The Fed has cut interest rates by 0.5%.
No doubt the Bank of England will do something similar sometime soon.
And both are pushing on pieces of string. There is not a hope that cutting interest rates will, right now, do anything more than encourage markets to fly to safety since they are clear indications of concern that can do nothing to change anything at all about the underlying economic problems that covid-19 will create.
The need right now is not for monetary policy, excepting indication that QE will be used if necessary. The need is for there to be very clear fiscal policy, and there is still no sign of that. The chance that we are, in that case, heading for a major shock with regard to government finances, which might only be capable of being addressed via QE, is very real, but so far, it seems, unacknowledged.
Covid-19 has a horrible course to run, but so too mighty the economy unless Treasuries realise very soon that they have to intervene a very big scale.
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“but so too might the economy”?
Too much haste
Capitalist models – most especially Neo-liberalism – are not designed to act preemptively. They are intrinsically reactionary – both in the generic and political sense. Hence logic dictates that situations have to get significantly worse before they will take any remedial (progressive/radical) action – and then only the minimum judged necessary to contain a situation to their socio-economic advantage. Not to be confused with markets preempting anticipated negative forces via price adjustment, which is just a tactic to protect and then maximise profit taking. It would therefore be misguided to expect otherwise.
Hitherto, the one big exception has been waging war – when all their peacetime financial ‘rules’ become redundant. The spread of the virus coupled with climate catastrophe seems like a perfect storm. Only time will tell how the prevailing, self-styled ‘popularist’ political right will deal with both. But at this moment in time it’s not looking encouraging on either front, is it?
On a related note, did you spot that HMRC are consulting on an update to their Charter?
https://www.gov.uk/government/consultations/hmrc-charter/consultation-hmrc-charter
(“Modern Money Scotland” has just pointed this out)
The old and new versions have the same nonsense about tax paying for public services, e.g. “HMRC is here to collect the tax that pays for the UK’s public services.” in the proposed new version.
I guess there may be other aspects of the proposed Charter deserving of comment, but perhaps we should all focus on telling them they are wrong about the purpose of tax.
I can think of someone who might be rather good at that.
Comments to HMRC.Charter@hmrc.gov.uk.
Blog coming….
[…] suggested that interest rate cuts would not address the economic consequences of the coronavirus before the markets issued their quite emphatic agreement yesterday evening. In […]
“The need right now is not for monetary policy, excepting indication that QE will be used if necessary.”
But you know as well as I do that if QE is considered necessary the necessity it will address will be to shore up the banking and financial sector.
In the wonderful world of ‘Newspeak’, what we are seeing is ‘helicopter money’ being dumped into a dysfunctional finance industry. They may well call it QE, or call it something else….I’m not sure what Jay Powell is calling a $400 billion injection into the banks in the past three months. (?) If effective at all, and it’s unlikely to be, a minuscule half percent reduction in bank rate will only massage the figures, it won’t alter the underlying real economy one iota.
It will be about as effective as sticking a pin in the temperature gauge to stop the indicator needle rising further and entering the ‘red’ zone.
Totally agree with you Richard. For all the good 0.5 pc off interest rates is gonna do, we might as well get Arnold Schwarzenegger to stand in front of the virus with an Uzi 9mm and wave it around animatedly. That would at least have the side benefit of being mildly amusing…
🙂
[…] suggested that interest rate cuts would not address the economic consequences of the coronavirus before the markets issued their quite emphatic agreement yesterday evening. In […]