There is widespread speculation that the Bank of England will cut interest rates as reaction to the UK economic performance that Johnson's election timing conveniently hid from public view.
My reaction is, so what? The official rate is 0.75%. What is it going to be cut to? 0.5%, again? Well, whoopee. That's going to change the square root of diddly squat in the real world.
It really is time that we faced reality. Green QE apart -and that is not possible because there are no green government bonds to buy - the role of the central banker envisioned by neoliberal economists is now over.
Monetary policy did not work.
Central banks did not deliver stability.
All they created was low inflation at the price of growing inequality that reflected precisely what they did not measure when coming up with their inflation claims.
There is now only one game left in town when it comes to economic policy. And that is fiscal policy. And there the Green New Deal is the answer to every question.
It's time the media, commentators, the City, central bankers and politicians admitted it: tinkering with interest rates is as much yesterday's news as VHS really is.
We need to move on. Central banks are not now going to save us from anything.
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Absolutely. Also worth noting the Base Rate seems to be totally disconnected from the actual interest rate real people pay apart from on a mortgage (though a lot also have some sort of fixed rate deal on those too). So personal loans are typically in the 5-10% range, credit cards are usually around 15-25%, and our business overdraft facility is at 30% (which is apparently ‘that is about the cheapest we offer’).
As has also been pointed out by others (and in my case by Prof Warren Mosler) changing the interest rate really only shifts money about. So cutting the rate shifts a bit of money from savers to borrowers (and vice versa). So any actual effect on the economy will only occur if the spending propensity of those savers and borrowers is different (which it usually is, but you are still talking about a net amount that is a lot less than any headline gross figures).
Apparently it’s rocket science for many economists and politicians to work out that a country’s sovereign monetary system works on the constant need to shuffle about the amounts of active and inactive reserves (savings) in relation to the quantity of real resources available and that government increasing the quantity of active reserves in a targetted manner is far more potent in dealing with an under-performing economy than twiddling about with base rate.
Well, there’s always the nuclear monetarist option …..
The rule of thumb has always been quoted as at least a 3% cut in base rate to have any impact on getting an economy moving again. So do it. Base rate down to minus 2%.
Let’s see how good monetarism is when it’s under pressure. Shit or bust. No more shilly-shallying.
Or we could have a Green New Deal, I suppose. 🙂
I’ll go for the GND…
I’m slowly working my way through Mitchell, Wray and Watts book “Macroeconomics”and on page 122 in their Chapter 8 “The Use of Framing and Language in Macroeconomics” they hit the nail on the head when they write people of a collectivist disposition fairly easily understand that an economy whether national or global is human made whereas individualistic Libertarians love to pretend to themselves that economies are created by the gods or a deity in that they’re magically always automatically self-adjusting! This is why against all logic they delusionally think a little tweaking of the base rate will work wonders. Keynes did his best to get these fantasists to understand this was not so and allowing government adequate fiscal space to intervene was the only real effective policy. Sadly primitive superstition has reasserted its head!
True…
The pressure has been building in Germany for some time to relax the anally retentive fixation on the schwarze null. The Guardian has an up-date:
https://www.theguardian.com/world/2020/jan/14/angela-merkel-under-pressure-spend-germany-record-budget-surplus
That is the biggest blockage in the EU system. Once it goes – and it will – damaging sectoral imbalances within the Euro Area and between the Euro Area and interconnected economies will be eased. A piddling little interest rate cut by the BoE would be totally insignificant and irrelevant by comparison.
But one should not underestimate the extent of the block-headed opposition in Germany, or of German influence (and that of others) in the governing council of the ECB to demand a tightening of Euro Area monetary policy in response. Nor should one underestimate the vicious response of the defenders of a fading neoliberal project.
It is amazing how ordoliberalism and neoliberalism find common ground in perpetuating ecomomically damaging policies. But all we need to ask is cui bono?
Thanks
I have missed today – too much work!
Lower rates are supposed to stimulate the economy and equity markets, higher rates are supposed to slow the economy and depress markets. There is no empirical evidence for this assumption indeed the reality is high growth leads to high interest rates and low growth leads to low interest rates which is exactly what is happening now. There is no growth indeed growth is declining so a further cut will do absolutely nothing. Therefore if growth determines interest rates, interest rates cannot at the same time determine growth. What will determine growth is that more transactions take place this year than last and that the supply of money will increase to cover those transactions however a report from the BOE points out that banks expecting to increase lending fell from -5.8% in the third quarter to an expected -13.5% in the fourth quarter to reach its lowest level since 2009 when the balance dropped to almost -50%. As banks are responsible for 97% of the creation of the money supply,where the money goes and therefore how the economy is structured it is impossible for a marginal drop in interest rates to have any effect whatsoever. “Give me control of a nation’s money and I care not who makes the laws.”
