co-ordinated action? or being forced to follow suit immediately? our and their sub-prime/toxic problems are so closely inter-twined after all.........
And aren't Barclay's and RBS both listed on the NY Exchange? would that mean that the US taxpayer might be taking care of our TOXIC problem for us?
Or would the US and UK govt actually have to formally agree how to divide up the TOXIC SHARES between them?
I haven't seen this issue discussed anywhere but all the big banks are multinational and listed on more than one exchange, so what happens/
Complain about this comment
Bank rate is largely irrelevant - except of course to ordinary savers. It now has almost nothing to do with rates charged to individual borrowers and businesses.
Clearly, the recession is driven to a significant extent by falls in the money supply (on any of the acknowlegded measures, such as M3 or M4).
It looks as if central banks and governments are running out of effective tools. Before long, we will have a fully fledged depression.
Complain about this comment
Interesting blog!
Protectionism far from being a dirty word can be a necessity for a country to keep its workers employed and stem social meltdown.
Self sufficiency particularly in this country is harder to sustain because we no longer manufacture or produce enough day to day necessities.
This is an ideal opportunity to start reversing this and stimulating new manufacturing businesses.
Those green issues would be solved if we had to pay a proper price for what we choose to buy instead of using up the worlds resources on the cheap by mass importation of mostly unnecessary tat.
More incentive to savers is essential to fund new businesses and sensible lending has to be a priority
You just have to look at some of the fabulous stuff manufactured here in the thirties and sold throughout the world.
When men had to leave to fight in WW2 There was actually a big shortage of labour and the women had to take up jobs that the men had left in agriculture and factories
Going backwards some will say but it's a lot better than going bust.
Complain about this comment
What's wrong with deflation?
Surely, the lower the prices, the more inclined people will be to spend.
Indeed, the cheaper goods and services are, the more of them you are likely to purchase.
So why is it so bad that prices fall?
Complain about this comment
"11. At 2:03pm on 05 Feb 2009, mrsbloggs13c2 wrote:
It just might be more productive to increase interest rates to increase the supply of money via increased deposits
If I am way off beam, please tell me, someone....."
You are... You see, what makes banks special is that they "multiply money" when they lend it.
You put 100 pound into a bank, it will be lent out many times, 30 or so in the UK, turning into 3000 pounds of credit. But only if people borrow. 97% of our money is bank credit.
There are a few options:
1: Reduce interest rates to encourage lots of borrowing and cause credit based inflation.
2: Print money which can then be multiplied by the banks to produce credit based inflation.
3: Wipe out the debt. Bankrupt a few banks and allow the credit to remain circulating.
4: Reform our money system so it isn't based on debt.
Complain about this comment
Our policy makerrs are now reduced to pushing on the steering wheels of their cargo cult to make progueress ,since failing to check if their was an adequate five star fool supply
They need to address the non banking fool shortage
You can fool them once ,but you can't
fool them twice again.
So their is hope
Complain about this comment
Will no one rid us of this absurd MPC farce and decide to take direct control of the supply of finance.
On the one hand we are encouraging people to borrow beyond their long term means and on the other we are discouraging saving and impoverishing those relying on savings. Where is this leading to?
Complain about this comment
Until the issues of TRUST and CONFIDENCE are adequately tackled, British society is going to exhaust itself trying out this and that in a chaotic manner, hoping for results while not really believing in the framework.
The current administration is tainted and mistrusted.
Cynicism and apathy will only be replaced by positive cooperation and truly durable constructive approaches when Brown and Labour are no longer in power.
Complain about this comment
Er. - I thought we were having a 'credit crunch' - how is reducing the interest rates from a reasonable 5% down to a very unattractive 1% supposed to encourage investment moneys into bank accounts ? If banks still paid 5% then no problems . However I have seen banks advertising less than 5% . Given that - it will just encourage investment moneys to be placed into shares etc. . Meanwhile we are all left , yet again , with the impression that the experts just don't know what they are doing - is this the case ? - if so - can we have a change of experts please .
Complain about this comment
As remarked by Somali Pirate, the velocity theory of money is critical here. The quantity of money in circulation can be increased by printing more of it ("quantitative easing"), or by speeding up the pace at which the existing quantity circulates.
Cutting interest rates is (in theory, and in normal times) a mechanism for speeding up the velocity of circulation by increasing the propensity to borrow and spend. But this presupposes (a) that borrowers are keen to take on board more debt, and (b) that lenders are keen to lend.
Neither is true at present, which is why rate cuts will not work. Consumers are averse to borrowing and spending, but this aversion is due to fear, and has little or nothing to do with the cost of borrowing. Lenders, too, are risk-averse, and their unwillingness to lend can only be made worse by the derisory returns that current interest rates represent.
So the velocity of circulation decreases because both sit on their hands - borrowers do not wish to borrow and lenders do not wish to lend. Total expenditure is velocity multiplied by quantity so, given borrower and lender aversity, expenditure will remain low irrespective of cuts in interest rates. Therefore, whilst increasing the quantity of money might seem desirable - and would certainly be better than manic rate-cutting - total expenditure would still be held back by declining velocity.
Complain about this comment
15. obangobang:
"The government needs to employ targetted initiatives to get business spending, employing people so that they have money to spend themselves. The most efficient, and possibly quickest way of doing this is via the construction sector, specifically housebuilders".
Absolutely right. Time and again I have called for a big programme of building council houses for rent.
