This morning's short video has now been published. In it, I argue that it is an economic scandal in the making that Bank of England base interest rates are not tumbling right now.
The transcript is:
The Bank of England's base rate should have been cut to no more than 3 per cent by now and on a downward trajectory, but it isn't. It's at 5. 25 per cent and at the same time we've learned that inflation is at 2 per cent, which is on target.
In May 2021 we were on inflation target at 2 per cent but the bank base rate was 0.1%. Now we have bank base rate of 5. 25 per cent and inflation of 2%. This makes no sense at all.
And if Labour wants to see any growth in the economy, those bank base rates have to tumble incredibly quickly for that to happen.
I hope it does, because we're all being penalised by Bank of England base rates, which are at an unnecessarily and inappropriate high level.
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Agree. Reeves, “we are going to grow the economy”.
Hmm OK, but one needs finance for that, bank loans & such like. A bank loan @ an interest rate of 3% used to fund XYZ, will mean that the overall rate of return needed from the investment (8% hurdle rate?) will be lower than a bank loan @ 6% & a hurdle rate of 10 or 11%. Or perhaps Reeves thinks that companies will self fund – makes not a blind bit of diff – interest rates (obvs coupled to project risk) drive hurdle rates. “LINO in Wonderland” in bookstores near you on July 5th.
(I focus on LINO because as we know, BoE “independence” is a fiction – which begs the question – will there be an abracadabra moment – interest rates reductions post 5th July & subsequent ones in the autumn? almost as much fun as SovU politburo watching).
I have to say that my first thought when the BoE held the rate higher than required was that this was deliberate, not because of the economy, but so that they can deliver a nice ‘treat’ for their new bosses once Starmer’s PM and Reeves is back cosying up to her old buddies at the BoE. So expect a cut – maybe a whole 1% – next time round. That way the awful and incompetent Andrew Bailey gets to keep his job, even after being a Tory patsy for all these years.
Ivan, you cynic…..
Ivan a cynic?
Recall Ambrose Bierce: A cynic is a person whose faulty vision allows him to see things as they really are as opposed to as they are supposed to be. Hence the Scythian practice of poking out a cynic’s eyes to improve his vision.
No quotation marks because that is from recollection without reference. I have, apparently, inherited an iota of my father’s remarkable gift for memory.
I’m not so sure. I reckon that a 1% cut would be breathlessly reported as a ‘panic’ measure by the right-wing media (and where they go, the likes of the BBC follow), no doubt spun as being necessary because of one of those evil incoming Labour governments which is determined to destroy the economy. On the other hand, if it occurred under the Tories, it would be reported as a jolly good idea.
Luckily for Bailey, his ineptitude is only matched by that of Reeves, so slow (much too slow) and steady cuts are what we’ll see and Reeves will think that this is entirely the right choice.
Might the finance industry favouring behaviours of the Bank of England indicate, along with the shared Neoliberal beliefs of the major parties, indicate that our country has only a facade of democracy?
Might this facade help to enable oligarchical groups, including the mainstream media, to operate to their real, shorter term and excessively selfish interests, rather than to the long term service of the majority of regular people and their children?
You may be right
There was a R4 Evan Davis interview yesterday with a bond market specialist who suggested that the finance sector would scrutinise any LINO government plans and decide whether or not to buy any new bond issues to cover either the shortfall in revenue budgets or any capital investment proposals by Labour.
A revenue account shortfall sum of £20bn was mentioned by the bond market specialist, without demur by Evan, but I’ve seen estimates that the shortfall in non protected departmental budgets requires £36bn just to stand still, the Hunt budget’s notional 1% revenue spending increase being the con trick highlighted by the IFS critique.
The blatant subtext was that the finance markets i.e. the City, have ultimate power of veto over all government fiscal budgeting and then select which bonds to support on merit for all revenue issues and then capital programmes too.
Only private sector support can validate government programmes.
Government depends on private investment.
No mention as to who creates the money in the first place.
If the bond market is sniffy, then the government has its knuckles rapped by the Market, as bond issues fail. It seems the Trussonomics myths are being perpetuated here.
This is unicorn type arrogance in City thinking, but demonstrates the City’s oligarchic mindset. Of course Evan Davis did not challenge it.
As I have said time and again, the government do0es not need the City to buy its bonds
They need the government to save with
How ironic that the BBC run a “Scam Interceptors” programme”-
https://www.bbc.co.uk/programmes/m00164f1
Never occurs to lazy mainstream journalists to ask themselves whether the bond traders are liars or at best lazy like themselves in not understanding how a fiat money system really works. After the GFC of 2008 and Covid bailouts together with fourteen years of failed Neoliberalism there is no longer any excuse for laziness in understanding there’s a direct relationship between caring and understanding how the country’s fiat money system works.
