Counter-intuitive (1)

We are being bombarded on all sides by financial commentators, economists and politicians telling us that governments need to cut interest rates to stimulate the economy. Notwithstanding that governments (or their puppets, central banks) should have no rôle in setting interest rates - that is best left to the markets - it is quite easy to show that this is complete and utter nonsense:

There are two types of households: borrowers and savers.

1. If borrower households are given interest rate cuts then they are less motivated to go out and earn the money they need to pay the interest. In extremis, if the UK government is mad enough to actually offer people two-year interest free holidays when their incomes fall, they actually encourage people to work a bit less or take a lower paying or easier job.

2. If savers suffer interest rate cuts, then they have less spendable income, so they have to cut back as well. OK, you could argue that they will then work longer hours of seek a higher paid job to make up the difference, but this doesn't apply to pensioners (who have given up work for good) or to pension funds who hold large chunks of deposits with banks (who will just tell their members, tough, the value of your future pension has fallen).

The situation with businesses that are funded by bank borrowings is slightly trickier, of course. But as interest is just the price of money, a reduction in interest rates will, all things being equal, increase demand for loans and reduce the amount of loans that banks wish to make, and as banks have the final say on this, interest rate reductions reduce the amount of credit available to businesses. In any event, businesses are complaining about overdraft facilities etc being reduced or cancelled, and not about the interest rate that they pay being too high.

To illustrate this, look at Japan that has had a central bank base rate between zero or 0.5% for the past ten or fifteen years and it hasn't done them any good at all.