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What Do They Think Slashing Interest Rates Will Achieve?


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Let's assume they slash base rate to, say, 2%. And, one way or another, mortgages get a lot cheaper.

So, credit is, once again, cheap.

But I keep hearing that it isn't the PRICE of credit that is the problem, it is the AVAILABILITY of credit.

How does lowering interest rates to the point where it is literally not worth saving any money - because the money is devaluing every day - increase the AVAILABILITY of credit?

So banks start lending to each other again - and lending to us - at lower interest rates. Where are they going to get the money from to lend? Presumably securitization of debt - re-packaging debt and selling it over and over again - lowering capital adequacy in the process - is not going to be allowed to happen again. This almost caused a systemic banking failure - or will this be conveniently forgotten now - and the whole nonsense allowed to start again. Will Applegarth be invited back to show us all how to take a bank into bankruptcy in the quickest way possible?

So, lowering interest rates will make the cost of servicing existing debts cheaper. But where is the money going to come from for new lending?

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The problem is the exponential interest payments to depositors.

If they don't get new money made to pay off the old money, they can't pay the depositors except by printing it. he depositors aren't idiots and will want a higher interest rate to compensate for the printing, which means they have to get more debt slaves into the system to pay them.

They can't win and we will have hyperinflation either way.

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Let's assume they slash base rate to, say, 2%. And, one way or another, mortgages get a lot cheaper.

So, credit is, once again, cheap.

But I keep hearing that it isn't the PRICE of credit that is the problem, it is the AVAILABILITY of credit.

How does lowering interest rates to the point where it is literally not worth saving any money - because the money is devaluing every day - increase the AVAILABILITY of credit?

So banks start lending to each other again - and lending to us - at lower interest rates. Where are they going to get the money from to lend? Presumably securitization of debt - re-packaging debt and selling it over and over again - lowering capital adequacy in the process - is not going to be allowed to happen again. This almost caused a systemic banking failure - or will this be conveniently forgotten now - and the whole nonsense allowed to start again. Will Applegarth be invited back to show us all how to take a bank into bankruptcy in the quickest way possible?

So, lowering interest rates will make the cost of servicing existing debts cheaper. But where is the money going to come from for new lending?

I wouldn't worry about it. It's finished. We're done. There was an idiot on BBC this morning who claimed the best way to stop a crisis caused by unbalanced LTV lending was for the banks to increase the LTV ratios again.

This educated person's best solution was to deal with out of control lending by out of control lending. This ends only one way.

AND THAT'S DOWN THE PAN.

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i'm leaning more and more to think that this is going too all end in war.

the uk/us is yet to default, what if they do? interest rates like iceland? there is going to be a massive clamour for international investment, and the superpowers will use force to get it.

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Agree on all the above. But we even have Lawson and K Clarke, come back from the political grave, who both operated in governments which shoved interest rates up to 15% now claiming that cuts are the order of the day. I find it breathtaking that they do not recognise the inconsistency and hypocracy of their positions. I don't think a single pundit has yet appeared (or dared to appear) on a mainstream broadcast to argue the case that interest rates should either stay put or go UP, not down. Yet there simply must be many thousands of reasonably savvy people with media access who think that rate cuts will at best do nothing and at worst will be a disaster. Where are they? Why are they not being invited on to the programmes or asked to write for newspapers?

The current accepted solution of cutting rates has now become so deeply entrenched that it has to be a virtual thought cartel. Instead of a good dose of castor oil to help clear the illness, the world's spivs and moneymen are now seriously speaking in one voice that the medicine be ditched and the masses fed yet more opium. Madness and stupidity!

VP

Edited by VacantPossession
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they will print it.... higher inflation here we come...

Who will print it? This is the bit that puzzles me. How is lowering interest rates going to increase the availability of credit?

Why does the government bother taxing us? Why not just print money to run the public services?

Why do economists keep saying that the money the government is putting into the banks is going on to the government's debt figures? Or not ... or is being fudged ... but it is accounted for somewhere.