This is somewhat akin to using your online banking account and ignoring your bank telling you they will never telephone you directly about your bank account transactions. A belief that Neoliberal parties will never scam you and all the UK’s political parties are doing this in one way or another including the Green Party with an unaccountable government committee dishing out government spending and loans permissions.
The recurring, unopposed theme in this election is that we can’t afford to make things better. My understanding of MMT is that this is not true with the major caveat that inflation has to be controlled – thus the question of tax.
Can a simple statement explaining how the economy really works be widely published so that the myths that frame the debate can be exploded?
Without the population understanding this it will be forever conned into believing that there is no alternative.
How to do it is the question
Oddly, that is the theme of a video I am making this morning
It might start to answer your question
Best I now think to avoid the term MMT since the right-wing rags in the UK have made it perjorative especially since the dictionary definition links to “theoretical” (A possible way of understanding how things work!). Better to use a term like Fiat Money Understanding (FMU) or something similar since it enables asking individuals if they understand they use fiat money and then the follow-up question how do they think it works.
interesting idea, Schofield. How about Fiat Money Explanation (FME)? Or Explained.
FMP
Fiat Money Practice
I am noticing
Fiat anything bears the problem that most people haven’t the faintest idea that Fiat means anything other than a make of car.
People with an inquiring mind need to understand they live in “Scamland” a country full of a minority of liars (mainly bankers, finance sector owners and workers, journalists and politicians) who actively seek to prevent the majority from understanding how the fiat money system they use actually works!
Keynes’ ‘anything we can actually do we can afford’ seems as good as anything.
If a politician said that to Ed Davis or any other BBC patsy – it might open things up
As John Maynard Keynes once wrote: “Anything we can actually do, we can afford.”
Which begs the question, why don’t we then?
Let’s follow the money. By preventing the government from making the necessary investment to make the economy work, it enables those in control to offer the private sector to replace government.
We’ve already seen the results of the government handing out £billion contracts. A few people do quite nicely thank you very much; Streeting has £175,000 in “political donations from private healthcare companies. Others by themselves a house or a yacht.
The rest of us end up with fewer poorer quality services which is evident from the last 14 years (actually since Thatcher 40 years ago). Raw sewage in rivers, and schools literally falling down. The rest of use also get the blame: we’re not working hard enough.
I am reminded of the 1950s/1960s when a single wage-earner in the family could afford to get a mortgage (3.5% fixed for 25 years), and today, a couple can’t even afford the deposit between them.
Many of us see what is going on. But others are coming around.
I agree that the bank interest rate is too high.
But I wonder if the BoE held back from making any change, on the basis that in the middle of an election period it might look political. Does anyone know if they have previously made significant changes in the run up to a general election?
(I am not arguing that the BoE is actually apolitical, just that it may want to avoid looking political, particularly when a change in government is likely).
In effect the City needs Bonds like my local Chippy needs Potato’s, it can’t NOT buy them
Interesting cross-reference to US Fed behaviour and inflation in different types of costs (and how they affect different wealth/income groups) just published by INET: https://www.ineteconomics.org/perspectives/blog/the-feds-chicken-run-why-sticking-with-high-rates-will-crash-the-economy
I read it. It is fair comment .
Why is a 1% real rate the right number? What is the logic for saying that interest rates SHOULD be 3% – on what basis?
Because the lower the real rate the lower is inequality and the higher the rate of investment.
What do you want?
I expected a stupid answer and you didn’t disappoint!
Low/negative real interest rates increase investment? Seriously what world of economics do you live in?
Do you have any clue at all about how investment appraisal works? Might you explain for all our sakes as to why high interest rates help it?
I think Georgina might be under the illusion that saving drives investment.
So do I.
It’s one of her/his many delusions.
Standard economic disinformation is emerging from all sides at a urine boiling level.
The current argument engaging the meeja clique regarding how taxes will be increased, or bonds issued to pay for whatever restorative expenditures are needed immediately is a whole shoal of red herrings.
There is a deafening silence in that folks are not being told that government expenditure is part of the GDP sum and hence contributes to growth, at both revenue and capital levels, and regardless of how such moneys are seen to be raised.
Just resolving the English junior doctors pay dispute would contribute to growth, immediately, and then via the multiplier effect, which will also aid further growth to whatever degree.
The inevitable immediate public spending review post GE will have to restore public spending levels across departments just to avoid deflationary ‘austerity’ cuts, and that expenditure itself will contribute to GDP.
Reeves quote “Economic growth only comes from businesses: big, medium and small” is a blatant lie to the electorate, is economically illiterate, and imo ought to disqualify her from public office.
This is economic illiteracy of the highest order – it comes from the premise that all Government spending is beneficial, which is clearly nonsense.
You could equally argue that reducing taxes would give people more money to spend which would also benefit GDP, and be already over a much broader base than just public sector workers who, according to the ONS data, already have better pay and benefits than equivalents in the private sector.