The 97% claim is very dubious
I would go so far as to say it’s simply wrong
Money is created by banks when they extend “credit” and through this never ending process they are responsible for 97% of the money supply generated. It has nothing to do with deposit aggregates M1, M2, M3 or M4, which are not really relevant as a measure of the money supply anyway.
Banks never lend ‘out their deposits’, as banking models assume. There is no such thing as a bank loan. Banks acquire securities the “loan contract” being a promissory note recorded as “credit” on behalf of the customer in the listing of the bank’s debt.
There is no such thing as a “deposit” or monies held in trust or bailment at a bank. Any monies “deposited” are loans to the bank who then own such deposits. The customer is merely a general creditor of the bank recorded as a credit on behalf of the customer in the bank’s list of debts. In this way money and its supply is created out of thin air
You miss my point
Banks only do this because government’s let them do so
And actually, the government could do exactly the same if it wished by running an overdraft at the BoE
So who really creates the money?
I’d argue the government does, and chooses the agents it wants to use
Basically, we need 100% location/land value tax (doesn’t include buildings) to prevent housing bubbles
Equally important is that taxes on income or output push down the rental value of land, so it’s quite possible that if we subsequently reduced income tax etc by £x billion, the rental value of land would go up by £x billion, and ultimately there’s no reason why we can’t replace just about all taxes with LVT.
I’m sorry, but as I have said time and again, this is in the realms of fantasy
And utterly and completely socially undesirable
You ignore that there are six reasons to tax:
1) To ratify the value of the currency: this means that by demanding payment of tax in the currency it has to be used for transactions in a jurisdiction;
2) To reclaim the money the government has spent into the economy in fulfilment of its democratic mandate;
3) To redistribute income and wealth;
4) To reprice goods and services;
5) To raise democratic representation – people who pay tax vote;
6) To reorganise the economy i.e. fiscal policy.
Note, none of them is about raising money, per se
So your logic is wrong
I may be slightly clueless on the MMT. land values are about 2/3 of ‘all wealth’; the highest rate you can apply to ‘all wealth’ is very low; the rate you can apply to land alone is much higher.
I Am nit convinced you are right on wealth….
The CBs en masse seem to be lately involved in a collective outing of the high street banks for their practice of creating money from nowhere. They’re also buying lots of gold, easy for them to do of course as they can create money too. An obvious next step for them would be to start wondering aloud why the high street banks are allowed to charge interest by way of undermining them, and an obvious step after the next financial crash (due in five… four… three… etc) would be to suggest the general population avail themselves of a (theoretically) gold-backed digital account at their friendly local oh-so-dependable-by-comparison central bank. One bank to rule them all then, and in a cashless society, one to which we are rapidly being advanced by the ongoing removal of ATMs, occurring that bank’s displeasure could easily result in your removal from access to all and any financial transactions as they freeze your account. Difficult to argue against them when you find yourself starving, cold with no internet, phone, heat or light. A power grab by the Boys from Basel seems to be on the way, and I’d suggest talk from the CB of interest rates making this or that incremental movement are just distraction, an attempt to facilitate the appearance of business as usual, till the real stuff gets underway.
Gold backed?
Come on….that’s the ultimate disaster
From an informed viewpoint, indeed. One thing the general population have recently demonstrated though is that they’re anything but informed. It would be a con of course but I expect a gold-backed currency would sound both impressive and appealing to the, er, the marks, especially in a severe post-crash scenario.
No!
Don’t con people on money
Problem with gold backed what if people hoard gold.
Kester says:
“Problem with gold backed what if people hoard gold.”
Problem with gold is it is a crap currency system which worked badly when we had it. Why would anybody wish to revert to a system that is inflexible and works badly ?
” Why would anybody wish to revert to a system that is inflexible and works badly?” asks Andy. Power is the reason. It gives the central bankers power because under the circumstances I’ve outlined above they’ll control the population’s only access to the necessity for trade.
Apologies in advance for joining this discussion from a very low level of background knowledge but having recently ‘tuned in’, I am fascinated by the dialogue.
Personally, I struggle to really understand the concept of money apart from recognising the more bland definitions associated with its role as a medium for exchange.
But if, for example, I take my £10 note into the bank and make my ‘pay the bearer request’ what exactly can I expect to receive in return? Another piece of paper I assume which like the original has no intrinsic value.
So I tend to see money and currency simply as fairly arbitrary units of ‘confidence’. But on the bottom line, confidence in what exactly?
Could I also ask if there is any consensus about the approximate ratio of ‘Broad money’ (however we choose to define that but including all the ‘stuff’ that the Financial Industry churns out) and ‘narrow money’ (which I think is usually taken as the amount of notes, coin and equivalent issued by the BoE)?
I note from above that some have estimated this ratio could be as high as 97:3 and others think this is far too high an estimate. So as a starter, can anyone suggest a range within which we might comfortably assume the true typical ratio might lie?
Alan
I am about to go into meetings that will last many hours
If others with experience can provide the links I’d be grateful
My book The Joy of Tax is not a bad place to start by the way…