Builders would accept lean margins just to get the work, and land can be made available through the planning system.
In addition to boosting the economy, this would provide much-needed homes at a bargain price to the state.
Just think how many houses could have been built with the GBP 12 bn wasted on an irrelevant VAT cut!
Complain about this comment
Businesses not getting liquidity - how very true my non financial business would be doing very well except that I am struggling with cashflow because I cannot get additional working capital to fund my growth. As a consequence I can't hire more people or expand the business.
My bank has told me there is "no money for anything" - not even finance for irrovocable letters of credit. I have been forced to reduce my overdraft (a useful source of working capital) by 20 percent. All my suppliers are screaming for money and my customers are telling me I'll need to wait for my cash. As a consequence I have to put customers on stop and turn business away. Its getting really unpleasant out here in the real world.
If the tax payer has been putting all this money into the banks Stephanie please could you tell me where it has all gone because business is n't getting any and neither are consumers.
Its no good cutting interest rates if you can't borrow any money it just takes cash from savers and more money out of the system creating a bigger downturn.
Complain about this comment
Every time I read the comments on these blogs, there is a furore of feeling to increase interest rates for the good of the long-term economy.
Will STEPH or PESTON please explain why this option has been discounted as it would appear Joe Public (and some sound logic) is totally at odds with those in charge!
Complain about this comment
#17
"I'd like a definition of deflation."
There are two definitions of deflation in economics - it's not called the dismal science for nothing.
The first is negative inflation for a whole basket of things over a prolonged period of time. The second is a contraction in the money supply. The second may lead to the first.
Complain about this comment
The latest Bank of England figures also showed bank lending to non financial corporates increased by 10.8% in 2008 compared with 2007 (..... and increased by 9.7% to other financial corporates).
This shows that politians and the media were wrong when they said that banks were reducing lending to businesses.
Facts can be so inconvenient for politians and the media.
Complain about this comment
Businesses not getting liquidity - how very true my non financial business would be doing very well except that I am struggling with cashflow because I cannot get additional working capital to fund my growth. As a consequence I can't hire more people or expand the business.
My bank has told me there is "no money for anything" - not even finance for irrovocable letters of credit. I have been forced to reduce my overdraft (a useful source of working capital) by 20 percent. All my suppliers are screaming for money and my customers are telling me I'll need to wait for my cash. As a consequence I have to put customers on stop and turn business away. Its getting really unpleasant out here in the real world.
If the tax payer has been putting all this money into the banks Stephanie please could you tell me where it has all gone because business is n't getting any and neither are consumers.
Its no good cutting interest rates if you can't borrow any money it just takes cash from savers and more money out of the system creating a bigger downturn.
Also we won't get to grow exports if we can't find the cash to finance raw materials etc.
Complain about this comment
Prof. Tim Congdon on the Daily Politics Show (cf)also says that the present policies will not work and that it is madness to try to persuade people to borrow again. That is part of the problem, not the solution. It was sad to see the Chairman of the Treasury Select Committee totally rejecting Prof. Congdon's idea.
More and more economists seem to be coming to your way of thinking - in fact some of them were announcing it some time ago.
Complain about this comment
Stephs article needs to be read along with the Willem Buiter comments on his blog today:
http://blogs.ft.com/maverecon/2009/02/fiscal-expansions-in-submerging-markets-the-case-of-the-usa-and-the-uk/#more-428
Complain about this comment
20. At 2:30pm on 05 Feb 2009, arnsbrae wrote: snow day for the moderators?
Big snow day for the Moderators 1h20 minutes, stuck in a drift.
Complain about this comment
OK here's the answer,
rather than pushing more cash into inefficient banks : send every 2007/08 taxpayer a £900 individual tax refund cheque which they can either spend or save or pay off their debts!
This puts liquidity/cash back into consumers pockets, will build confidence and encourage demand.
Complain about this comment
What is preventing the bank of England from lending to consumers?
Surely if they start moving the money directly to the population (and making a profit) then the commercial banks will follow suit for fear of missing out.
If the government / Bank of England use Northern Rock as an outlet for sensibly rated personal and commercial loans then huge numbers of people will abandon the other comercial operations forcing them to start behaving responsibly or go under.
Alternatively, the government could just slap the banks with some legislation to stop them behaving like a bunch of selfish XXXX's
Complain about this comment
If I was pm I would do this, there are lots and lots of new cars sitting doing nothing, they have newer cleaner engines, instead of giving money to the car companies to bail them out, hows about giving us 50% off the price of a new car, that way everyone who wants gets a nice new motor, spends some money, car dealers clear the backlog, the older cars get off the road, banks can give low interest loans for the cars, for those who cant pay cash, and it wouldnt be protectionist either because most cars are made abroad, same with houses, no stamp duty on houses at all except on the banker mansions, + £10k from the government to refurnish or do what you want, instead of giving more to the banks.
Complain about this comment
They may be pushing string, but to get the string to push they borrowed it from me. Can I have it back now, given they're not using it for the purpose they borrowed it for?
Complain about this comment
There are two main problems with deflation. First, consumers put off buying until later because they expect prices to fall. Second, how do businesses impose annual pay-cuts? Whilst negative inflation might appear to have superficial attractioons, the truth is that it would be economically corrosive and socially divisive.
Complain about this comment
Keynes talked about pushing on a piece of string. His liquidity preference theory also suggested that there was no point reducing interest rates below 2%. Have the economists at the Bank of England read Keynes?
