From yesterday's City AM:
IF you owe a lot of money to your bank, it’s time to rejoice. There is now almost no chance of interest rates going up this year. The Bank of England’s monetary policy committee voted 7-2 to keep rates on hold; and given the arguments and worries about growth expressed by the majority of the members it would be foolish to bet on a rate rise any time soon...
It is fair to assume that prices will rise by 5-6 per cent this year: for someone with a £200,000 mortgage, that is equivalent to a gift of £10,000-£12,000... People with big mortgages and low interest rates are gaining immensely, at least if they are prepared to weather the downturn in house prices; people facing ever-higher rents are being hammered.
Savers are even bigger losers and are directly paying for the gains being made by those with large debts. Interest rates on savings products are miserably small and capital is being depleted. As ever, inflation is transferring wealth from those with savings to those with debt. The poor and those on fixed incomes are being hit the hardest and retail sales are under intense pressure.
The UK government is doing its best to fulfil its core rôle, which is to keep house prices as high as possible, which they achieve in collusion with the banks by having interest rates lower than the rate of inflation, so borrowers (primarily home-owners or landlords) are getting richer at the expense of savers (as well as at the expense of first time buyers and tenants).
The government could make this transfer explicit by allowing interest rates to rise, levying a five per cent annual tax on deposits and then paying the money over to homeowners or landlords (or cutting out the middleman and using the wealth tax to finance scrapping Council Tax and Stamp Duty Land Tax), but they don't want to do this as it would tend to give the game away - so they do it by the back door.
But the economic effect is exactly the same - negative interest rates (i.e. when inflation is 5% but a saver only earns 1% interest) are a wealth tax on deposits and a cash subsidy to home owners and landlords.
Friday 24 June 2011
Negative interest rates = privately collected wealth tax
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8 comments:
Aren't you a saver, a landlord and a tenant all at the same time? So how does that work for you...
First of all, thank you for being one of the ever-diminishing minority of people who knows how to spell rôle. I get really bored of people who think the letters "roll" are an adequate substitute.
Secondly, yes of course inflation is a tax but isn't there an argument that putting rates up to reduce inflation would reduce the wealth-creating capacity of the economy. Isn't the current state the least-worst?
L, do you mean me personally or yer average household. Yer average household breaks even of course, they gain on the swings what they lose on the roundabouts, but overall there is a transfer from low income/tenants/savers to high income/banks/homeowners-landlords.
I am probably a special case being technically a saver, but actually that is capitalised land rents (i.e. I made a fair amount of cash by selling off my flats and house), so all that inflation is doing is cancelling out some of my ill-gotten gains by transferring money back to the people to whom I sold the flats and houses.
BE, ta for pedant points.
If we hiked interest rates to (say) 4%, thereby reducing inflation to 3% (reinstating the traditional interest rates = inflation + 1% equilibrium), why would that reduce 'wealth creating capacity'?
Most businesses, if they are financed by borrowings at all - which few are, pay about 7% to 10% interest or something i.e. "as much as banks can get out of them". This is way above current interest rates and would not be affected if the BoE increased base rates to 4% and so would not be affected.
Further, if such a move reduced house prices (which well it might) then the money that would have otherwise been transferred from first time buyers to home owners/vendors will go into productive investment instead.
If a business needs constant short term financing at -4% real interest rates it probably needs to go bust.
It's hardly rocket science to borrow for 3 months at 0.75% and buy some 5% long dated bonds, then pay yourself a nice salary until the music stops is it?
SL, according to this, total outstanding business loans are about £150 billion (which i assume includes overdrafts, and excludes lending secured on commercial premises, which are about £250 billion), so the interest bill on that is only £10 - £15 billion a year, less than one per cent of GDP, half as much as Business Rates, it's f- all in the grander scheme of things.
Which I suppose is another answer to Blue Eyes' question - business would be barely effected by interest rate increases (to the extent that there were any, which there wouldn't be) because the volume is so small, it's like businesses wouldn't be much affected if the price of a box of matches trebled.
Oh well, if pedantry's in favour, it should be "least bad" not "least-worst".
A proper saver should be able to get 3% on his savings today, especially if his income is below the personal allowance. The BOE rate is only bad for those who linked their savings rate when it was 5%..if that still exists
Touché dearieme!
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