So, what is the mechanism for 'printing money'? How does it get into the system? My understanding is that broad money supply has been running at 13%/14% for some years. i.e. the total amount of money in the economy has been doubling every 6 years or so. Normally this would cause high inflation, but didn't because of globalization. Instead it caused massive asset inflation.

So, all the extra money turned into debt.

But, surely, they can't keep that up. The banks are supposed to be lending sensibly now. So, if the government 'prints money' - how will it get into the system now?

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Who will print it? This is the bit that puzzles me. How is lowering interest rates going to increase the availability of credit?

Why does the government bother taxing us? Why not just print money to run the public services?

Why do economists keep saying that the money the government is putting into the banks is going on to the government's debt figures? Or not ... or is being fudged ... but it is accounted for somewhere.

So, what is the mechanism for 'printing money'? How does it get into the system? My understanding is that broad money supply has been running at 13%/14% for some years. i.e. the total amount of money in the economy has been doubling every 6 years or so. Normally this would cause high inflation, but didn't because of globalization. Instead it caused massive asset inflation.

So, all the extra money turned into debt.

But, surely, they can't keep that up. The banks are supposed to be lending sensibly now. So, if the government 'prints money' - how will it get into the system now?

Unfortunately LGIR you will find that is nearly impossible to get any of our resident experts to explain the basics. I am torn between thinking that it is either so self evident to them that they cannot lower themselves to explain it or that they really don't understand it themselves and would like to continue making predictions and arguing with each over using accepted beliefs.

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Reducing savings interest rates to a negative level ie less than inflation means a greater incentive to spend rather than save.

Especially for those higher rate tax payers. Buy property to rent out might be a wheeze worth trying. Anyone else think so?

Yep. All it needs to complete that little wheeze now is to allow us to hold residential property in a pension fund.

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i'm leaning more and more to think that this is going too all end in war.

the uk/us is yet to default, what if they do? interest rates like iceland? there is going to be a massive clamour for international investment, and the superpowers will use force to get it.

You Sir, are spot on, throughout history, deregulation of the financial markets always leads to the same final destination, war, and lots of it. This time however we have two problems, 1) we can destroy the whole planet in minutes, and 2) we are exhausting our resources at record rates and will have no room to recover, war will simply use them even quicker.

Bad news all round really, and a lot more serious than Brand and Ross making some prank calls.

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Unfortunately LGIR you will find that is nearly impossible to get any of our resident experts to explain the basics. I am torn between thinking that it is either so self evident to them that they cannot lower themselves to explain it or that they really don't understand it themselves and would like to continue making predictions and arguing with each over using accepted beliefs.

Well I'm hoping one of the resident experts will explain. Sometimes people who have a deep understanding of a subject kind of gloss over things - assuming that others understand the basics well enough to understand their arguments.

I am quite happy to proclaim my ignorance. Sometimes I think the only thing one can contribute is to ask the right questions - and hope this 'forces' someone to provide an answer to something which I am sure puzzles many people.

Governments create money by selling gilts? Where do people get the money from to buy the gilts? I have never understood this sort of 'low level' stuff.

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They cut interest rates low as possible...

This makes people think sack this and splurge their savings on useless tat...

This makes the economy look good. when in reality it is very bad...

Gordon wins the next election and is hailed as a saviour , anybody who kept their money will have its buying power eroded and will be sent to the death camps.

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But, surely, they can't keep that up. The banks are supposed to be lending sensibly now. So, if the government 'prints money' - how will it get into the system now?

It's already in the system. It's just tied up in bricks&mortar.

The money they print now - including most obviously the hundreds of billions that have gone into the banks since the Northern Rock guarantee - is just a posthumous admission of what the banks had already printed. It's kept the banks afloat, and prevented carnage in the housing market (!)