Complain about this comment
#24. , dpjburns24
"Savers are not a priority right now. Individuals with mortgages and small-medium businessess are."
Now that is where the present strategy has got it wrong.
Many, many people have come on here crowing about the savings that they are making on their tracker mortgages. Therefore why should savers have to fund their reduced payments?
As for SMEs, it is not beyond the wit of the banks and/or BoE to construct a business lending rate that is not reliant on base rate.
Finally most savers are individuals. Savers can only be savers because they have not over-extended their credit lines. Therefore they deserve better than to refund the feckless credit bubble.
Complain about this comment
Dear Stephanie,
Clearly, all recent initiatives both by the major banks and HMG have, as yet totally failed to start the green shoots needed. How much HMG money has now been piled into them, or guarantees given? Billions.
Why pile more money into businesses which have spectacularly failed, their executives running off with money which now does not exist?
Surely, subject to an 'Equitas' type rescue fund (cf Lloyds of London), surely other money should go into completely new banks where the executives would be different, and which would have no history? Deposits would soon build up, and with, say, 50% of those lent to borrowers, and with no resort to the wholesale banking market, some confidence would resume.
Why put good money after bad?
Complain about this comment
The committee are in noddy land. I certainly can not see how this will help. The savers are looking at options really carefully and wondering why lend money to banks/building societies for so little return, but will certainly not be rushing out to spend. It is amazing that they are rushing headlong into pushing down rates without waiting for any sign that it has an effect. The pound in the meantime has crashed to all time lows. Between the MPC and the government we do not stand much chance, neither seem to have much idea. Who will rid us of these idiots.
Complain about this comment
The amazing thing to me is that with credit tight and banks not lending, that the deposit interest rates are so minuscule. One would expect that if banks want more depsits they would pay higher interest on them.
In the US, " bank deposit rates are priced off of the Treasury yield curve", and that yield is 0-.25%. The NY Times recently borrowed $250 in Mexico and is paying 14% interest. I have funds available, but am not willing to give that money to banks at 0-2.5%.
The banks are taking advantage of their customers assuming that they do not know how to get better rates elsewhere. That is what is strangling the low lending rates.
In addition, people will stop spending and conserve/save their cash, just like banks are doing. Thus, the entire effort to get people to resume their profligate ways and "buy now pay later" and spend more than they earn
will end in well deserved failure.
We must return to living within our means if we want a healthy economy, one not dependent on a huge debt load.
Complain about this comment
Most economics goes over my head so there's not much difference between my position and Gordon's; the only difference is, I'm willing to admit the fact rather than pretending I know what I'm doing.
It seems to me, as has been noted above, that if you are scared of losing your job, scared of being able to get credit, and scared of being repossessed, you are not going to spend any spare disposable income you may have; you are going to save it.
When it's your money, you are not going to spend, spend, spend, spend. Now if someone gave me some 'free' money, I would spend like there is no tomorrow. But no one is going to do such a thing which brings me to another difference between me and the government; they are receiving 'free' money from you and me in the form of taxes now and for the future. I bet you Gordon and his mates are not splashing their own cash but are quite prepared to be profligate with someone else's as they have been for the last 11 years. Time to rein it in chaps; get in the saving habit.
Now my question which is asked quite seriously to elicit a serious reply (message to moderator):
Why don't the government leave interest rates low but perhaps not as low as they are now and reduce tax to say 15% across the board. To my mind that would benefit everyone, not just the borrowers. Loosening up more disposable income rather taxing everybody 'till the pips squeak' (remember that quaint soundbite?) would mean more money in my pocket to go and spend.
I mean if 5 out of 6 people are savers, surely these are the people you want spending, not the 1 in 6 borrowers who are hocked up to the eyeballs. Maybe I am being naive but if someone can give me guidance, please feel free to do so; Gordon and his chums might learn something too.
This is not a serious statement (message to moderator): It has just occurred to me that Gordon will not specifically deny bonuses to the failure that is RBS and others because it may be that rather than go into tax exile, these ruinous executives will squander their unearned cash on useless products and services and the country back on its feet. Perhaps Gordon knows that the amount of bonus is so enormous, it could dig us all out of a financial hole; although it would take us years paying off the amount we borrowed to gift to this scum.
If the banks would have gone bust without taxpayers money, how can it be morally justifiable that they don't just pay themselves a basic salary, but millions of pounds worth of bonus money that they wouldn't have had if they had not been bailed out. If these people receive one penny of a bonus, I will move my account from RBS elsewhere. I recommend all depositors do the same; this way, the bank will go bust and it will be no more than they deserve.
This government should not be spineless; let these people bring law suits. They will get short shrift especially when it they have to justify their position no matter their contracts.
Gordon had the cheek to say this morning that he said in October last year what Obama said this week about capping bankers' bonuses. Another difference: Obama is capping bonuses to bankers in bailed out banks whilst Gordon is NOT capping anyone at all. What part of capping or refusing does this man not understand?
Complain about this comment
Stephanie Flanders:
Inflation will go up for a while longer and then, the inflation will probably drop suddenly.
~Dennis Junior~
Complain about this comment
Interest rates are too LOW - evidence: House prices are rising (see today's Halifax survey)
All this reduction in interest rates to absurdly low levels is doing is to re-inflate the housing bubble.
I outlined how to avoid this outcome and specifically warned against it in recent weeks - but as usual nobody takes any notice. (I hate being proved right! - really I do, in this instance.)