Of course, if you are a public sector worker who would directly benefit from such largesse, you could take a more selfish view.
So, what government spending is wasteful?
After 14 years of Tory rule our failing public services make it clear we clearly have insufficient government spending. But you think we have too much.
Tell me what precisely, and what the consequences of cutting it will be. Precisely now, as you made the claim.
@ Richard Prowse.
You are barking up the wrong tree.
As any fule kno, the equation for GDP is as follows:
Gross Domestic Product = Consumption + Government Expenditure + Private Investment + (Exports – Imports)
There are no value judgements involved. Or straw men, such as you present.
There are no suppositions regarding productivity or efficiency in either public or private sectors in GDP figures, you are merely overlaying your personal prejudices.
If you merely want to pursue the dogma of :
Public Expenditure = bad Private Expenditure = good
…. you might want to start your considerations with the English Water Companies.
I’ll refer you to Mariana Mazzucato’s ‘The Entrepreneurial State’ for a more detailed debunking of this position.
If you want to argue GDP is the wrong measure, then please lobby the political class that uses it. Kuznets himself commented:
“The welfare of a nation can scarcely be inferred from a measure of national income,”
Otherwise your posts seem to be making wild statements with no evidence whatsoever.
Conjecture is not evidence.
The economic illiteracy is entirely yours.
Of course government spending can lead to wastefulness. Thus the government spending millions on useless PPE can be said to be wasteful. But it is important to realise that the waste consists of the PPE itself, the resources used to produce it, transport it etc and the work done to produce it. Only a finite amount of all these things exists and once gone cannot be replaced. Hence we can speak of waste.
The money spent can be thought of either as a measure of the waste or as part of the social machinery whereby the waste was brought about. Of course one might speak of the spending being a waste of money but this is a kind if shorthand and is not to be taken quite literally.
It is clearly economic stupidity of the highest order to assume that all Private Sector spending is both efficient and beneficial, whereas all Public Expenditure is inefficient and of little value, as you have.
The question to ask is: who upvoted this post by Mr Prowse 22 times?
I have notice that such posts (a mixture of half-truths & nonesense) are getting quite a few likes.
It would seem that those that want to preserve what passes for the status quo are getting organised. Has anybody else noticed this?
(fair comment is different – but too often the commentator is not interested in “fair comment”).
Mr Prowse has many identities it would seem upon my furtyher investigation
A one person bot factory, I think
I didn’t say anything about cutting public spending, I said that not all government spending is value-adding. And I think if less was wasted then people would be happier for the spending to take place.
Some people might argue (quite reasonably) that public sector productivity is terrible and the general public don’t get value for money. They could also reasonably argue that many core areas deserve more spending which could easily be funded by taking money from elsewhere – compare the treatments that the NHS is currently providing with what it was originally set up to provide.
But if you think that the government can take money off people through tax and spend that on whatever it likes and suddenly value has been created, then that speaks volumes.
So, youn want shorter GP appointments. That increaases productivity. It also tenmds to massively incrtease risk and pateitn dissatisfaction
Or why not 40 children in a class? Productivity is up, but no one learns anything.
And maybe our soldiers should kill more people. What are they playing at?
Do you have the slightest idea what you are talking about?
If so, evidence it, or shut up, I suggest.
As someone who never provides any evidence, and who refuses to accept all the evidence that contradicts your view point, then I think I’ll discount your demand for ‘evidence’.
As an example, where is your evidence that the private sector can provide £200bn of demand for government debt as opposed to the £10bn provided currently?
As I said, if you think that the only way that productivity is improved is through the provision of a worse service then there’s no point in discussing this with you.
You do realise that more than £200bn of gvernment debt will be sold this year, don’t you?
So, what is your point?
1 in 15 GP appointments is missed – perhaps we could halve that and save £150m per year, with absolutely no change in service for other people?
You do realise that GPs know this and overbook their surgeries as a result? No time is lost, at all.
And if you knew anything about being a GP (and you clearly don’t) you would know that they never sit twiddling their thumbs waiting for a patient to arrive – they have vast amounts of other work to get in with.
So, another totally crass comment from you.
Yes, the vast majority of the £200Bn of government debt issued was purchased by ‘the City’, that’s exactly the point!
You claimed that the government didn’t need the City and could sell the debt to private individuals, who currently fund just £10bn of the borrowing.
Where is your evidence? (Or “shut up”?)
You know most of that money was recycled from debt redemptions?
You really do fall into the traps, time after time.
Don’t try again.
Ah, but does the city need the Bonds? Where else will they place their money risk free? corporate bonds? junk bonds? We’ve been there before and it resulted in a massive amount of printing of money and Government debt!! What did we get out of it apart from junk bonds?
You still think the city are the saviours?