Carney, Wrong, Wrong, Wrong
The Bank of England under the auspices of Mark Carney has reduced interest rates down to their lowest level ever, or 0.5% just to clarify half of one percent.
The reasoning is, to stop UK going into a recession.
since the Lehman Brothers crash
It is a strategy that satisfies only in the short term, and is wrong, as all the previous interest rates have done since the Lehman Brothers crash.
If Her Majesty’s Treasury, and hence the Bank of England wanted long term growth, then interest rates would have been handled in a completely different manner.
Certainly instead of cutting them, they should have gone up, and be ready to go up again, but that would have meant the Government having a long term strategy, it hasn’t, it’s short termism, so again wrong, and doing nothing for UK industrial and commercial growth.
The reasoning behind the B of E’s interest rate cuts, is to stimulate consumer spending and keep the economy from going into recession, it works, but does little for industrial growth.
It has been the policy of all Governments right back to 1945, but is now starting to run out of steam, the reason, simple there are not the savings, to invest in Capital spending.
H.M. Treasury is directed by the Government of the day
Mark Carney the Governor of the B of E, gets his direction from H.M. Treasury, and H.M. Treasury is directed by the Government of the day, and every man jack of them has followed the same short to medium term policy, keep consumer spending going, to keep UK from hitting the recession buffers.
What utter codswallop, it leads to a lack of savings, so putting it on the wrong side of history, this can also translate into increased debt, again a wrong strategy, and with the UK it is the case.
At this point please note, most of what I write about UK also applies equally to USA, although American savings have been just a tad higher and the Trade deficit in percentage terms has not been quite so bad as UK, but US readers can draw the same conclusions, for B of E read the Federal Reserve, for Mark Carney read Janet Yellen, and for ISA read Roth IRA.
Now before we go further it must be pointed out, that at least there has been some attempts by the various Governments to increase savings, not least the ISA scheme, where at least one can save £15,400 per year, and not get hit by the regular taxes. Indeed you can have either a cash ISA, or a Shares ISA, and the shares side of it, has created a few £Millionaires, who have been very savvy with the particular stocks they have purchased, and made sure all the dividends are reinvested, and that is the trick. Keep re-investing the divis and interest starts to build on interest.
Pensions, these were first promoted enthusiastically, back in the mid 1970s, but the backing for pensions has been patchy, Gordon Brown famously stripping £Billions from them, by stopping tax relief, which meant either one paid extra with each monthly payment, or one received less in retirement, and this could be drastic, if you were in your 20s to 40s. Hence why Teachers got it wrong with the general public, and didn’t get the backing they thought was their due, when it was announced they would receive, 10% less pension when they retired, many private sector workers, who had paid into their pensions for years, thought why didn’t I only having a paltry 10% cut?
doesn’t increase the amount individuals have in their rainy day kitty
So people in UK don’t have enough saved in their pensions, along with too few savings all round. Hence why the banks don’t have the cash to lend to industry? But the Government has supplied them the money to lend I hear you cry. Well yes, but that doesn’t increase the amount individuals have in their rainy day kitty. It is this that makes the difference, because, if you have Amy Ambitious, goes along to her bank to buy kit for her ~super duper gizmo company~ and has only her few savings, the bank is, quite rightly, going to want to know how much she can put up as collateral.
At this point I break the story, here is the alternative scenario, instead of an interest rate cut, increase interest rates.
Put interest rates up? Has the man gone bonkers?
It is one of the key avenues to stimulating savings, yes I realise the Government also needs to enact other incentives, like tax breaks, but increasing Interest rates can boost industrial investment, especially in Capital equipment. This leads to an increase in productivity, and hence to an increase in real wages. It also has the effect of lowering overall debt, and with an increase in commerce and trade, it can lead to a reduction in the trade deficit.
There is a downside, and that is a drop in consumer spending, but even this has a positive side, which is reduced imports, the whole reduces the trade deficit, and as I have previously posted, that should be high on the agenda.
In fact a prime reason for increasing interest rates, would be to increase investment in UK, but at the same time, this should also bolster, savings, which brings us back to Capital.
In Economic terms Capital is both savings, and can also refer to major company purchases, and here we hit one of the many economic conundrums. Let’s say Amy Ambitious’ super duper gizmo company, decides to buy in a new 3D printer, purchase cost £100,000 and then sack 50% of its staff. But the purchase of this piece of kit, makes the company much more efficient. What happens? Well they sell more product, but the nature of selling more product, more efficiently means more people can afford more ‘super duper gizmos’.