My scheme is to lower interest rate now (if you must - which I doubt) but also to announce that rates will be going up quite soon - this would prevent absurd long term borrowing based on the current "affordability" and also give a feeling of security to savers who are at risk of going on strike!
A savers strike would completely and more fundamentally trash the economy and if that happens we are in for up-to 20 to 30 years of the current economic conditions.
Money could become worthless something that has not been seen since the Weimar republic in Europe. I can't think of any time in history, except perhaps during the Crusades or the 100 years War in English History when we totally run out of money. It was not this bad after the Napoleonic War or the Glorious Revolution - perhaps not since the end of the Roman Empire and in the following Dark Ages.
These 'wise men' are at serious risk of destroying 2000 years of economic history (let alone the 300 years of the Bank of England's history) and all of modern civilisation through their 'wise' moves!
Complain about this comment
Where did savings originate? All existing wealth has come from previous debt. So it's hypocritical of those with savings to slag off borrowers.
Even one commenter above - a saver hoping to get a mortgage - had the cheek to complain about the low rates. Would you complain if you had got that mortgage already?
Another thing - most of us with mortgages will be overpaying as much as possible at the moment. Surely this is a good thing, given the fact that we're constantly reminded that all this mess was caused by too much debt and this level needs reducing.
Complain about this comment
#34. true-liberal wrote:
"What a load of rubbish...
They did nothing of the sort. The problem is built into the monetary system."
The Bank and the MPC failed to understand that money needs to have value to retrain its credibility in the monetary system they are entrusted by us to run.
Your point that collapses and booms are an inevitable consequence of the capitalist system (c.f. K. Marx) whilst supported by the evidence does not excuse the total and absolute devaluation of money by the Bank.
Throughout the last 300 years the Bank has understood that money needs to have a value and be sound for any economy to function and they have managed to achieve that through the various slumps and booms, but now that have completely lost the plot. So I stick to my point that they have failed. "Failed men still pursuing failed policies." #2
Complain about this comment
Low interest rates,, GREAT! mortgage fallen from £960 a mnth to £360 a mnth. Will I be spending on getting the economy going? Yes, but because we are in recession, I find I am getting much better deals when I spend.
If recessions are so bad, then how come I'm better off???
Complain about this comment
I would like to hear how the Bank of England could "yank the string" credit demand side. As far as I am aware, there are no means of panicking people into borrowing. Nor is there the capital to facilitate it while reducing leverage. Since the incentive of low interest rates is already spent, at what could you possibly be hinting? A spell of negative real interest rates?
Complain about this comment
Stephanie, I've looked it up and I'm none the wiser.
What is M4, and why should I care?
Complain about this comment
Surely it was apparent last October that the US policy under Helicopter Ben of cutting interest rates was not working. So armed with this information, the BofE and Treasury pursue this impotent policy. In so doing did it never occur to these idiots that millions of people who have saved sensibly whether pensioners or younger folks would simply see their average income halved as a result of the rate cuts?
So naturally these same people are faced with drastic changes in their spending patterns and in many cases are forced to watch helplessly as their capital becomes a substitute for income (which can only last so long).
Cheap money is not going to make people who are out of work, fear loss of work, or who have seen their fixed incomes halved go out their and start spending like in 2007. The truth is that these idiots have got it horribly wrong.
Finally, I wish Stephanie would stop referring to "respected economists". They are not all respected. Greenspan was "respected" in his time, now look at him. The great man himself John Maynard Keynes was respected for decades, but then fell out of favour for decades. This is no different to politicians. If you are the flavour of the month then you're respected. But it doen't mean you are talking sense of making sensible policies. One only has to look at a few of the Nobel Economists who contributed to the disaster that was Long Term Capital Management to see where such hubris can lead us!
Complain about this comment
Take all the tax payer money back from the banks and pay off every mortgage up to £200,000.
Why on earth not? Giving it all to the banks is crazy, at least this way the tax payers would see something for the money.
Complain about this comment
It's been used to pay off some of the Banks' own debts -- without it they'd have disappeared from the world for good.
Previously, I thought this was a good thing -- save the banks, ergo save the economy.
Now I think we've been hoodwinked.
We should have let the banks go to the wall, and given the money to businesses and consumers direct.
At least then the money would be going to where it needs to go most.
Instead the Govt have helped those who dug us into this to keep on digging.
Complain about this comment
#50
"Every time I read the comments on these blogs, there is a furore of feeling to increase interest rates for the good of the long-term economy."
In the absence of Steph's response at this time, I should like to venture one opinion in response, which may explain part of the problem, but sadly not the whole problem.
The conventional wisdom of macro-economic theory suggests that there is an inverse relationship between interest rates and stock market growth. i.e. raise interest rates and the cost of borrowing goes up, so that companies find it more expensive to invest and consumers find their bank charges and credit charges increasing which dampens demand. Hence companies suffer a downturn in earnings and a subsequent drop in share price. In aggregate this is reflected in a declining stock market and a slowing of the real economic growth (usually leading to a recession). The theory is that the reverse is true, so that the Fed's lowering interest rates, now mirrored by the BofE should stimulate demand and get us back on the path to growth.
