It's a weird world when Mark Carney seems to be the one person able and willing to act on the UK economy. But we are, very definitely, living in weird times and as a result it is his voice that is giving indication as to what may happen next.<\/p>\n
What we know is twofold: the Bank of England is likely to cut its interest rate. Already at 0.5% and with 10 year government borrowing costs at less than 1% this is the clearest indication that even if we are not yet heading for negative interest rates in the UK we are certainly following the trend in that direction.<\/p>\n
Second, we will almost certainly have more\u00a0quantitative easing (QE) which must \u00a0mean that he thinks that there is a shortage of liquidity in the banking system.<\/p>\n
Put these two factors together \u00a0and it is obvious that Mark Carney thinks that Brexit is having \u00a0a significant, and \u00a0negative impact on the UK economy. \u00a0In effect, what he's saying is that he expects people to save more and borrow less. \u00a0In the new understanding that the Bank of England, thankfully, has of money \u00a0saving (which can take the form of loan repayment) effectively destroys money by taking it out of existence whilst lending effectively creates money by pushing new cash into the economy.<\/p>\n
Cutting interest rates is designed to encourage lending when there is a shortage of new money creation.<\/p>\n
QE is a backstop measure when a cut in interest rates does not work and means that the Bank of England does, itself, create the money that the economy needs to keep \u00a0functioning.<\/p>\n
That both measures were mentioned in the same speech clearly indicates that Mark Carney has little confidence that interest rate adjustment work: \u00a0it is symbolic rather than effective. \u00a0It would be wise to assume that QE will follow soon.<\/p>\n
This puts us back in the position we were in in 2010. \u00a0QE will pump money into the economy, but the reality is that the vast majority that will go into speculative activity, will support financial trading, will boost bankers' bonuses, and will preserve the integrity of bank balance sheets, which \u00a0is, however, an objective that could be much better achieved by the government taking direct stakes in their share capital instead using the same money. \u00a0 To put it another way, \u00a0QE is an extremely blunt instrument to achieve a goal that has very little direct benefit to most in the UK.<\/p>\n