Thursday, Aug 20, 2009
Debtors rejoice! Foolish savers!
Guardian: Low interest rates are here to stay, City predicts
Bank of England gives strong hint it may again expand its policy of flooding the economy with money. Expectations were growing in the City tonight that interest rates could remain at historically low levels for years after the Bank of England gave a strong hint that it might again expand its policy of flooding the economy with money.
Posted by quiet guy @ 01:00 AM (2330 views) Add Comment
31 Comments
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1. hpwatcher said...
It's a stupid speculative article, just wait for the waves of inflation.
2. taffee said...
mervin king is desperate,he realises if we don't inflate the economy its years of deflation
Dear mervin
When you have years of assets bubbles due to huge over supply of money,the way aftermath cannot be dealt with by creating more of the same.
Let businesses fail,allow asset deflation and increase interest rates to encourage saving
3. mark wadsworth said...
Interest rates might stay low for years (who knows) but there'll be a lot of unpleasant surprises for people coming of fixes and trackers in the next couple of years as well.
4. japanese uncle said...
Yes, until there will be an inevitable run on GBP. UK cannot afford low IR as Japan can.
5. uncle tom said...
taffee - I tend to agree - The growth of the money supply during the boom years was really alarming, and trying to maintain and expand the money supply further while the economy is in contraction, does look like a recipe for a currency crisis, leading to inflation.
Can any of our graph gurus rustle up a bar chart that shows the money supply of different countries, as a percentage of GDP?
It would be interesting to know where we stand, relative to other nations..
6. bluebeach said...
Exactly whose ar$e is Merv at the Bank of England trying to save.... the working people of GB, Gordon's, or his own? To say that a political party now has no involvement in the setting of interest rates is tosh.... The reason they are staying low is in order to save the unelected Scottish duo and ensure another term... with the blessing of those on benefits, who now incidentally, pull more out of the system than the total income tax take of this country!!
Will the Tories bend Merv the Swerves arm in raising rates? Or will it all be game over by then and the county fecked for years to come...
7. mountain goat said...
"Debtors rejoice! Foolish savers!"
It really is becoming harder and harder to save. Given the recession and budget deficit, taxes can only rise in the future and wages fall. Tax-havens are under more scrutiny than before. There is hardly a safe bank to be found, and interest rates are puny. Safety deposit boxes are liable to raids by the police looking for "criminal stashes". Gold and silver are the most manipulated markets in the world. It is still possible to buy foreign currency but for how long? In South Africa (where my mum lives) she is unable to buy Euros without producing an airline ticket to Europe.
Unfortunately I agree with the article headline, interest rates are going to stay low for years as the mountain of debt slowly grinds the life out of our economy. Inflation seems like a relief under this scenario. Sorry about the dark assessment, no point in kidding ourselves though.
8. paul said...
I've commented on this article on the Guardian website.
Actually, as prudent savers we have something to be happy about here.
If interest rates are going to stay low, it means inflation is also going to stay low. Deflation is GREAT for savers. It actually inflates the value of your savings - take the currently negative RPI and add that to the deposit rate you are getting - that's the actual rate you are receiving.
9. alan said...
I was wondering about the chance of a run on the pound. Could this happen? we still seem to be spending beyond our means. Much of the fruit & veg in Morrison's supermarket comes from beyond our shores.
Will the prospect of a run be lessened by Germany pumping money into their bit of the Eurozone or Obama overspending and pushing up debt levels in the USA?
Won't the prices of commodities rise to make allowances?
@3 Mark,
Building societies are now offering savers better deals - does this indicate the abandonment of the Standard Variable Rates in future?
10. quiet guy said...
@paul 08:53
You make a good point. Personally, I am struggling to contain my scepticism about the deflationary threat and suspect that inflation will creep up on us. I admit that my position is caused more by visceral distrust of the authourities rather than intellect but I just can't shake of my suspicion that debtors will be bailed out to get our consumer economy going again. Whatever the cost.
11. paul said...
quiet guy
I'm quite sure the Bank of England would love to bail out debtors. I'm sure they'd gladly crap on savers to do it too - they did it before in the 1970s. Trouble is, the wheels have only just fallen off that debt-driven consumption wagon last year.
The Bank of England is still trying to put the wheels back on, thinking that the Japanese somehow didn't do it quite right.
Stand back everyone! Mervyn King's about to learn an important lesson.
12. inbreda said...
the comments under the article suggest that 99.999% of guardian readers don't buy this BS.
It really is time to take all of your money out of these sh1tty banks.
gordon or gold.
13. mander said...
King has been growing increasingly concerned that with the banking sector still in trouble, households carrying enormous debts and unemployment rising strongly, Britain risks the kind of "lost decade" of deflation that Japan suffered in the 1990s rather than a return to high inflation.
QE did not work in Japan so the only solution still remains to drop the house prices by 30-40% where credit worthy people become credit worthy for all the banks not only for the Bank of China. Transactions will double and we will have full economic activity. Or wait 10 years to get in same place and have printed 2000 billion pounds.
14. mrflibble said...
The more this charade goes on the more my desire to hold Sterling diminishes. Why any foreigners would hold our currency is still beyond me, it's risky and the rewards are rubbish.
15. hpwatcher said...
It's all about getting people to spend.....that's one reason why interest rates are so low.
16. uncle tom said...
I am sure the BoE means well, and as Merv & co. will still be there when this Govt. is thrown out, I doubt they are falling over backwards to conspire with the current incumbents of Downing St.
Whether they really know what they are doing though, is another matter; and I get an uncomfortable feeling that they are placing too much faith in abstract and untested theories.