Clearly, something is wrong with the theory, but it doesn't stop the politicians buying the idea on the advice of central bankers and their economic advisors, since most politicians are not particularly savvy when it comes to economics and therefore cannot effectively make well informed decisions. In other words, we are often (but not always for example Ken Clarke or Vince Cable) faced with politicians who at best might manage a "C" in A level Economics. For those politicians who protest and claim they read PPE or an Economics tripos, I wonder how many who are not professionally involved in the field can honestly remember much of the subject 10, 20 or 30 years later beyond the generall accepted mantras.
Unfortunately, in the kind of financial crisis that the world has been submerging itself into over the past 2 years, the theory of the impact of interest rates is clearly weak, especially at the lower rates, when demand has been sapped by limited liquidity, rising unemployement and falling consumer and business confidence.
Specifically in relation to your quesiton, I would suggest that politicians and central bankers fear that if they had left interest rates at say 5% then this would have hastened a recession that they were all so busy trying to avoid. In that assumption, I should have to agree with them. Where I disagree is that this would have been a bad thing. Yes it would have caused bank failures, rising unemployment, a dramatic fall in demand and possibly a depression (rather like what we've got coming anyway). But we the taxpayer and those with savings would not be footing the bill for the idiots who borrowed like crazy and now want to be saved by these same taxpayers.
To be seen to pursue such a policy would appear political suicide, since governments like to be seen to be solving the problem, even when all they are doing is moving the deckchairs on the Titanic!
I should be interested to hear Stephanie's view on this topic also.
Complain about this comment
As an amateur I think the Bank of England has completely lost the plot.
Who is going to lend to businesses at anything like base rate with all the risks around. As for the mortgage market savers have been wiped out and their spending ability transferred to those who were heavily indebted. In other words having had their pensions raided by g brown their other savings are now effectively being appropriated.
What a shambles.
- and could it just not be that in the great scheme of things pipelines have suddenly been filled. The two cars per family move has possibly played out and with cars more reliable and the government increased taxes on bigger cars demand must be reducing.- and in electricals could we not have broadly filled up to the point where demand is becoming more reliant on replacements as new products are no longer ground breaking?
Complain about this comment
#70 5imple5imon wrote:
"Where did savings originate? All existing wealth has come from previous debt. So it's hypocritical of those with savings to slag off borrowers."
Nope, wrong. Most MONEY was created from previous debt. Wealth was created from labour. Nothing more, nothing less.
Complain about this comment
Hi Stephanie,
The bank of England used to have some shred of credibility. Right now they are running around like headless chickens, appearing to be absolutely clueless about what is happening right now and making decsions which are going to make the coming depression even more painful.
For the sake of clarity, and if anyone is listening out there. The mess we find ourselves in is precisely because of 'loose monetary policy.' The central banks where meant to be moderators of the economy, but they became cheerleaders-in-chief of the economy in the last 20 years, greeting any possible correction in the global/local economy with yet more easy money. The world does not want this money. The banks are hording it and stuffing the central banks with horrendus toxic debt, and if they start to easy money even more all that is going to happen is inflation.
You can't solve the problem of loose monetary policy with more of the same! It's like giving a cocaine junkie more cocaine to cure his/her addiction! Sometimes it is best to do nothing and allow the 'creative destructionism of capitalism' to run it's course.
Unfortunately those in power are too ignorant and too stupid to make sensible, long term decisions.
Complain about this comment
#74
"Muninn wrote:
Stephanie, I've looked it up and I'm none the wiser.
What is M4, and why should I care?"
The job of an economics editor is not to explain, because that would require some understanding. No, the job of an economics editor is to befuddle with pseudo-science to justify their own position. The complete opposite of science in fact.
Complain about this comment
I think the real problem is that the only borrowing that is getting cheaper is that of the Government. They are about the only organisation who accounts for their borrowing cost in terms of the bank rate. Everyone else is finding it difficult and expensive to borrow.
Unfortunately the money they are borrowing is just plugging the hole of money leaking abroad as our banks' liabilities fall due (or just sittting in bank vaults).
Would it not be better to allow RBS to go bust, protect domestic account holders, and have a fire sale of any assets of RBS that can be liquidated?
Complain about this comment
No doubt Mervyn King is oiling the printing presses as I write this. Is he insane? As Jim Rogers says, no country ever became rich by debasing its own currency.
If Mervyn King hadn't been so beholden to the Golem in Downing Street we might have had proper interest rates going into this recession. But the Golem excluded all inflation from the inflation figures. Interest rates should've been at circa 10 percent going into the downturn. That would've choked the insane borrowing binge that preceeded the downturn.
Complain about this comment
I think this crash is one for the students of chaos theory as applied to Economics.
Physical Systems become inherently unpredictable when removed from the bounds of normal operation. They become impossible to predict or control.
Sadly our greedy rulers have replaced the steady beat of the economy with a series of wild fluctuations. I have read sensible arguments for both low and high interest rates. In the old days a quarter of a percent did what it said on the tin. Who knows now.
We may even fluke a save landing.
(I doubt it though).
Complain about this comment
Multi-national banks may be able to dump their toxic debt in Europe (by which I mean the euro-zone) or U.S.A. without our Government doing anything useful. Masterly inactivity on the part of HMG may prove a cunning stunt.
"I have a cunning plan ...."
Complain about this comment
Eventually the interest rate will fall to 0%. Savers money on the cheap to pay bonuses and lend at higher rates than before the credit crunch. Neat trick eh?
Complain about this comment
When are people going to be able to stand back and look at the bigger picture and the data for the last 100 years.