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Agree on all the above. But we even have Lawson and K Clarke, come back from the political grave, who both operated in governments which shoved interest rates up to 15% now claiming that cuts are the order of the day. I find it breathtaking that they do not recognise the inconsistency and hypocracy of their positions. I don't think a single pundit has yet appeared (or dared to appear) on a mainstream broadcast to argue the case that interest rates should either stay put or go UP, not down. Yet there simply must be many thousands of reasonably savvy people with media access who think that rate cuts will at best do nothing and at worst will be a disaster. Where are they? Why are they not being invited on to the programmes or asked to write for newspapers?

The current accepted solution of cutting rates has now become so deeply entrenched that it has to be a virtual thought cartel. Instead of a good dose of castor oil to help clear the illness, the world's spivs and moneymen are now seriously speaking in one voice that the medicine be ditched and the masses fed yet more opium. Madness and stupidity!

VP

Post of the Day!

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Meh! I thought I was the only one that did that. ;)

Don't you just hate it when you find yourself, mid-argument, going "and another thing..." before running off to the loo to leaf through several bits of VPs polemic, returning with a killer put down only to find the conversation has moved on to compost heaps and the price of gutters or something?

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Agree on all the above. But we even have Lawson and K Clarke, come back from the political grave, who both operated in governments which shoved interest rates up to 15% now claiming that cuts are the order of the day. I find it breathtaking that they do not recognise the inconsistency and hypocracy of their positions. I don't think a single pundit has yet appeared (or dared to appear) on a mainstream broadcast to argue the case that interest rates should either stay put or go UP, not down. Yet there simply must be many thousands of reasonably savvy people with media access who think that rate cuts will at best do nothing and at worst will be a disaster. Where are they? Why are they not being invited on to the programmes or asked to write for newspapers?

The current accepted solution of cutting rates has now become so deeply entrenched that it has to be a virtual thought cartel. Instead of a good dose of castor oil to help clear the illness, the world's spivs and moneymen are now seriously speaking in one voice that the medicine be ditched and the masses fed yet more opium. Madness and stupidity!

VP

To be fair to Ken Clarke, although he does favour IRs coming down, on Newsnight the other night he was talking about 0.25% ... as a nod towards the fact that inflation will subside in the medium term. Another bloke on there was arguing loudly for an instant base rate cut to 2% and Ken rounded on him and said:

'But the price of credit is not the issue, the availability of credit is the issue.'

Regardless of the price of the credit - how is the government going to make credit widely available again? Answer, I guess, is that the Government is lending HBOS, RBS and Lloyds our money, so they can lend it back to us.

Is this true? It sounds nuts.

But where is the government getting the billions it is giving the banks?

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Why does the government bother taxing us? Why not just print money to run the public services?

I will attempt to answer of your questions. One of the main reasons for this is that the money would quickly become completely worthless, the reason for this is that one of the main drivers for the value of a currency is that it is required to pay taxes to the government. If they were not demanding any of the cash, people would realise that they did not need it and use some other medium of exchange which actually had an intrinsic value. Happy to be corrected, but this makes sense to me.

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So, credit is, once again, cheap.

But I keep hearing that it isn't the PRICE of credit that is the problem, it is the AVAILABILITY of credit.

How does lowering interest rates to the point where it is literally not worth saving any money - because the money is devaluing every day - increase the AVAILABILITY of credit?

Computer says: NO! (So it does it matter what the interest rate is)

Where doe the "new money" actually come from ? i.e. there are lots of loans out there and people keep maying monthly payments. So bank uses all profits from what is coming in to reduce the banks own borrowing needs and reinflate itself to deal with capital inadequacy. So there is still no new money to loan out to all but the best picks and the risk of writing those new loans can't be sold into the market as no one trusts the rating system anymore so the bank has to hold onto the risk like in the good old days. This is what I'm thinking will happen.

So money goes round and round the merry go round a bit more. I'd also like to know what point happens next ?

