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Hike Interest Rates And Return Real Working Capitalism Back To Britain

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http://www.cityam.com/article/hike-interest-rates-and-return-real-working-capitalism-back-britain

There are lessons from history. One of the most important is that lowering interest rates and maintaining record government deficits is not sustainable. There is not one credible historical example of the current combination of extreme monetary easing and persistent fiscal deficits succeeding in stimulating growth. At best, these policies will only substitute false government-fed demand for a short time, while fostering conditions for an even bigger depression in the future. Just look at the last two decades in Japan. The UK’s real GDP is lower now than five years ago, and it will not grow sustainably for another 25 years with the current mix of monetary and fiscal policies.

On the other hand, if governments and central banks were to stop deficit spending and hike interest rates (and thus stop the debasement of people’s capital), and if they refuse to feed an over-borrowed economy with ever-cheaper credit, history says the market will clear and the economy will recover.

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Well said. Bravo!

Agreed, but we won't return to real working capitalism until both the government and the banks are safe. Some time in 2016/17 I reckon. The over-indebted will have had the good fortune of a decade of benign circumstances to get their finances back in order. If they're still over-leveraged they're for the chop.

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Ok I'll bite

AFTER the First World War, US industry took out far too much credit. The country experienced a nasty credit bubble and prices, including share prices, soared. Does this remind you of economic conditions anywhere else? The past has direct lessons for Britain, and they suggest that, at its meeting today, the Bank of England’s Monetary Policy Committee should hike interest rates from their historic lows.

From the beginning of 1920 to the middle of 1921, the US faced a truly ugly deflationary collapse, as overheated credit markets blew up and manufacturers produced far more goods than consumers could buy. Stockmarket prices plummeted by about a half, and the collapse in producers’ prices came at the fastest rate in US history -- surpassing even that of subsequent Great Depression.

Did the then US President Warren G Harding increase spending to “stimulate the economy”, as commerce secretary Herbert Hoover demanded (the same Hoover who was President during the Great Depression of the 1930s). Did the Federal Reserve slash interest rates? No. They both did exactly the opposite.

The Fed increased rates and the US government balanced its budget. The over-borrowed went bankrupt, the markets cleared, and 18 months later the US economy was back to full employment. They now call the following decade the Roaring Twenties. But you never hear the preceding deflationary recession talked about by politicians and central bankers. The only reason it was not called a depression is that it didn’t last long enough to qualify.

They then blew an even bigger bubble which led to the bust in 1929. They tried the same trick, and ended up with the Great Depression. Roosevelt got out of it through evil government spending like the Hoover Dam. When he turned it off too early, the US went back into recession.

There are lessons from history. One of the most important is that lowering interest rates and maintaining record government deficits is not sustainable. There is not one credible historical example of the current combination of extreme monetary easing and persistent fiscal deficits succeeding in stimulating growth. At best, these policies will only substitute false government-fed demand for a short time, while fostering conditions for an even bigger depression in the future. Just look at the last two decades in Japan. The UK’s real GDP is lower now than five years ago, and it will not grow sustainably for another 25 years with the current mix of monetary and fiscal policies.

The last two decades in Japan have seen GDP per capita rise at the same levels as US and Europe. Japan's situation are more a function of peak population, an ageing population and a lack of investment opportunities. Naturally companies and household are sitting on large cash piles, which as a matter of accounting will lead to large government debt (your "savings" are someone's debt, if the private sector and households save as whole, who else can go into debt other than government or foreigners? Unsurprisingly the Japanese appear to prefer keep large amounts of their savings in Japan)

On the other hand, if governments and central banks were to stop deficit spending and hike interest rates (and thus stop the debasement of people’s capital), and if they refuse to feed an over-borrowed economy with ever-cheaper credit, history says the market will clear and the economy will recover.

Like in Spain, Greece et al I assume. Vive la recovery.

Due to the Bank of England’s excessively low interest rates policy for the decade before the 2008 collapse, borrowing and lending spun entirely out of control. Eventually the banks collapsed. Households and businesses were left with gigantic debts that some will never be able to repay. The government bailed out the bankers with our children’s money. Remember too that the Bank of England didn’t spot the biggest economic and financial collapse in history. Since then, it has slashed rates further and has kept them at 300 year lows for the last four years to help the economy. Have you seen any real economic growth during the last four years?

If they hadn't done that, you'd have Greece. You don't address that, which is telling.