This is precisely what happened with Calculators, the first ‘All’ electronic calculator was built and sold by Sharp, the Japanese Electronics company, it retailed for around $240 which translated into just over 3 weeks wages in USA.
One desktop calculator, three weeks wages?
Sharp started making big money, and large profits, and were soon joined in the game by other competitors. Who started to undercut Sharp, by offering slightly better designs, and improved ‘functions’.
this was all done with ever diminishing retail prices
The important thing to note is, this was all done with ever diminishing retail prices, but yet, companies were able to afford to borrow money to invest in capital equipment which gave huge profits, so there could be money for Research and Development (R & D), and this led to ever cheaper calculators, and drove some once profitable companies out of business, leading to people being sacked, or left unpaid for their work.
But these newer companies could trade on smaller prices, and still make large profits, all due to the fact people had saved, and so the banks had money to lend that they needed to turn a profit on interest, so they could pay their savers higher interest on their savings. And indeed they lent to businesses who then invested in machines that could produce more products using fewer people. So much so, you can go into a Pound/Dollar shop and buy a calculator that has more functions than some computers in 1968?
Now here’s the conundrum, there are more people today, employed in manufacturing, pocket calculators, than back in 1968.
These people have a higher disposable income than those employed in 1968, even where tsome are paid only a pittance relative to UK/USA earnings? You can buy a calculator that will perform all the calculations you may need, all for less than a cup of coffee, at a choke and puke café on the local by-pass, for US readers that translates as ‘Greasy spoon’ just off the freeway! But no conundrum the percentage of the workforce with permanent employment, is highest where it is easiest to sack people.
On top of all this, the Bank of England has just started a new round of Quantitative easing, which has gone down like a lead balloon, and is not the stairway to heaven Mark Carney envisaged.
Now for those who don’t know, quantitative easing is where the Central banks buys large amounts of bonds from the Pension and Insurance funds, the bonds equate to debts, and the idea is the funds then can use that, money which was previously debt and now translated into cash, to invest in buying stocks.
There is a problem, all pension funds, are required by Law to have a spread of risk, but also to maximise its returns, now the rules are by nature complicated, because in the UK when you take out a pension, you can elect how much risk you wish to take, and then each pension fund, decides how to spread that risk, and which investments it will put YOUR money into, along with its astronomical administration fees, the pension then grows, on top of the input, of monthly deposits you place into your pension pot.
Fred Karno, sorry Mr. Carney
So along comes Fred Karno, sorry Mr. Carney and the Bank of England Mark Carney SkyNews and they want to translate debt, into cash, so that the banks have money to lend to industry and commerce. They do this by buying long dated gilts, or Government debt, the famous National Debt, from the Insurance companies, Pension funds, and other large Financial organisations who invest on a large scale. Nice idea, but it has a fatal flaw, John and Jane Public aren’t saving more, so debts keep mounting. Yes it reduces the national debt and translates that money into cash, but it avoids a fundamental, of the individual and their friends and family having more capital, and this is the true driving force of increasing GDP per capita.
GDP in UK should be higher, but more to the point should be improving faster than it is. It is stuck in a rut, and it is not dissimilar in USA, and the way out of that rut, is to sacrifice consumer spending for higher savings, this may well cause a temporary recession, but the upside more than compensates for the downside.
Quantitative easing is failing, because the Bank of England, has got it wrong, and is trying to get the big investment institutions to reduce their, returns on capital employed, which in fact breaks their contracts with the people they are their to serve, namely me and thee.
There is also the fact that buying long term gilts is trying to reduce the National Debt, but also the cost of repayments of those debts, nothing wrong with that, but why not boost savings, this will reduce consumer spending, which reduces imports. This combined with increasing the wealth of individuals, because they are saving more, and enables them to invest in a friend or family member who is trying to get the ‘Super duper Gizmo company’ or what ever their idea is, off the ground.
Will Mark Carney in the coming months look to increasing interest rates, stop it, he is a safe pair of hands, plus most important it is not in his remit, that is the new Chancellor of the Exchequer, Philip Hammond, and while he may well put some emphasis on savings, this will be tinkering, because the big push in increasing interest rates will not arrive.
This Government like all the Governments since 1945, will get it wrong.