Can the banks draw any profits while there are still problems with balance sheet ? I'd have thought fixing the balance sheet is above all other matters. Obviously number one motive in any ordinary circumstance (when the govment doesn't have a chunk of you) is to create profit (for the bank). So what can a bank do to extract maximum profit once the balance sheet is in order ? (which reduces tax payer bills and risk too)

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Agreed. I really like VPs posts... in fact I've kept a few so I can pretend to be clever in the pub.

Meh! I thought I was the only one that did that. ;)

Thanks both! I do my best. By contrast, all of my family and most of my friends think I am a rampant doom sayer and completely out of touch, but they would say that because they are all up to their eyes in vested interest expedient. I am the only debt free, house-free, sceptic who disbelieves every word the government tells me, or at least nearly every word. I imagine many other posters here are in exactly the same position. It can be a lonely life challenging the conventional wisdom, since there are very few outside of HPC who have the least understanding of what is going on.

One good friend of mine actually asked me to "explain what the credit crunch actually is", since she really admitted she had no clue what caused it, what it means and how she might be affected by it. She is not alone.

VP

Edited by VacantPossession
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To be fair to Ken Clarke, although he does favour IRs coming down, on Newsnight the other night he was talking about 0.25% ... as a nod towards the fact that inflation will subside in the medium term. Another bloke on there was arguing loudly for an instant base rate cut to 2% and Ken rounded on him and said:

'But the price of credit is not the issue, the availability of credit is the issue.'

Conceded. But if the availability of credit is the issue then 0.25% is chicken feed and is nothing more than a very hollow "nod" as you say. Banks are not lending because they don't want to lend unless or until they are as certain as possible that they won't make further losses. I cannot see that attitude changing whatever interest rates are.

VP

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Who will print it? This is the bit that puzzles me. How is lowering interest rates going to increase the availability of credit?

Why does the government bother taxing us? Why not just print money to run the public services?

Why do economists keep saying that the money the government is putting into the banks is going on to the government's debt figures? Or not ... or is being fudged ... but it is accounted for somewhere.

So, what is the mechanism for 'printing money'? How does it get into the system? My understanding is that broad money supply has been running at 13%/14% for some years. i.e. the total amount of money in the economy has been doubling every 6 years or so. Normally this would cause high inflation, but didn't because of globalization. Instead it caused massive asset inflation.

So, all the extra money turned into debt.

But, surely, they can't keep that up. The banks are supposed to be lending sensibly now. So, if the government 'prints money' - how will it get into the system now?

*** SORRY FOR LONG POST ***

You know I think everyone is trying to pin down specifics on the creation/destruction of money into the closed system (that is call the world). I think I can have a crack at some answers, but I am in no way an expert (only of armchair economics LOL) and I hope someone will put me right on some of the wacky ideas picked up here.

The understanding I have is that; the government can't just print money, if they did then all foreign investors holding our currency will see that we are devaluing it. Exactly why this is I am unsure, but thats the consensus I have picked up. Maybe its because human nature just doesn't like it when you blatantly have a resources which has value but in which someone else (who is also playing the game of finance with you) can make it one demand and you can't, that must leave a lump in ones throat. The demand verses scarcity price point of something of value.

My understanding is that the support the government has made to the banking sector recently is more a promise to pay out of future taxation than it is real money. All that money are just numbers in the computer system (no tangable thing) needed to be managed in the process, a stroke of the pen did the trick.

Having a society where all public services were funded 100% from printed money might not work very well for a lot of reasons. The employees and suppliers to your public services are citizens / private companys and they will spend their money into the economy - in a robust economy the creation/destruction of money should follow the patterns of population growth, real wealth creation (i.e. real physical and tangible changes in the environment) - maybe my definition of a "robust economy" is not well thought out enough for this post, but that was a crack as it.

So it would be no good if there was a continuous stream of money created into the economy the rate at which is set by the scale of the total amount of public projects in any one year. The only purpose of money is to spend it and while savings and reserves are good insurance for a rainy day any excess surpluses that are not moving through the economy might be considered bad for the economy. I think this fact is born out by the weight given to various taxation, slow moving money not creating wealth is taxed higher than money being used to create wealth. It could be argued that slow moving money gets bank interest ~5% and fast moving money gets a higher return (~8% for business profit dividend, 30% for stock market surfing, wish I could cite better examples but someone else wrote this better than me in something I read).