What is the problem? Keynesian socialists have been in power for decades (with a brief respite in the 1980s). We do not have capitalism. If we did, there is no way we would have bailed out banks in 2009. Capitalism without bankruptcies is like Christianity without Hell.

Could you name these amazing Keynesians? I am struggling to think of one. New Labour are bought and paid for corporatists.

So would higher interest rates help restore capitalism? Yes. The prudent saver would no longer be bailing out the imprudent borrower. Those with savings, who currently receive practically no interest on their capital (despite higher and higher costs of living), would spend in the economy rather than on eating and heating their homes. We would stop handing billions of pounds to banks every year. The cost of living and running businesses would plummet.

If the borrowers default, what happens to the savings? Oh, yeah, they get defaulted on and disappear....Presumably as long as other savers get defaulted on (and not you) it'll be ok

This would be a major step in bringing back real capitalism. By keeping zombie companies and households alive, we sap strength from strong businesses and families. Why should a family from Walthamstow, which earns £30,000 per annum, with three children and a mortgage, pay to keep reckless lenders in a princely lifestyle?

We are finally getting to the heart of the issue, which is one of distribution. Basically you are calling on the government to favour one group over another, whilst simultaneously berating phantom socialists for, wait for it, favouring one group over another.

Capitalism is the only model that works. Ask the Singaporeans or the Scandinavians, or the UK car workers of the 1980s and 1990s. It’s time to bring it back to Britain.

Singapore and Scandinavia is an odd combination. One is absolute free market capitalism, red in tooth and claw, the other is a group of high tax, heavily regulated states. Which should the UK adopt?

I'd agree that the keeping of the bankers in their position is horrifying, but basically at the end of the day your argument boils down to the same thing - "Please Mr. Government, pay me not him". There is not natural state for the economy, everything is defined by government action and regulation and hence ultimately artificial. It'd be a stronger argument if you acknowledged this.

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Agreed, but we won't return to real working capitalism until both the government and the banks are safe. Some time in 2016/17 I reckon. The over-indebted will have had the good fortune of a decade of benign circumstances to get their finances back in order. If they're still over-leveraged they're for the chop.

Agreed on 2016/7 begin the start of the return of real capitalism. If a decade long "get out of jail free card" doesn't work for businesses or individuals then not much will.

(Governments may need 2-3 decades)

Edited by koala_bear

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Could you name these amazing Keynesians? I am struggling to think of one. New Labour are bought and paid for corporatists.

This..

I'm reasonably sure that a genuine Keynesian approach would have been more about getting cash into consumer's hands by wages (and capital investment projects) than throwing epic amounts of credit at the banks whilst pointedly ignoring wages and unemployment.

At the moment policy seems to be to spend perhaps £80 billion a year keeping people unemployed and training a few hundred thousand under-25s for a life of welfare dependency.

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Hike interest rates in the citeh, London and SE for sure.

Cut them in the productive but underemployed parts of the economy. i.e. nearly everywhere else.

The problem isn't rates per se, it's the single currency. i.e. sterling coupled with the power base in Westminster and the Citeh.

Edit: Failing that of course the obvious solution is to raise taxes on assets in London/SE to compensate for the negative real rates. So, wealth taxes on houses, equities, art, wine etc etc. But that doesn't really sort out the underlying problem which is the imbalances in the currency itself, it simply redresses the impact of monetary policy with fiscal policy. Unfortunately the Bullingdon Boys are doing the opposite. With predictable outcomes.

Edited by R K

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This..

I'm reasonably sure that a genuine Keynesian approach would have been more about getting cash into consumer's hands by wages (and capital investment projects) than throwing epic amounts of credit at the banks whilst pointedly ignoring wages and unemployment.

At the moment policy seems to be to spend perhaps £80 billion a year keeping people unemployed and training a few hundred thousand under-25s for a life of welfare dependency.

That's the problem isn't it ?

On the beeb I notice there is a leaning towards anti austerity at the moment.

Do they understand that anti austerity in the terms the IMF talk about it is investment in productive infrastructure to generate long term economic benefits and in that sense more investment to the private sector and not wage stuffing for public sector middle management and retirement funds ?

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The other JD was saying in the Express that high house prices are a good thing though?

;)

TOSH! Read what he was quoted again. And he was misquoted. He said crashing not subsiding.

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TOSH! Read what he was quoted again. And he was misquoted. He said crashing not subsiding.

This is why loads of politicians and actors now, when they are interviewed by journos, insist on voice recording the interview.