This is not the 1930's - it is multiple orders worse. There isn't even a piece of string to push
There is no kick starting this - it is only just starting.
Debt as a percentage of GDP has been rising exponentially for the last 30 years. In the USA, total debt to GDP is now twice what it was when the 1929 crash occurred. Similar stats apply in the Australia and the UK
Meantime real incomes in developed countries have been falling on average - the trend has been a growing divide between rich and poor. The middle class has only hung in there by becoming a two household family and by increasing their debts against the illusion of increasing paper wealth (house and share bubble).
The whole global economy was a big unsustainable bubble built on exponential debt growth. Now the assets prices have collapsed but the debts remain. Consumers are suddenly waking up to the fact that they aren't rich like they thought they were. but in debt and about to loose their job and their home. They aren't interested in consuming or borrowing right now.
There is no real economy to kickstart. It was a mirage based on an illusion, based on debt. Do the charts - plot per capita gdp by country against per capita debt - the intrinsic difference between a developed country and a developing country is whose citizens had managed to borrow more money and therefor who has the biggest debt.
Complain about this comment
No 74, M4 is the total amount of money in the kingdom by its broadest definition. That is to say that it's coins and notes in circulation (M0, or "Little Mo") plus all deposits held in bank accounts.
And it is important because the Golem at No 10 Downing Street is likely to go on a printing binge, increasing the size of M4 and decreasing the worth of sterling. This, the Golem supposes, will get him out of his tight spot, but all it will really do is debase sterling, stiffle recovery and stoke the fires of inflation.
It's insanity, but it means the government can pay off its massive debts by just printing money.
Complain about this comment
It may be worth considering extreme measures - like a negative interest rate - to get banks lending again. In real terms, base rates are already negative (because inflation is higher than the 1% interest rate) - but it does make a difference to have the nominal interest rate less than zero. This is why:
http://www.knowingandmaking.com/2009/02/getting-monetary-stimulus-to-work.html
Complain about this comment
Money supply HAS to shrink to remove all of the immaginary money that was put into the system by people "taking equity" out of over-priced houses which now leaves them massively in debt. This problem will not go away and makes a period of deflation as inevitable as a hangover after a beer binge. All the bank is doing is ruining the currency in a Canute style attempt to stop the inevitable.
The alternative is to bypass the banks (which begs the question why did we bother saving them anyway?), get the money directly into the market where it will cause a quick burst of (hyper)inflation to drop the value of all those debts (cue quatitative easing.....)
Complain about this comment
I sincerely hope the majority of people use their new found bonuses of lower mortgage rates by paying down their debt rather than spending it. The consequences of another binge will only bring on the hyper inflation quicker.
Complain about this comment
John_From_Hendon (#69) "Interest rates are too LOW - evidence: House prices are rising (see today's Halifax survey). All this reduction in interest rates to absurdly low levels is doing is to re-inflate the housing bubble."
It's the only game the incumbents and their Masters of The Universe know is it not? As committed free-marketeers, why would anyone expect them to abandon an economic policy/philosophy (which basically amounts to deregulation, privatisation of profit whilst securitizing and socialising/internationizing toxic risk)? To do anything else requires government, i.e. regulation, planning and effective, i.e. a well resourced executive (Public Sector) to enforce it, everything which has been progressively taken off the table for decades.
The alternative mut truly terrify them (FDR's program was esssentially fascist), so they're desperately trying to re-establish the status quo as I see it. There's lots of empty rhetoric to make us all think otherwise, but the reality is that their hands off/light-touch, approach means that they now have nothing in their repertoire, just spin. That's all one gets from non-governing (anarchistic) governments (although they have beefed up the CJS/anti-terror legislation - not that that's effectively enforced) - how could it be otherwise?
Refutations welcome.
Complain about this comment
No. 53. Longandtall wrote:
"I am being forced to reduce my business overdraft".
Answer = Good!!!!
If you pay off your business overdraft and any other borrowing, get your customers to pay you 30 days end of month, pay your suppliers 30 days end of month, and hedge any currency exposure, you may just have a viable long term business.....
The aim of any business is to generate cash. There is no point having profit if you can't distribute it by way of a dividend. Only cash allows a business to pay its owners a return on their investment. Don't borrow money unless you can repay it within a year or two from increased cash flow. Also, cash reserves kept within a business allow it to weather any short term drop in demand for its products or any reductions in gross margin.
Don't forget to employ a full time credit controller - don't waste your margin by going down the lazy route of invoice factoring.
Complain about this comment
I am begining to conclude that a Depression is more than likely for the simple reason that it was predicated by the collapse of the wholesale credit market. Once the economy went out of control it was only going to end up in the ditch despite how hard you wiggle the wheel, stamp on the brake and change gear.
I also feel that all these measures being taken by the adrenilating Brown and friends are not only putting off the evil day but are likely to make that day even worse than it might be. The measures look like panics, sound like panics and smell like panics; so they must be panics!
If there is a shortage of money in the system then surely the value of any pot of money has to go up. To make it do otherwise is just perverse!
What happened to all those bright ideas about the market? Or does that only apply to the great and good but not the little people?
This entire situation is looking more and more like a self-appointed elite, unable to think any other way than in the manner which brought them to disaster, seeking to avert the loss of their own privileges at the expense of everyone else.
I think this is more about averting political defeat than anything else. I think savers are going to revolt. This could get nasty.
