Saturday, July 30, 2016

Endless emeregency

Interest rate cut: good news for mortgages, bad news for savers

"A rate cut is a certainty, according to most experts." The unemployment rate has dropped to an 11 year low and our currency has lost significant purchasing power against the dollar. The BoE monetary policy committee is allegedly preparing to lower interest rates down from the seven year 'emergency' rate of 0.5%. I'm wondering what it will take to get interest rates rising now.

Posted by quiet guy @ 10:06 AM (5047 views)
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4 thoughts on “Endless emeregency

  • Market rates on the 2yr Gilt (most mortgage deals are 2yrs), was averaging about 0.5% before Brexit but is now languishing at under 0.25%.
    http://uk.investing.com/rates-bonds/uk-2-year-bond-yield

    BOE will have to cut rates in response to this because why would anybody borrow from BOE when they can get cash cheaper on the private market? A cut to zero is out of the question right now, but BOE may well cut to 0.25.

    Remember that all talk of BOE controlling markets is bull. They are a relatively small player in a global FOREX market with the Federal Reserve and ECB being the main market makers. No, they are reactive to market conditions because they COMPETE with other funders. Think about it, if their rates were way higher than any others nobody would borrow from them and they become obsolete unless they drop lending standards, just like any old shark lender.

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  • “Market rates on the 2yr Gilt (most mortgage deals are 2yrs), was averaging about 0.5% before Brexit but is now languishing at under 0.25%. http://uk.investing.com/rates-bonds/uk-2-year-bond-yield. BOE will have to cut rates in response to this”

    I presume your phrase “market rates” refers to yields.

    You are implying there is a direct casual relationship between interest rates and gilt yields which is incorrect. Gilt yields are determined by bids in an auction process and the last time we had a failed auction was in 2009:
    http://www.ft.com/fastft/2016/01/20/uk-dodges-a-failed-gilt-auction-just/

    So if the yield on 2 year bonds is falling, doesn’t that imply that the DMO is currently having no problems selling gilts at auction, which is what actually matters?

    “why would anybody borrow from BOE when they can get cash cheaper on the private market?”

    Ergh. Gilts are used by the government to borrow from investors – not the other way around.

    “Think about it, if their [UK] rates were way higher than any others nobody would borrow from them”

    See previous comment.

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  • britishblue says:

    We now live in a world of spin, spin and more spin and little substance. Our media channels are no more than propaganda outlets.
    Hence we have Lloyds bank cutting 3000 jobs last week and blaming it onto Brexit when it had very little to do with this. If you have negative balance of payments or your currency is too weak, then you raise interest rates to draw money into the economy, not reduce them. Yet we are told because of Brexit we have to lower interest rates. I tend to think that they believe the exchange rate is just where is should be, but interest rates will need to go lower, if they go lower elsewhere and especially if some banks in Europe topple over. Imagine just how much the pound would explode upwards if they raised rates by 0.5%. On the night of Brexit when they though REMAIN would win it went up to 1.50 to the Euro. A 0.5% rise would put the pound into the stratosphere. The real news is that there is a race to the bottom worldwide to devalue currency and go into negative interest rates defying logic for the last few thousand years. The Uk is having to swim in the tide with everyone else. Where this will all end? I suspect the only way out is to create a war with China or Russia or moving over to a totally electronic currency. I don’t see an economic way out of rates going further and further into negative territory.

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  • Interest rates are important in real economies but much less important in modern financialised economies. Marx distinguished between real capital and ‘fictitious’ capital (modern finance capital). The real economy for him consisted of human labour (wages) and surplus capital (value over the cost of production, consisting of profit, interest and rental income). The monetary sum of these incomes cannot deviate much from the real values (the forms of income mentioned) created by production without causing instability, bubbles and crashes. Crashes happen when there is an over-accumulation of ‘fictitious’/’finance’/’money’ capital relative to the surplus value produced (huge bubble of fictitious values on a narrow base of real values).

    Financial deregulation, securitisation and various forms of financial ‘innovation’ are the vehicles for this accumulation of fictitious capital.

    Where mainstream economists (with their fetishisation of interest rates and money supply) go wrong is to think in real economy terms when the economy they’re analysing is a financialised one. For them there is no distinction between real and fictitious capital. Each ‘factor’ of production (labour, capital, managers/entrepreneurs and landlords) automatically gets a share of output or income that is equitable because it is determined by the market – wages, profits, interest and rent are equal to the corresponding factor’s contribution at the margin to the production of output/income.

    In early capitalism, before big banks and the modern credit system, industrial (real) and finance (fictitious) capital were not far apart. Credit was mainly commercial (wholesalers lending to retailers, retailers to consumers), no big banks centralising and controlling savings, or profits from trading in financial claims existing only on paper, or massive borrowing to engage in speculative trades not backed up by tangible assets.

    The mistake economists make is to retain the old S (savings) = I (investments) formula. When these are unequal they are allegedly rebalanced through interest rates or, with Keynes, if this doesn’t do the trick then government must borrow the ‘idle’ savings and use them for public works. With Marx a divergence between productive investment and fictitious capital can indeed persist and widen and will end in bubbles and crashes, but the mainstream posits that any outflow from production to finance capital would re-stabilise as above. (Or we have the ‘secular stagnation’ idea that in advanced economies with high incomes people save more, this reduces investment in the future and this will eventually reduce incomes, and with reduced investment and income you get ‘secular stagnation’ – again this analysis ignores financial variables.)

    Interest rates are proxies for changes in more fundamental forces, which may be real variables like money, technological change, cost of physical capital, expected rates of return on investment etc. but most economists ignore the fact that interest rates reflect financial variables as well. The mainstream fails to explain dismal (and unstable) economic performance globally when about $10 trillion worth of bonds and other securities are in negative rate territory. The answer of course is that the flood of central bank liquidity has gone into financial asset markets, or was hoarded on balance sheets in expectation of future opportunities in financial assets, or was redistributed to shareholders in trillions of dollars of stock buybacks (in the US especially) and dividend payouts. Financial asset investment has proven to be simply more profitable and less risky in the short run than real investment.

    Similar problems arise with those who focus on money supply/velocity. Financialisation means central banks do more than provide liquidity to commercial banks so the latter will lend to business. They also inject money directly into the system through electronic printing and QE. More than this, financial security products may be purchased without access to traditional money. Investors are furnished with credit based on the collateralised value of assets previously purchased – asset price inflation leads to more debt availability. Then there are other forms of non-money credit creation – Bitcoins, digital money. Shadow banks are taking over the functions of commercial banks, from financial repo markets to peer to peer online lending. Technology is enabling the acceleration of money velocity and credit velocity in general, accelerating the turnover and de facto raising the supply of money and credit.

    Central banks and the economists behind them pay little attention to the linkages between financial forces and interest rates because their toolbox (as the BoE terms the levers available to it) is composed of pliers, hammers, wrenches and such, instead of a software machine-learning algorithm tool that might show how financial forces today are eclipsing real forces in determining the impact of interest rates on economic growth and stability.

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