Journos increasingly use voice recorders so that the interviewee cannot go back on what was said... but this has resulted in those interviewed, or their personal assistants, plonking down a voice recorder on the table and making their own copy of the interview.

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TOSH! Read what he was quoted again. And he was misquoted. He said crashing not subsiding.

I thought he said they were going to soar!?

:D

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Hike interest rates in the citeh, London and SE for sure.

Cut them in the productive but underemployed parts of the economy. i.e. nearly everywhere else.

Excellent idea RK. I live near London and could really use the additional income I'd get from my savings ;)

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A government, like its predecessor, that behaves in a way that ensures I will never vote Tory again. And there are many more like me. (Obviously I won't ever vote LD or Lab again either. Am guilty of having voted for all of these in the past.)

Edited by inflating

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They then blew an even bigger bubble which led to the bust in 1929. They tried the same trick, and ended up with the Great Depression. Roosevelt got out of it through evil government spending like the Hoover Dam. When he turned it off too early, the US went back into recession.

You are confusing monetary and fiscal policy. From the end of WW1 to the start of The Great Depression, the US government engaged in a fair degree of fiscal tightening and shrank the national debt.

The Federal Reserve raised interest rates significantly during the panic of 1920/1921. After the panic finished and as the economy recovered the Federal Reserve lowered interest rates unti they hit a low of 2% in 1925/1926, resulting in a credit bubble where the money found its way into the stock market (rather like 2000 onward, although the money found its way into land and property).

In other words, raising interest rates at the start of the 1920/1921 panic did not cause the credit bubble that occurred further on (although it did mean the crisis ended quickly and was not drawn out over a decade due to intervention), and it's a little dishonest to suggest otherwise. It was lowering of interest rates after this period that caused the problem.

Further the Hoover Dam was started in 1931, during the Hoover administration (the Hoover administration ended in March 1933). The Fed Funds Rate also hit 2% during 1930/1931.

The last two decades in Japan have seen GDP per capita rise at the same levels as US and Europe. Japan's situation are more a function of peak population, an ageing population and a lack of investment opportunities. Naturally companies and household are sitting on large cash piles, which as a matter of accounting will lead to large government debt (your "savings" are someone's debt, if the private sector and households save as whole, who else can go into debt other than government or foreigners? Unsurprisingly the Japanese appear to prefer keep large amounts of their savings in Japan)

Japan have two options, write down debt, or destroy their currency through a continued policy of attempting to re-inflate. Japan cannot keep issuing ever greater amounts of debt lest their interest payments exceed their revenue, even if they used money printing to keep up (Japan would need to print so much at this stage it would without doubt cause hyperinflation).

Like in Spain, Greece et al I assume. Vive la recovery.

Southern Europe will not recover until the debts are significantly written down. Austerity in conjunction with continued attempts to re-inflate are an absolute disaster.

If they hadn't done that, you'd have Greece. You don't address that, which is telling.

Austerity in conjunction with re-inflation will not work. * EDIT * That's just wrong, there is no austerity, just re-inflation and it's not working.

Could you name these amazing Keynesians? I am struggling to think of one. New Labour are bought and paid for corporatists.

Would "monetary dove" be a better term?

If the borrowers default, what happens to the savings? Oh, yeah, they get defaulted on and disappear....Presumably as long as other savers get defaulted on (and not you) it'll be ok.

People should take responsibility for whom they trust with their savings, rather than abrogating responsibility for the government/central banks to look after them. If people were conservative with where they put their money, realised the danger of excessive lending and the risk it put on their savings, credit bubbles would be less severe.

Aside from that prices would fall massively . As it stands there are people with significant savings completely unable to afford a decent home, ironically, if their savings were wiped out and house prices more than halved they would be in a far better position. The UK would also be more competitive and new businesses would require less start up capital as they wouldn't need to spend so much on rent/land when procurring floor and factory space.

We are finally getting to the heart of the issue, which is one of distribution. Basically you are calling on the government to favour one group over another, whilst simultaneously berating phantom socialists for, wait for it, favouring one group over another.

Singapore and Scandinavia is an odd combination. One is absolute free market capitalism, red in tooth and claw, the other is a group of high tax, heavily regulated states. Which should the UK adopt?

I'd agree that the keeping of the bankers in their position is horrifying, but basically at the end of the day your argument boils down to the same thing - "Please Mr. Government, pay me not him". There is not natural state for the economy, everything is defined by government action and regulation and hence ultimately artificial. It'd be a stronger argument if you acknowledged this.