Complain about this comment
The answer to your question is 'yes'. Collectively, consumers have rightly lost confidence, and realised that the 'feel-good' factor of recent times was created by 'smoke and mirrors' and living beyond our means. No amount of string-pushing will help, especiallly as the 'string' is tied to nothing (ie bank rate is not formally linked to minimum rate for deposits).
Indeed, bank rate would be more effective if it were the minimum rate for deposits. It could be RPI plus a fair return, and all other rates could be linked to this as banks etc decide. They would have to live on the 'turn', depositors would be rewarded for thrift, and borrowers pay the going rate. One thing is certain, as it stands base rate is not an economic lever. Effectively, it never has been, except psychologically.
Complain about this comment
I can tell you why all these efforts to find solutions to the crisis - won't work. The reason slapped me in the face once again. Every time I click "Post a comment" on a BBC blog.
Why then? Answer: Depth of analysis. Question: What is depth? Answer: By my definition, related to this crisis, the medium effects the message. Blogging makes short messages.
I clicked your link yesterday to Keynes on Protectionism. Immediately I saw my own "writing style". I also found it unreadable from the screen. It needs to be printed to be read.
I can write in the style of 1. short lists 2. required by bloggers 3. by BBC staff and excited tweeters. This post here in total contains no depth. I'm deliberately avoiding it.
Why? When I write in depth, the final result is useless for blog posting. Why? For the exact reason I recognise my own style in the link to Keynes's essay cited above.
1. Too long.
2. Non-scannable style.
...cutting a few hundred words out because it started to acquire analytical depth.
As children are effected by video games, adults are effected by blogs. I too! I wouldn't read my own writing longer than it takes to edit because I don't like my own style. I prefer blogs too!
But I write to resolve inner issues, which to me are about the strucuture of the world (economy and technology) around me. Once finished I move on.
Will I ever publish? I don't know. But what I can say in the world of bloggers and micro-publishers, would Keynes's material be published online in his time? Unlikely because the style is unreadable on screen.
Ok, but surely there is still a traditional publishing market? You think so! First in the queue to the editor's desk are the hundreds of successful bloggers on the subject of the gloabl economic crisis.
Complain about this comment
*92
will hyperinflation bring higher interest rates?
Next -
Sorry if this appears off-topic but no-one has mentioned the awful HIP in relation to house prices/market
I refuse to pay for a HIP which will be out of date - and need replacing at a further £400 cost - in 6 months time, and I guess I'm not alone
Complain about this comment
The BoE main driver in all of this is to manage inflation. Inflation needs to be restored by way of interest cuts or quantative easing or something yet to be invented. Inflation devalues debts. When debts are devalued Banks capital ratios will restore and money will be flowing around the system - it just wont be worth as much.
Complain about this comment
I'd like to know how trying to get me to spend my savings helps the fundamental problem of the fact that people have borrowed too much and now can't afford the debt they've got themselves into!
By cutting interest rates, you're penalising me for the impetuous actions of my fellow countrymen.
I was listening to a mortgage lender on the radio the other day saying how the interest rate cut will hopefully help to raise house prices again.
This is one of the single biggest problems we have currently. Houses are still grossly over-priced for what they are, and if the housing crisis wasn't enough, they actually want to elevate the prices back to where they were!
I'd be a first-time buyer were it not for the required 40% deposite (which on a modest mortgage of £90,000 is £36,000 they want NOW. I simply don't have that kind of money, and they're on another planet if they think I'm going to borrow that!! What was the point of a mortgage again?
I digress. The situation is bad, and getting worse.
The problem is this country has a personal "debt mountain" of £1.3 Trillion the last I heard, which is a gargantuan sum of money.
One solution I proposed 18 months ago was that we let *commercial* banks go bust, and lend to people directly. Lest we forget, we're bailing out profit-making organizations with public money, so they can lend it back to us at a profit!!!!
Cut out the middle-man, and help get people out of debt! We might get somewhere then.
Complain about this comment
#97 diginomics
So your point on the topic under discussion is......................................?
Complain about this comment
A next-to-nothing interest rate for savers and depositors ????
The B of E MPC has just joined the list of
'The Institutionally Insane'
I shall have to ask that Nurse to say a prayer for the swift recovery of the MPC.
Oops I can't do that, she is forbidden to under the restrictions of that other 'Institutionally Insane' organisation,.
So it looks like Merv and Co will just have to continue with their decision making processes which are based on an absence of strategy.
A challenge for Merv
The first test of a strategy is that it can be articulated to show how it will meet its required end - so how about doing so ?
(thought not, the BoE is living in LaLa Land, making it up from month to month as they go along)
Complain about this comment
#48
I actually dealt with that specific question a couple of weeks ago on one of Pesto's blogs.
http://www.bbc.co.uk/blogs/thereporters/robertpeston/2009/01/mervyn_and_leverage.html#comment119
the truth is that whilst the Government would have to underwrite, say, GBP12.5bn of new housing, the actual cost to the Treasury would be significantly less, and partly made up for with increased tax revenues. Whatsmore, there would be real assets, and rental income securing and servicing Government debt as opposed to simply taxpayers money.
