Thursday, February 26, 2009

“Interest rate rises needed in the long-term may fall foul of political short-term expediency”

20% chance of Armageddon

PSigma income manager Bill Mott believes there is now a 20 per cent chance of Armageddon for the UK economy. Mott says that the UK economy is now at a long-term inflection and that we can no longer rely on financial services and consumption to drive the economy forward.He says: “We need several years of anaemic growth so that our savings rate can be restored and so that the economy can rebuild its productive manufacturing base. This can only be achieved gradually over a number of years. In our view, there is a good chance that the measures already taken will deliver this readjustment.”Mott says the 20 per cent chance of Armageddon is one of three scenarios, one of which he says is a 50 per cent chance that ‘green shoots’ of recovery appear in the likes of cyclicals and start to rally.

Posted by jack c @ 04:12 PM (935 views)
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4 thoughts on ““Interest rate rises needed in the long-term may fall foul of political short-term expediency”

  • Eternal Sceptic says:

    I think the man is an optimist. The frugal are being punished, the profligate rewarded. Never been a model for success in the past, don’t see it being one for the future.

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  • The last part was the most interesting for me:

    ‘Mott points to concerns over the Government over-doing any potential stimulus to the market, claiming that there is now a 30 per cent chance we could face an inflation problem thanks to quantitative easing.

    He says: “In our view, the authorities should delay quantitative easing -effectively increasing the money supply – until it is certain that recent aggressive initiatives have not worked.

    “My view is that history is littered with examples of authorities tightening – raising interest rates – at too late a stage of economic recovery. We should remember, also, that this need for interest rate rises could coincide with a Labour Government trying to get itself re-elected in spring 2010. Interest rate rises, though needed in the long-term, may fall foul of political short-term expediency.”’

    Will Gordo do the principled thing or try to shock the economy into activity just before the election? It’s beginning to look as if 2010 will be an interesting year.

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  • It is £10 to a penny (which is what £10 may be worth in a few years time!) that the govt will manage to over egg the pudding with QE. Because if you were going to be brutal about it, as soon as the economy started to show any signs of growth you would stop QE immediately, and fairly soon after raise rates and start to withdraw the money you had injected. Which would stop any recovery in its tracks, and condemn us to the long hard slog of paying down all the debt we had built up previously.

    What is the likelihood of any politician, of any hue, being prepared to take such drastic steps, when the recovery was still only just beginning? Slim to none in my view. They will pump money in for too long, and will not try to withdraw it (if at all) until too late. I am increasingly coming down on the inflation side of the argument. I don’t trust politicians further than I could throw them (preferably into a vat of something very hot!)

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  • I believe that the quicker we come out of a recession the quicker we’ll simply get into the next asset bubble which will be even bigger than the last, will not last as long as the last and will explode more spectacularly than the last. We need a REAL dose of medicine if we’re going to learn any worthwhile lessons about long term financial stability. Also, the longer the recession the more the great British Public will focus their attention on the reasons and try to ensure we don’t make the same mistakes again. Wishful thinking I know but what have we got left?

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