The persistant uncertainties in the banking sector don't help - has anyone ever managed to properly tally the UK banks exposure to the opaque debt instruments that kicked off this recession? - or work out how long it will take for them to reach maturity, and reveal their true worth?
17. Mark Wadsworth said...
Paul said: "Deflation is GREAT for savers"
That's how I (and no doubt lots of other sell-to-renters) console myself. The interest I'm getting is no more than CPI, but slightly more than RPI (which is negative, allegedly) and a hack of a lot more than the amount by which house prices are falling (seeing as my stash is earmarked for the purchase of one large unit of housing).
@ Alan, that I don't know. It's all guesswork from here on in, and it's not like Mervyn King has a clue what to do either.
18. stillthinking said...
UK isn't supported by external demand for sterling and less so with extraordinary levels of government debt, and if interest rates are low I don't think that will prod savers into spending, at some point they will look for a more reliable store of value. They haven't so far of course, but that could be because savings for many are tied up in inaccessible pension funds.
Devaluing on an ongoing basis while watching domestic inflation in an environment of global oversupply is going to work right up to the point that it doesn't, and this import inflation will constitute a supply shock and tip us into stagflation. I don't see wage inflation occurring before this particularly with government cuts, and a new batch of unemployed, coming in less than a year.
Poor old savers. They were always the only ones with any money.
19. alan said...
@ Mander,
You could get part of your wish in the next 6 weeks. House prices must fall in August & September in my area (Essex, ajoining M25). Lots of new sellers and few people with 20-25% deposits. Buyers market -> prices drop!
20. mander said...
alan,
Wish you luck if you're looking to buy. You may be right some areas will be flooded with properties more than others but this is the best time to sell and I think that next year confidence in a housing recovery will completely disappear.
21. uncle tom said...
"UK isn't supported by external demand for sterling"
Erm.. we create the demand through our balance of payments deficit, which supports our inability to make as much as we consume.
That in itself is an indicator that Sterling is overvalued globally.
A problem that we may well face, arises from our lack of relevant skills and facilities to promptly resume UK manufacture when a rise in import prices makes it theoretically cost effective to do so.
It is possible to get caught in a spiral whereby Sterling falls because of a lack of confidence, which in turn pushes up import prices, worsening the balance of payments and thereby pushing Sterling further down. At the same time, the rise in import prices levers inflation upward.
Such a spiral would normally be arrested by a rise in exports, supported by a more competitive position; but I am not convinced that this nation can produce sufficient exportable product, without a considerable time lag.
This puts us in the Zimbabwe situation, where political mismanagement led to a collapse in agricultural exports, and a nation that no longer had the management skills to resume them when their currency collapsed.
22. mystie010 said...
Call me a conspiracy theorist - but I honestly believe the BoE is just plain lying about keeping low rates. If you remember not so long ago the BoE was saying that rates were rising and would probably continue to so so for a long while. And look what happended! I would take this as as signal that they are trying to drain the last drop out the housing market and just when everyone thought it was safe to go back into the water I reckon they will jack up rates again just as quickly or if not quicker than they lowered them. You may think I'm crazy but let's just wait and see. Remember what I said in a few months time.
23. mystie010 said...
I Should have also added to my post (21) Long term savings rates are steadily going up and the last time I saw this it was a precursor to the base rate rising, the clues are there, we are all being played for mugs!
24. mark wadsworth said...
Mystie, that is a bold prediction indeed, but you are right - they did a complete 180 degree turn around in late 2008.
If anybody had predicted a base rate of 0.5% in mid-2008 they would have been laughed at.
I hope you're right about this.
25. Qed said...
The real problem of the UK economy is low productivity. This low productivity is due to: (a) general incompetence of the British (especially in engineering and in any difficult disciplines) and (b) under-investment, especially in infrastructure.
Because of the above, UK's labour productivity is 85% of that of France. That is one day per week. The French require 4 days to generate the same output that the lazy and incompetent Brits, who struggle with outdated infrastructure, manage in 5.
If the French stay home on Fridays, it is not because they are lazy. It is because they can.
In the UK, the concept of preventive maintenance is virtually unknown. You do not fix or upgrade anything until it is too late. The UK obsession of 'value for money' means that public infrastructure spending is constantly cut and lags behind the needs of the economy. Proactive infrastructure planning is unknown.
Yes, it is possible to save yourself to poverty.
Look at Scandinavia. Their infrastructure would make the British weep. Public transportation is excellent, modern, efficient, and costs only a fraction of that of the UK, for the same amount of public subsidy. The standards of living there are much higher, in spite of the fact that they have to build their infrastructure to sustain harsh winters.
Because of their investment in infrastructure, they are much more efficient and enjoy significantly higher standards of living than the Brits do. Their education is free and high quality.
Productivity is the key.
26. jack c said...
valid point raised by mystie010 which might just go to prove that they havent got a f*****g clue what they are doing !
27. uncle tom said...
"Call me a conspiracy theorist - but I honestly believe the BoE is just plain lying about keeping low rates"
Hold on Mystie, its not the BoE making that prediction, just some nobodys in the City who want their fifteen minutes of fame.
The BoE does not make long term predictions about Bank Rate, but they do report the consensus view of the markets, which is currently projecting a rise to 1.5% by mid 2010
28. inbreda said...
it would certainly explain why the banks are offering such pitiful rates on accounts where you can remove the money easily, and pushing everyone into long term fixes. I think a lot of people will get burned by locked in savings rates over the next few years.
29. mr g said...
@8
Agree entirely with your assessment.
@26 "I think a lot of people will get burned by locked in savings rates over the next few years"
Do I understand from that, that you expect IR's going through the roof?
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