I am aware that there are those who say I have predicted seven of the last four downturns, but by and large that has only been because my forecasts have tended to be premature: I often spot these things sooner than they happen.
And I have been saying the UK has been heading for a downturn for a while, I agree, but there are two further signs today.
First, the Bank of England seriously considered increasing interest rates in May. If that happens the proverbial will be mingling with the fan faster than you can imagine: the UK is sitting on a mountain of private debt that many can barely afford.
And people are already under enormous pressure. Retail sales volumes fell by 1.2% in May as rising prices depressed consumer spending growth.
It's not just that austerity mixed with Brexit does not work: it is now an outright disaster.
Bring on the Green New Deal: it was designed for situations like these.
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Amazes me that people will whinge to high heavens about increased taxation which will be put to some visual use, but if the Bank of England takes their money from them via higher interest payments, not a peep.
Very good point
I will remember it
Can interest rates be seen as another form of Tax as it relates to a decision by the consolidated Government? Just a thought.
Of course it can be….
Raising interest rates = UK economy shooting itself in the head.
How has it come to this? Are there any actors in the UK economy who will enjoy a net benefit from a rates rise after its impacts on demand are accounted for?
Pensioners believe they will
Note how they vote
“Raising interest rates = UK economy shooting itself in the head.”
More like BoE shooting economy in the head.
1981 – rates hitting (I think) 16%
The objective then was to “cure” inflation.
It certainly “cured” British industry – a cure from which it never recovered.
Adam,
Nominally, generally, savers benefit. They get a higher rate of return on their savings. The most notable among these being rentiers with large variable interest rate investments. Some of those maybe be the pensioners that Richard refers to.
With lenders its more complicated. They get a windfall from their current variable-rate loans but with new loans there is an elasticity issue. A higher rate on new loans could be more than offset by a reluctance of people to borrow at a higher rate. In which case the lenders net position may not improve over time, quite the opposite. The evidence of the bubble economy (pre & post-GFC)has been that lenders have done very well out of a low interest rate regime with a much higher volume of lending. But, you know, to hell with them anyway.
This one is controversial and contingent on rental yields, irrational exuberance and the effect of a rate rise on property speculator sentiment – but it is possible that an interest rate rise could undo the housing bubble and restore some long-term affordability to young home-buyers. The rate rise could do that alone or it could do it in combination with other factors.
A housing market crash could have recessionary effects of course but a correction is due (and necessary) anyway. If a crash is going to happen it may as well happen on the Tories’ watch.
This is not original to me unfortunately, but I think we can say that the rates are set by the Money Tree Policy Committee.
Groan…..
so what’s so wrong with pensioners hoping for a better return on their savings ? the jibe about voting was particularly snide.
Pensioners need to realise it is not their savings that provide for them
It is young people willing to work that provides for them
And if interest prices young people in to poverty they’re not going t work for the well-being of the elderly: they’re going to vote their pensions down instead
We’ll need to interest rates at some point though right? I can’t see us getting our private debt under control?
Do you think we’ll see a house price collapse? I worry we have another housing bubble
Interest rate rises*
The last thing we need as animals net rest rate rise
Woukd you beg for a tax increase now to deflate the economy?
I doubt it
Why raise rates then, which does the same thing?
“I am aware that there are those who say I have predicted seven of the last four downturns, but by and large that has only been because my forecasts have tended to be premature: I often spot these things sooner than they happen.”
That’s certainly one for “Modesty Blaze” in Private Eye.
An alternative explanation is that even a stopped clock is right twice a day.
If you can’t see that I am being self deprecating I am sorry for not being blatant enough
The “stopped clock” analogy has become the pathetic cliche of those failed to predict the downturns or deliberately ignored the warning signs (and talked the market up at the expense of others).
Their clock is like one that is always set for the wrong time zone. It is never right when it needs to be.
I was waiting to see if anyone else would say it but the ostensible premise for an interest rate increase would be the fact inflation is now above the target rate.
The obvious problem with that is that inflation-induced rate increases assume demand-pull inflation where higher demand results from higher wages, higher employment levels, increased investment etc.
Clearly this is not the case. The decline in retail sales that Richard was referring to indicates weak demand and the graph that we saw recently in this post:
http://www.taxresearch.org.uk/Blog/2017/06/14/a-farewell-to-austerity/
demonstrates a fall in real incomes. Recent inflation is largely a cost-push result of Brexit and the falling pound. Mind you, an interest rate rise could theoretically strengthen the pound (maybe). But the BoE doesn’t generally change interest rates to appreciate or devalue the currency, it has other ways of doing that.
In recent years Australia’s central bank, the RBA, has openly declared concerns about that nation’s housing bubble as a reason for its reluctance to reduce interest rates. So they are thinking about asset-price inflation on the one hand and low consumer prices (weak demand) on the other. The two concerns are conflicted.
http://www.abc.net.au/news/2017-03-21/reserve-bank-warns-housing-bubble-in-sydney-and-melbourne/8372856
I don’t know if the BoE is thinking along similar lines but has now become clear that monetary policy is not only squeezed by the zero lower bound, it is conflicted by the two strand economy. Neoliberalism’s preferred economic policy tool is caught between a rock and a hard place and doesn’t know which way to jump.