Tuesday, 10 March 2015

Everyone's a loser.

In Moneyweek Matthew Lynn makes the point that, if interest rates don't go up soon, they might never go up at all.

It's been six years since the Bank of England took interest rates down to near zero as an "emergency measure", and during that time, people have got used to the low rates. They have become the new normal. When rates go up, an awful lot of people will feel the pain, but, more importantly, almost no-one will feel the gain. This is because savers, too, have got used to the low rates and have spent years putting their money into something that pays a better rate of return than an interest-bearing bank account. So with so many losers and so few winners, why should a government ever want to put interest rates up again?

It's also starting to look like the "new normal" is pretty like the "old normal", with the high interest rates of the end of the twentieth century being just a blip, but, more ominously, it looks like the high home-ownership rates and low house prices of that same period may be a blip too and the "unaffordable" house prices of today are here to stay. Not so much back to the future as forward to the past.

17 comments:

Curmudgeon said...

Actually I'd say there's still a huge amount of money tied up in deposit accounts earning paltry interest. Older people are well-known to be risk-averse, and until recently you couldn't move money from a cash ISA to an equity one.

Having said that, the base rate would probably have to go up to at least 1.5% before there was any noticeable movement on savings rates.

Rich Tee said...

I've reached the same conclusion. It is a problem for me because I planned my life on the basis that I could delay buying when young and then buy a small flat when older.

Older people are more likely to vote, and they are more likely to own their homes outright, so they gain the most from high house prices. There is no hope in sight as far as I'm concerned.

Yet the politicians will still be baffled why so many people won't vote for them.

Lola said...

I don't buy that. Long run 'normal' interest rates are in the range 2% to 4%, for basically instant access money.
Market forces dealt with high interest rates, and they will deal with low interest rates.
The long run interest rates, before about 1914, were set by the 'market'. Rates since about then have been set by central banks, and their track record in setting the 'right' rate has been woeful.
Governments have been using central banks power over our money to fund their gerrymandering welfare state programmes. These are now being funded by foreign borrowings. The 'market' knows that this is unaffordable and the reckoning will come when our creditors want their money back.
It's not going to be pretty.

Mark Wadsworth said...

B, the post-war lowish house prices and rapid increase in owner-occupation levels had nothing to do with the level of interest rates, or is this just an example of how things can change back again?

Bayard said...

Yes, while I'm not trying to claim that low interest rates in the past caused the low house prices and high owner-occupation levels, I do reckon that low interest rates in the future will act against a return to that situation.

L fairfax said...

Is there an alternative to low interest rates to keep the economy from flatlining.
Would higher interest rates and a small amount of money printing to cut payroll taxes be a better idea for stimulating demand and stopping deflation (lets assume that deflation is bad)? The increase in employment should take away the pain for borrowers.

Lola said...

LF. There is a whole literature as to how to deal with situations like this. And money printing isn't in them anywhere. Nor are artificial interest rates - or rate rigging as I prefer to think of it.

The booms are caused by bad loose money, so you cannot solve them with more bad loose money. The malinvestments made in the boom have to be unwound and prices (including wages) have to adjust - downwards. Getting this over and done with quickly is always better then trying to stop it, as all you can do is delay it in the certain knowledge that when the bust does eventually come it will be far, far worse.

L fairfax said...

@" Getting this over and done with quickly is always better then trying to stop it, as all you can do is delay it in the certain knowledge that when the bust does eventually come it will be far, far worse"
Not from a politicians' point of view if someone else will be in charge when the bust comes.

Lola said...

LF - Good point, you little old cynic you.

Ralph Musgrave said...

The word “normal” in relation to interest rates is wholly illogical. It was “normal” in the Middle Ages to hound old women accused of being witches. That doesn’t prove that witch-hunts are desirable.

Having government interfere with interest rates is not a good way of adjusting aggregate demand because it brings DISTORTIONS. That is, an interest rate cut expands only loan based activity, not non-loan based activity.

Milton Friedman and Warren Mosler advocate/d having the state borrow NOTHING and adjusting AD by adjusting the amount of base money in private hands. As to interest rates, Friedman and Mosler advocate/d leaving that to market forces. I agree.

Ralph Musgrave said...

Lola,

Re your "malinvestment" theory, I've heard that one a million times from Austrians. Austrians never seem to understand that we do not need to endure a bust in order to get rid of malinvestments. Reason is that even during a boom, a thousand businesses close per week and are replaced by a thousand new businesses. Malinvestments are being disposed of all the time, regardless of whether we're in a boom or a bust.

Lola said...
This comment has been removed by the author.
Lola said...

RM. Nope. Your logic is flawed, again.

paulc156 said...

"These [welfare programmes]are now being funded by foreign borrowings"

1. Welfare programmes? But defence spending, the judiciary and foreign aid are all funded domestically. ;)

2. 70% of our debt is held by domestic institutions and individuals.

paulc156 said...

Above post was in response to Lola.

Lola said...

P156. Indeed. The point I was making - badly - is that we are living above our means and that non-uk institutions hold a lot of UK debt. At some point that 30% you identify will think aye aye this doesn't look good and ask for their money back or require a much higher return. Something will have to give.

Bayard said...

"The word “normal” in relation to interest rates is wholly illogical."

If I wanted to say something was desirable, I would have used a word like, er "desirable". Anything becomes normal (or "the new normal", which was the term I actually used") if it go on long enough for people to get used to it. People get used to all sort of undesirable things, like crap politicians, inefficient bureaucracies, high levels of taxation, government waste.