Right around the world, economies face the risk of recession due to Trump's irresponsibility. We need interest rate cuts because of him, not because he wants them.
This is the audio version:
This is the transcript:
Trump is right. Those are words I never expected to say, but let me add a caveat. Trump is right that we need an interest rate cut in the world's economies, and he's wrong as to his reasoning as to why we need it.
Let me stand back a bit.
Trump is clearly crashing the world's economies. The fact that we are at the moment on a little pause with regard to his tariff war is neither here nor there.
It's perfectly obvious that his abuse in the USA is going on: his assault on universities, his assault on human rights, his assault on the whole process of government, his assault on the US government and its activities, everything is continuing, and we do know that there are still going to be tariffs at a rate that are unprecedented on most of the countries of the world, and higher rates still on China, but also remember on all cars, and that has a big impact on somewhere like the UK.
So, Trump's assault on normality is ongoing. There is no change and there is nothing that we can rely upon when it comes to Trump because it's highly likely that when he gets to the end of his 90 day moratorium on tariffs, if the world has not queued up and kissed his ass, as he so nicely puts it, then those tariff rates are likely to go up again.
So, we face the prospect of serious economic downturn.
That is inevitable in the States, and I've already explained why in other videos. But around the world we tend to follow what the States does, and if they move into recession, and they impose tariffs on the world's trade, and they create disrupted supply chains and disorganization with regard to the overseas markets of many countries who will then have production that has not got a market to deliver it to, there will be complete confusion amongst the world's businesses and when that happens, they stop investing, people stop spending and recession follows. So, although Trump is right that we need an interest rate cut because he thinks that will make America great again, I think we need interest rate cuts to avoid the consequences of Trump making America very small again.
because that is the inevitable outcome of what he's doing.
How much of a cut do I think we need? I've long held the view that there should be no net positive interest rates set by the government within an economy. In other words, the central bank interest rate should be, near enough, the same as the inflation rate within an economy.
If it's anything else, there is a redistribution of wealth. My bias is towards redistribution of wealth towards those who are on lower incomes and with lower wealth. The government's bias at present and very clearly the bias of the Bank of England inside the UK, and also the bias of other central bankers, is towards having interest rates which are above the rate of inflation, which means that there will be an upward redistribution of wealth within many economies from those who are borrowers - who by definition tend to be those with the lowest incomes and wealth - to those who have the highest income and wealth, who therefore have sums on deposit. It's really not rocket science to work that out, and this is what I want reversed. I want there to be an interest rate that is at least net zero at present.
In other words, in the UK, the interest rate should be in all likelihood a little bit below 3%, and if we are really trying to save the economy from recession, it should be lower still.
Why does this matter? Because people who pay less interest have more to spend on other things and, therefore, we will not see the depth of recession that we might otherwise face.
If the Bank of England reacted to recession, as they might well do by saying they must increase the interest rate because that recession might well be accompanied by inflation because Trump is going to export that from the USA, then we could be in an even worse situation, because a rising interest rate at this moment would deepen a recession and probably turn it into a depression, and we haven't really had one of those since the 1930s, whereas if we have a cut in interest rates at this moment, we could mitigate the risks of the recession that is, I think, almost invariably coming our way. The world cannot go through a shock of the sort that Trump has imposed upon it and not suffer a recession because of the disorganisation and disruption that he has created.
So if we really want to ensure that we mitigate the risk of recession to the greatest possible degree in the UK, we cut rates now to the inflation rate.
If we want to actually go a little bit further to ensure that people are protected from the harm that recession will cause, we go below the inflation rate. Two per cent or less would be desirable because that would redistribute wealth into the hands of those who have least - the borrowers of the world, the parents who are young with big mortgages and children to provide for, for example, or those in rented accommodation who are under stress because rents tend to move in line with interest rates.
And what we must also do is guarantee that these new interest rates, if they were to come into place, could flow through as soon as possible for the benefit of those people who are the biggest borrowers in proportion to their income, who are, of course, those with mortgages.
Right now, it is normal inside the UK for people to borrow on long-term rates, but if we cut the interest rate and then leave people on a five year mortgage, paying four and a half, five, six per cent, whatever it might be, because they've fixed some time ago - then of course we're not going to see any benefit from the rate cut. Only the banks will get that, and that is not the goal of this policy.
The goal of this policy is to put money in people's pockets, and therefore the government would have to put into place emergency legislation that would say anybody on a fixed rate mortgage should be able to buy themselves out of that fixed rate mortgage and get a lower rate mortgage with any penalties being added onto the mortgage and spread over the remaining cost of the balance, in other words, over the rest of the mortgage's life.
That would be fair.
It would be just.
It would be equitable.
It would prevent recession to some degree.
It would protect the most vulnerable.
It would redistribute wealth downwards.
It would protect the financial stability of the UK.
It would deliver the prospect of growth because businesses who can borrow at lower rates might overcome their fear that recession would otherwise create with regard to actually undertaking investment at this point of time.
We need an interest rate cut.
Andrew Bailey, take note. You cannot talk any longer about sustaining interest rates because of the risk of inflation.
The risk of recession is so much greater that that must be your priority, whether you like it or not.
Come on. Do the right thing. Get those rates tumbling and start them falling now, because we can't wait until recession arrives for this to happen. That's too late.
The job of a good economic regulator is to anticipate problems, and that means interest rate cuts are needed now.
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I recall reading that in the 50s bank lending had to follow govt. priorities. So borrowing to invest in industry and for homes was easier than for more speculative or other purposes.
I think about three quarters of current lending is for property but I may be wrong.