So taxation is a good way to recycle money, provide government with budgets and keep the total supply of new money low.

Part of the reason why a small amount of inflation is good is that while everything is going up slowly and steady you cant just sit around on your ass with your money and expect to be in a good position. If you do nothing and hoard your money under your mattress your money looses value over time, so dead money or financially inactive money looses value, Going up steadily allow people to plan and build in a small amount of price increase and makes them look for ways to be more efficient business in resource usage etc. So deflation is the opposite of this why should I build cars today if its cheaper for me to build them tomorrow, assuming people could afford them, why carry stock of anything, infact there is no incentive to create a surplus and abundance of stuff anymore since it will only loose value. I suppose said like that it can be easy to understand why real deflation can not every happen again but there must be a lower limit where no one makes a profit and the price is based on need/demand rather than frivolous consumption of stuff that really isn't required. But not creating anything unless its required is also bad, no more Research and Development of anything unless you do it for free, no new technology, no new pharmaceuticals, little diversity of industries, only 2 types of loaf, only 2 types of pen there is no market exception one of need and most pens will do the job and there market cant support 50 companies all doing different pens anymore, yadda yadda.

In relation to board inflation in the double digits. My understanding of this is that much of that extra money is locked away in as yet unpaid for property which has then been stored in the stock market (by the banks investing the money) which has now been recently wiped away due to lack of confidence. I hear you say "but the seller got the money right away" yes but that payment always ended up in someones bank account somewhere in the world and the bank that received it wrote out new loans because it was deposited.

Some of that money was new created money, I read figures of as much at 95% was due to 20:1 basel2 capital adequacy ratios. I'm not sure myself if the capital used to buy the house can be created money, I just can't get my head around believing that although I've read it enough times. But given that over 25 years the buyer can pays back as much as 250% of the original price that leaves 150% profit over 25 years, I can believe that this money is created money that the bank gets to reintroduce into the economy.

Maybe someone else can cite references to threads detailing the exact interplay of money creation during the lending process, there have been enough discussions on this point.

Maybe this is an argument for not treating debt-money as real-money (maybe capital adequacy rules should state you can only lend from real-money) and as a mortgage is repayed debt-money is converted to real-money at the rate of repayment. But at things stand debt-money is treated as real-money.

Getting money into the system I thought was an easy one to understand. Government makes guarantee to underwrite banks to the value of, this is done with a stroke of a pen. The promise here is that the government will see to it during the future that it will use the tax system to pay it all back. Example of long term financial matters like this include the WWII debt the UK had to the US until recently, took decades to clear. I wonder if we'd needed to pay up if we lost, LOL.

I'm wondering how the government will extract the money from the economy once it does start getting payed back, I'm thinking that we want to destroy money but not at as fast a rate as has been happening, we want a steady and orderly destruction of debt. At some point in the future the extra money pumped in will swing the pendulum the other way where there is now money being created before the levels of debt have been reduced as far as they want this being the hyperinflation phase. I'm thinking there needs to be a way for the money to continue to be destructed to eat up the inflation (cause by the recent bailouts). I think of this like a corporate "buy back" of stock, this is where a company buys up its own shares on the stock market and in so doing reducing the amount available which usually increases the share price (demand verses supply again) but it has to do this out of its own profits and reserves and it is no longer paying face value they we issued at but the market price. So can governments do something similar to maintain the price of their currency ? Would they want to, it seems that no currency in the world wants to replace the USD by being dominant and strong (everyone needs to export something) and the USD is doing what it can to weaken itself (lower IR etc...) I guess due to needing a reduction in debt servicing burdens.

My throats dry lol... please point out my errors :) as I'd like to understand the detail better.

Edited by Odin
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