Money printing and deifict spending also create winners and losers but to a much greater degree (There are plenty of charts on HPC showing the increase in net wealth/wages for the top few percent in comparison to everyone else, since the start of the money printing and bank bailouts). Get rid of central banks and there would be no choosing at all. Far safer and fairer for individual organisations to set their own interest rates based on their deposits, and without the implicit guarantee of central bank or governent bail outs to fall back on.

Edited by GradualCringe

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Hike interest rates in the citeh, London and SE for sure.

Cut them in the productive but underemployed parts of the economy. i.e. nearly everywhere else.

The problem isn't rates per se, it's the single currency. i.e. sterling coupled with the power base in Westminster and the Citeh.

Edit: Failing that of course the obvious solution is to raise taxes on assets in London/SE to compensate for the negative real rates. So, wealth taxes on houses, equities, art, wine etc etc. But that doesn't really sort out the underlying problem which is the imbalances in the currency itself, it simply redresses the impact of monetary policy with fiscal policy. Unfortunately the Bullingdon Boys are doing the opposite. With predictable outcomes.

You never struck me as a follower of Hayek.

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They then blew an even bigger bubble which led to the bust in 1929. They tried the same trick, and ended up with the Great Depression. Roosevelt got out of it through evil government spending like the Hoover Dam. When he turned it off too early, the US went back into recession.

there were many in the roosevelt administration that would disagree with you, and in fact if you look at the private part of the US economy, it didnt start growing until 1949ish when the public spending taps were turned off and people were allowed to invest without restrictions again.

The last two decades in Japan have seen GDP per capita rise at the same levels as US and Europe. Japan's situation are more a function of peak population, an ageing population and a lack of investment opportunities. Naturally companies and household are sitting on large cash piles, which as a matter of accounting will lead to large government debt (your "savings" are someone's debt, if the private sector and households save as whole, who else can go into debt other than government or foreigners? Unsurprisingly the Japanese appear to prefer keep large amounts of their savings in Japan)
true enough - japan hasn't been as much of a disaster as the press they get but for they are an example of how to dig yourself into a really deep hole. I would argue that it hasn't competely played out yet that one.

On the other hand they certainly are not growing like they used to.

Like in Spain, Greece et al I assume. Vive la recovery.If they hadn't done that, you'd have Greece. You don't address that, which is telling.
greece and spain etc are an example of the kind of problems you get when you need to devalue, but don't have a floating currency. The the market has to clear through unemployment and falling wages, which is much much more painful
Could you name these amazing Keynesians? I am struggling to think of one. New Labour are bought and paid for corporatists.
true, but then I dont think there were ever any "real" Keynesians. No politician wants to run a surplus during the good times.
If the borrowers default, what happens to the savings? Oh, yeah, they get defaulted on and disappear....Presumably as long as other savers get defaulted on (and not you) it'll be ok
Singapore and Scandinavia is an odd combination. One is absolute free market capitalism, red in tooth and claw, the other is a group of high tax, heavily regulated states. Which should the UK adopt?
scandinavian coutries are actually pretty lightly regulated compared to the UK. Really, and they certainly have a much more localised mix of spending, which leads to less corruption and waste - all other things being equal.
I'd agree that the keeping of the bankers in their position is horrifying, but basically at the end of the day your argument boils down to the same thing - "Please Mr. Government, pay me not him". There is not natural state for the economy, everything is defined by government action and regulation and hence ultimately artificial. It'd be a stronger argument if you acknowledged this.

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You are confusing monetary and fiscal policy. From the end of WW1 to the start of The Great Depression, the US government engaged in a fair degree of fiscal tightening and shrank the national debt.

The Federal Reserve raised interest rates significantly during the panic of 1920/1921. After the panic finished and as the economy recovered the Federal Reserve lowered interest rates unti they hit a low of 2% in 1925/1926, resulting in a credit bubble where the money found its way into the stock market (rather like 2000 onward, although the money found its way into land and property).

In other words, raising interest rates at the start of the 1920/1921 panic did not cause the credit bubble that occurred further on (although it did mean the crisis ended quickly and was not drawn out over a decade due to intervention), and it's a little dishonest to suggest otherwise. It was lowering of interest rates after this period that caused the problem.

Further the Hoover Dam was started in 1931, during the Hoover administration (the Hoover administration ended in March 1933). The Fed Funds Rate also hit 2% during 1930/1931.

