Saturday, 19 September 2015

Just shut up about interest rates!

…because you don’t really know what you are talking about!

After six years of endless predictions for when interest rates will start to rise, a lot of people are now gradually realising that many economists and central bankers don’t really know what is going on. Banks and investors have been pencilling in rate rises for years.

We have had Forward Guidance from the Bank of England which has proven fairly useless at giving anyone a clue when interest rates will begin to rise. There is always an excuse not to raise rates; inflation is too low, volatility in Chinese equities, a central banker wears a strange tie, etc. Will there ever be a right time?

In the six years that rates have been held at near zero in the UK, US and Europe there has been an additional $57,000,000,000,000 of debt added to the world economy. Debt which can never be repaid. We see bubbles around the world, from property to stocks.

By keeping interest rates so low for so long and injecting trillions of dollars of liquidity into the banking system, central banks have sown the seeds of the next financial meltdown. They seem so out of their depth that they spend their time reacting and adjusting to the rapidly changing developments in the markets and are incapable of making real assertions about the right policies for the future.

In the U.S. the reaction of the markets to positive employment data has been negative. Good news is bad news. This shows how dysfunctional things have become. Banks are addicted to cheap money and the highly leveraged want rates to stay low forever; they know that their debt is unaffordable if rates should return to the long term average.

Recently there has been two conflicting comments from the Bank of England’s Monetary Policy Committee. Kristin Forbes said that if you linger too long in the sun you could get burnt. She was concerned that if rates did not rise soon it could undermine economic growth. Meanwhile Andy Haldane has indicated that the next move for interest rates could be downwards! He is so concerned about another economic crash that he would consider making rates negative and even the abolition of cash to stop people hoarding. Good luck everyone!

Sunday, 18 January 2015

Will the debt monster eat your savings?

 With house price growth and house sales slowing down; I sometimes begin to wonder what other crazy plans the government could invent in order to prop up the housing market. If house prices still begin to fall after Help to Buy, Funding for Lending, bailing out the banks, printing £375,000,000,000 and holding interest rates at 0.5% for six years; what would they do? How bad would things have to get before we would see even more extreme market manipulation?

They could reduce interest rates even further so that they become negative. This would reduce the cost of servicing debt but I suspect that savers would have something to say about paying a bank to hold their money! There could well be a mass exodus of capital out of UK banks and possibly social unrest.

As the whole fiat monetary system is based on growing levels of debt, maybe the debt monster will soon consume all bank deposits. The following scenario may seem extreme but we now live with a western economy that already has unsustainable debt levels, increasing volatility and signs of currency wars.

Savers deposits are replaced by debt of equivalent value due to a collapse in economic growth and deflationary pressures. This helps keep mortgage rates low because an artificially engineered demand for the debt would have been created. Savers are paid a small amount of interest (yield) for holding the debt but would never be able to draw out any of their original capital as it would no longer exist! Virtually all money in existence represents debt and savers become mini bond traders. Capitalism without the capital.