Complain about this comment
A FREE-MARKETEER DOESN'T CHANGE HIS 'POLICIES'
OrbitalObserver (#100) See #93. We know that growth over the past couple of decades has been driven mainly by Financial Sservices, we know that 70% or more of the economy is Service Sector driven and we know that the FTSE 100 weighting means that anything that hits the banks/Financial Services brings it down. Leaving the international banks (HSBC and Standard Chartered which oddly fell a bit even thought they are traditionally conservative, especially HSBC) out of the picture, RBS, Barclays and Lloyds-TSB all fell dramatically to under a pound. We know how they handled/disposed of risk from predatory lending, and we know that they don't have an alternative in their markets (which are getting dumber and dumber). Now that easy loans look far more risky to them, why should they lend? They've said they're not charities, and they're not, they have to be viable businesses for their shareholders and their easy earning bubbles have been popped as nobody will buy their toxic SIV products.
So, what do we expect to see other than all the industries which depended on easy loans to consumers (and businesses) noe desperately trying to kick start the buy-now-pay-later-even-if-you-think-you-can't-afford-it business model which created this mess? That's what they do, that's all they know how to do, and that's all that New Labour (and the Conservatives, and the Lib-Dems) know about - i.e. legislating to let the market rule - that is, let the market do its thing. These are self-interested, ruthless people who make money out of consumers and will spin that to try to ensure that it happens - they'd even go to war to preserve it.
Complain about this comment
No. 100 OrbitalObserver wrote:
"I'd be a first-time buyer were it not for the required 40% deposit".
The banks are expecting house prices to fall between 30% to 40% from peak to trough.
Hence, they ask you for a 40% deposit to ensure their loan will be secured against an asset value which will not be less than the loan value after house prices have bottomed out.
Therefore, if you wait, house prices will keep coming down and the size of the deposit required by the banks will also shrink.
The increase in house prices reported the other day is likely to be a bear market rally. Fear of unemployment will keep driving house prices down over the coming months and years.
Complain about this comment
Where is this deflation people keep talking about? Petrol is rising agan,, car manufacturers are putting up prices, food is rising and the latest is some other commodities are rising. Are we not at severe risk of stagflation?
Complain about this comment
103. obangobang:
"the truth is that whilst the Government would have to underwrite, say, GBP12.5bn of new housing, the actual cost to the Treasury would be significantly less, and partly made up for with increased tax revenues. Whatsmore, there would be real assets, and rental income securing and servicing Government debt as opposed to simply taxpayers money".
Absolutely right. Set the netted-off cost, as you describe it, against the absolutely compelling economic and social case for a council house building programme, and it becomes an absolute no-brainer.
Also, it is right up Labour's street ideologically.
So, why, oh why on earth, isn't this being done?!
Complain about this comment
#107
Presumably because the Tories haven't suggested it, yet.
Complain about this comment
‘I said yesterday that the major accepted cause of the US Great Depression was the Federal Reserve's failure to prevent a collapse in the money supply after the stock market and financial panics of 1929-31.’
Ms Flanders, the debate here should not be about what the generally accepted cause of The Great Depression was, it should be about what the specific cause of it was, if we want to have a greater understanding of how the present economic crisis started and, more importantly, what can be done (if anything) to ameliorate its effects or, even better, prevent it from happening at all. Simply saying that it was the Fed’s failure to prevent a collapse in the money supply does not answer the question of what specifically caused the money supply to collapse in the first place. A good starting point in trying to make sense of what happened in 1929-31 and what appears (the same?) to be happening today is to study the Austrian Business Cycle Theory.
Ms Flanders also tries to make the point – albeit obliquely - that deflation is the big economic bogeyman that’s going to ‘get us’ whilst we sleep in our beds. Let’s just clarify what deflation is: Deflation is a contraction in the supply of money and credit which increases the value of the currency unit in circulation or purchasing power and results in prices (in general) falling. In other words, the cost of living decreases without an equal or corresponding decrease in wages and salaries. Therefore, the wage or salary earner is able to buy more goods and services with his or her pay packet; his or her standard of living is actually getting better. Mild deflation actually benefits 95% of the population. The 5% of the population who do not benefit (the banking establishment and government) try to convince the 95% that deflation is bad. Falling house prices is not deflation; it is the price of a capital asset or investment going down. Ms Flanders why are you trying to scare people, or is it that you simply do not understand what deflation is?
Complain about this comment
41. At 4:03pm on 05 Feb 2009, scotbot wrote:
What's wrong with deflation?
The problem is with it is...not only will goods go down in price but your salary/wage will also go down comensurately (if not more!).
And if you unlucky enough to have any debts, these will increase in relative terms.
So you will be poorer.
Note: a few of the auto industry companies have already cut their employees wages by 10%.
Complain about this comment
If you don't have any debts and the currency is not devalued, then even if your income falls in nominal terms, under deflation you will be richer. Much richer. Cash bidders buying without competition from credit bidders would clean up in a sale that comes along only once every three generations. The only problem is this cyclical redistribution of wealth is not inclusive enough for these politically correct times. Everyone should be a winner, always, even if they made the wrong choices in life, and someone else should pay for it. That is the sentiment that dare not speak its name. Pushing string is the process of attempting to give credit to those unqualified or reluctant to receive it so they may sneak into the event. Yet compound interest reveals all posers in the fullness of time.
Complain about this comment
M1 , M2 , M3 , M4........
The Treasury Model
Ain't got no more......
You'll have to admit
It really ain't funny
the financial universe
contains so much
DARK MONEY......
Complain about this comment
It may be the orthodox view that "the major accepted cause of the US Great Depression was the Federal Reserve's failure to prevent a collapse in the money supply" but what if that view is wrong?
Complain about this comment
View these comments in RSS