Had a look at Wikipedia and it does not seem so clear cut

http://en.wikipedia.org/wiki/Depression_of_1920%E2%80%9321

http://en.wikipedia.org/wiki/A_Monetary_History_of_the_United_States

Anyway, thanks for that will have another look at it. My point is that simply saying burn everything down, it will right itself over time. In the 1930s it didn't, which is where, IIRC, Keynes's "In the long term we are all dead" quote comes from. He was agreeing that in the long term the economy would right itself, but in the long term we are all dead - i.e. the amount of time it would take was not reasonable.

Japan have two options, write down debt, or destroy their currency through a continued policy of attempting to re-inflate. Japan cannot keep issuing ever greater amounts of debt lest their interest payments exceed their revenue, even if they used money printing to keep up (Japan would need to print so much at this stage it would without doubt cause hyperinflation).

Why is Japan going to write down the debt? It is their pensions.....the issue isn't paying the debt, the issue is how much of the young's productivity are they willing to hand over to their parents? It should also be remembered that Japan has the lowest (IIRC) tax of OECD countries - they have room to maneuver even if I am wrong and they cannot control the yield

Southern Europe will not recover until the debts are significantly written down. Austerity in conjunction with continued attempts to re-inflate are an absolute disaster.

Southern Europe's problem is that they are a part of the Euro. Here I agree, they need to exit and default. Governments must take responsibility for their own destiny by being sovereign in their currency and ensure that very little (preferably no) debt is held in foreign currencies.

Austerity in conjunction with re-inflation will not work. * EDIT * That's just wrong, there is no austerity, just re-inflation and it's not working.

Austerity doesn't work because the problem is a private debt problem. As the economy went into freefall because of private debt problem, the deficit naturally ballooned. It is an effect, not a cause. As the economy recovers, the deficit will reduce as we will see in the US over the coming years and we saw during Koizumi era in Japan.

People should take responsibility for whom they trust with their savings, rather than abrogating responsibility for the government/central banks to look after them. If people were conservative with where they put their money, realised the danger of excessive lending and the risk it put on their savings, credit bubbles would be less severe.

1. I disagree, some people are too dense - there needs to some form of government backstop, I think the current guarantee is sufficient and the government should have done a managed bankruptcy with the banks and started again. They bailed out the banks, they should have bailed out households (where necessary). Where we would part company would doubtless be the level of govt support.

2. The history of the 19th century had many banking panics and no government back stops - I think history is against you on that one.

Aside from that prices would fall massively . As it stands there are people with significant savings completely unable to afford a decent home, ironically, if their savings were wiped out and house prices more than halved they would be in a far better position. The UK would also be more competitive and new businesses would require less start up capital as they wouldn't need to spend so much on rent/land when procurring floor and factory space.

Stand for election on the platform of having savings wiped out in exchange for a cheaper home and see where it gets you. Again you are arguing for the government to pay one sector of society instead of another - so much for your free market.

Money printing and deifict spending also create winners and losers but to a much greater degree (There are plenty of charts on HPC showing the increase in net wealth/wages for the top few percent in comparison to everyone else, since the start of the money printing and bank bailouts). Get rid of central banks and there would be no choosing at all. Far safer and fairer for individual organisations to set their own interest rates based on their deposits, and without the implicit guarantee of central bank or governent bail outs to fall back on.

Yes, the increase started in the 1980s, not since the bailouts.

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Had a look at Wikipedia and it does not seem so clear cut

http://en.wikipedia.org/wiki/Depression_of_1920%E2%80%9321

http://en.wikipedia.org/wiki/A_Monetary_History_of_the_United_States

My point is that simply saying burn everything down, it will right itself over time. In the 1930s it didn't, which is where, IIRC, Keynes's "In the long term we are all dead" quote comes from. He was agreeing that in the long term the economy would right itself, but in the long term we are all dead - i.e. the amount of time it would take was not reasonable.

Oh thank goodness for that. We're all OK then. Behave.

In the 30s it didn't right itself bcos Govt and CBs got in the way. Er...

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Interest rates won't go up until they bring in a new higher "unearned income" tax. The governbankment will want their share if/when that income goes up.

Ireland's DIRT was 27% in 2011, 30% in 2012 and 33% in 2013. Gidiot cannot have missed that.

http://www.citizensinformation.ie/en/money_and_tax/tax/tax_on_savings_and_investments/deposit_interest_retention_tax.html

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  • 238 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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