So is there a case for some controls on the type of lending as much as on the volume?
Yes
And the relevant figure for lending for mortgages is around 85%
Would it be realistic to require the banks to give preferential mortgage rates to first time buyers – I mean, if they wanted to reduce homelessness rather than increase it?
Given the current situation, what would a *socialist* British government do?
Many options are available
Fixed rate mortgges for life – at low rates – would really help
See my post below on how South Korea built its automobile industry – one of the ‘draconian’ measures they used was indeed preventing banks lending for house purchases.
I hope every member of the Bank’s Monetary Policy Committee has read your post. (I despair of the Chancellor of the Exchequer reading it/acting on it.)
[…] as I argued this morning, we need substantial interest rate cuts […]
Like a stopped clock, Trump is right about tariffs too – just not in the US, not now, and especially not in such a chaotic manner.
I have in mind Ha-Joon Chang’s account of how South Korea created its massive automobile industry out of virtually nothing – it was truly draconian – the government didn’t just impose tariff barriers, it actually banned all car imports for a time, and forced the banks (which were then publicly owned, as indeed they still are to some extent) to invest strategically in industry.
Chang also points out that the brexiters’ ‘Singapore-on-Thames’ aspiration betrayed profound ignorance, since nearly all the land in Singapore is in public ownership, as is 85% of housing, and nearly a quarter of national output is from state-owned enterprise.
We shouldn’t let our dismay with Trump’s particular protectionist idiocy align us with the equally idiotic free-marketeers.
Thanks
And correct
Having just seen my Council Tax bill I could not agree more. Thank you Labour, and thanks for retaining 20% VAT.
The punitive levels of charging for everything it seems – for money, for items and services seems very unconstrained.
No doubt related to the Government’s wish to ‘balance the books’ and reduce support grants to Councils and police forces, highways etc.
I watched a documentary about London’s bridges last night which spoke of how the putative corporation of London abolished tolls on the early bridges and roads in the city in order to promote growth, get the city moving. And wonder if our Rachel was watching that?
These days we seem to be going backwards to a time when services and utilities can be sold to private individuals to create rents – a rich person’s utopia beckons.
And so the same applies to interest rates it seems – we always had a fixed rate mortgage but the heavy selling was on variable rate mortgages, you were made to feel dumb back in the day when you went FR because the variables were always sold with teaser rates – a wonderful marketing ploy, the equivalent I always thought of as a Venus flytrap.
Exploitation is not democracy. Plain and simple. Such a ‘democracy’ deserves to be opposed, called out, ridiculed.
I haven’t seen the documentary, but from your description, if Rachel Reeves watched it the only thing she would have taken from that episode is: “I can promote growth by removing congestion charges”. Sadly.
Tolls created congestion elsewhere, slowed things down and also sucked out disposable income to be spent on other things, thus choking off other markets.
Tolls were also monopolies and even Adam Smith and Frederic Bastiat knew how exclusive and therefore destructive monopolies and their rents were.
The big lie in our time is that we have sold off what is public on the basis that it is wrong to have a monopoly, forgetting that they were under political and therefore democratic control to stop private monopolies which funnel wealth to a narrow band of people.
Neo-liberalism is the failure to remember history that helps reassert private abusive monopoly power that is basically unaccountable to anyone.
I have suggested it before but what about some sort of ‘citizen mortgage’ with a fixed (?) interest rate standard earnings to borrowing ratio, includes mortgage insurance.
Available for about 90% of properties – nothing over a certain size/price/poor energy efficiency etc
Steve Keen’s radical proposal during the last Australian election was grants so that home owners (only the one property) could reduce their mortgage which would allow them to maintain their equity and would result in reducing house property prices, rules that limit mortgage debt based on the income-earning potential of the property ~ 10:1 , and restrict negative gearing to investors that rent out properties with long-term leases of five years or more.:
https://www.youtube.com/watch?v=eSEM6l3vLj4
https://www.patreon.com/posts/new-liberals-61077693
I think you raise two separate (although related) issues.
I agree that high real interest rates transfer wealth to the already wealthy but I think a “risk free” policy rate equal (on average) to the inflation rate would lead to excessive leverage and asset price inflation. I think the Base rate should be (on average) equal to nominal GDP growth (say, inflation plus 1%). In short, I would prefer 3% versus your 2%.
Yes, this would still be a wealth transfer… and remember, borrowers pay a substantial spread over that which (historically) far exceeds default risk). This wealth transfer can only be addressed through taxation…… I believe there is a publication that might deal with this….by a Prof. Murphy??
In the current situation the BoE clearly needs to cut rates – no question. But the Fed? This is interesting.
“Tariffs are a tax on the American consumer” I read. Well, imagine Trump was not raising tariffs but introducing that other tax on consumers – VAT. How would the Fed respond? It would certainly see past the one-off inflation spike and see reduced demand, smaller budget deficit and cut rates. This is, to some extent, true for tariffs, too.
Of course, the problem for the US is that tariffs disrupt supply chains so might semi-permanently damage the growth potential. Also with all the “onshoring” that Trump boasts it could lead to higher inflation in the medium run as a labour shortage drives up wages. In addition, money raised by this tax is not for reducing the deficit it is earmarked for tax cuts.
So, for the Fed, they are being pulled in both directions.
For the BoE the path is simple – cut rates.
I think we are not far apart Clive – precisely because of the spreads
RM, AB is tin-eared he can’t hear you, he can only dance to the tune of Neoliberalism, his job depends on this, because how else would such mediocrity get promoted?
Many such visionless enablers across our institutions, obeying and dismantling the state is paid well.