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Finally the truth is out, we are just like Zimbabwe

It wasn’t widely reported, but a landmark event took place in UK monetary policy last week.  Perhaps it would be more accurate to say, the truth was finally admitted. 

Mark Carney was appearing before the Treasury Select Committee and he confirmed that the £375B worth of gilts the Bank of England bought as part of the QE program would not in fact be sold back to the market as previously claimed.  This is shattering stuff; it means the fig-leaf which separated the BoE from the Bank of Zimbabwe is now gone.  They are both monetise debt, they just differ in degree. 

Carney went on to play Nostradamus by claiming he expects rates to rise to about 3% in the next three years.  Quite why anyone takes BoE economic forecasts seriously any more escapes me.  Their record is unimpressive.  Perhaps what he was actually expressing was an aspiration rather than a prediction. 

Now it’s true, the Monetary Policy Committee can set rates at any level they want regardless of relevance, but I wonder if the long-dormant inflationary dragon might make a fool of Carney.

Quantitative Easing didn’t cause much in the way of inflation*contrary to my expectations.  To some extent this was because policy makers were pushing on a string.  The demand for consumer credit was neutered and banks just used the QE cash to repair their balance sheets or buy gilts as above.  It also held up UK house prices and set a fire under stocks as investors chased dividend yields.  

But this money hasn’t substantially gone away. If you printed a trillion pounds in cash then buried it in your back garden, it would have no impact on inflation.  The impact would come when you start spending (and therefore circulating it to increase the money supply).

So what does the future hold?  Like everyone else on the planet, I don’t know, but the combination of current economics and future politics leads me to believe the following:  the BoE will tolerate higher inflation as banks start to loan again.  They may well tolerate a negative real interest rate for years to come.  This is because the national debt simply isn’t payable, so they will erode it with inflation crypto-tax. 

House prices will probably zoom on for a while, certainly until 2015.  No-one will want to rock the boat in an election year, and the way you get the floating voters to give you their loyalty is to convince ‘em they are rich by means of rising house prices.  And I suspect there will be some momentum in this.  But sooner or later around 2016/7 there must be another serious correction as inflation is well and truly out of control and beyond even Carney’s capacity to ignore.  At this point, interest rates have to go close to real terms parity.  Even rates as low as six or seven** percent would slaughter lots of recent highly leveraged buyers and rates may need to be higher than that.  This beats the hell out of UK property prices, bank balance sheets, companies etc

This period will be very ugly indeed and I think we might see some full on financial repression and possibly civil disorder.  So don’t keep much cash in the bank because I think Ed Balls might just help himself “in the national interest, to protect the most vulnerable, because of the actions of greedy bankers” etc 

As ever, this is not financial advice, make your own decisions yadda, yadda.

* Except insofar as we probably would have experienced deflation which debtors fear, but is good for the rest of us because it just means falling prices, i.e. things getting cheaper.

** Contrary to Radio 5’s assertions, we have not seen the end of high interest rates.  I recall building society interest rates of 17% in the early 1980’s  The normally quite sane, if curmudgeonly financial guy went on to rail about bitcoins because they are not backed by anything (true) unlike the pound (sic)  What the fuck is the pound backed by?  Fiat currency much?  It is paper with pictures of dead guys on it, nothing more.  It is simply more widely accepted at the moment.

  

6 Comments

  1. dioclese says:

    I have to say that as a retired person living on the interest from savings that I got by downsizing my home, I am praying for an increase interest rates. I was self employed and have no pension fund.

    There’s a lot of focus on youth unemployment, but unemployment amongst over 50s is rising and THREE TIMES the rate of the under 25s.

    As for mortgages, my generation survived 17% mortgage rates and lived to tell the tale. When I retired I was getting around 6-7% one year fixed term in the building societies, now I get less than 2%

    I’m duly sympathetic for people with debts and credit cards and mortgages and kids, but the focus is too one sided. There has to be a balance in the middle somewhere where I get a decent savings rate without borrowing rates going becoming punitive.

    I’ll take a bit less if they pay a little bit more. My kids might be paying low interest rates on their mortgages but that’s at the expense of me being squeezed – as Denis Healy once put it – until the pips squeak. Retired people need to be able to live reasonably as well, but nobody seems to give a flying about us!

    The politicians would do well to remember that it’s our age group that turns out to vote…

  2. Paul Marks says:

    Good post.

    Of course there was no point bailing out the banks (not the open bailout that has been repaid) by producing more money (from nothing) and using it to buy various rubbish (such as government IOUs) if you then “requested” that the commercial banks (and other such) then came up with money of their own to buy this stuff.

    If the government did that (demand that the bankers actually buy back this stuff – with their own money) then the London property market would collapse.

    Nothing must upset Mr O.s bubble plan.

    “Which Mr O? the British one or the American one?”.

    In this (credit bubble economics) does not matter? They both support the same monetary policy.

    Marxists and Keynesians are different things – but neither has any love for real savers.

  3. Julie near Chicago says:

    Meanwhile, over here, everybody from the Republicans through the Dems, from the an-caps through the commies, and all the pundits for sure, are hawking the line that the Evil Seniors–Baby-Boomers all–are living off the fat of the land and the backs of the young.

    The “fat of the land” part is far from true, and “the young” have a legitimate complaint (but not not quite the one they’re encouraged to think they have); but I am well-and-truly po’ed (surely never concerned or worried) by this constant blaming of the elderly for the sorry state of the young’s affairs onaccounta Medicare and Social Security. It would or will be easy to blow it up into another form of Class War, creating yet more tears in the social fabric.

    Here at least, the politicians are constantly berated (especially the Republican ones, especially by the Dems) for pandering to the Seniors. “No no no my plan won’t touch Medicare,” “No no no we wouldn’t dream of tinkering with Social Security!”

    [Re this last, whatever one thinks of G.W. Bush, he did bring up and push for (insofar as he had it in him to "push") the idea of at least "privatizing" Social Security via private retirement accounts. It seemed to me he was quite sincere about that. Then push-back against the idea rose to the level of attracting 10 seconds' worth of notice on the TV, and it was dropped never to be heard from again. But it seems to me that there was considerable strong feeling amongst the public that this sorely needed to be done and done NOW!, and that surely included the opinions of many of the older among us.]

  4. There are no investments (just government IOUs – “government investment” being a contradiction in terms) and these schemes are not mutual aid (what Americans used to call Fraternities – before this name just came to mean student society) either.

    So they are doomed schemes – and that the old would be hated was predicted long ago.

    In “The Constitution of Liberty” (published in 1960) F.A. Hayek predicted that, if nothing was done, these various Western Welfare States (at the time the United States was not a full Welfare State – as such things as Foodstamps and Medicaid for the poor and Medicare for the old did not exist in 1960, although government “pensions” did, and were a Ponzi scheme even then) would break down in the early 21st century.

    Well nothing was done – other than the Welfare States grew bigger, and spread to the United States.

    But would not the old be able to vote to protect the schemes?

    Hayek’s reply was brutal – that as the taxes needed to fund the schemes grew higher and higher (and the economy went into decline because of them), the fact that the armed forces and the police tend to be made up “of the young” would settle the matter.

    A horrible vision.

    I hope it is somehow averted.

    But it has been left very later – too late?

    As Julie says – George Walker Bush did try in 2005 – but he found that reform is not possible till the crises is upon us.

    But when the crises is upon us it is too late for reform of such schemes.

  5. Julie near Chicago says:

    Of course, as the SSA is constantly at pains to explain to us, “Social Security is an insurance program, not a savings-account program.” And of course, life-insurance payments from a (private) policy of a deceased person are not taxable. And for many of us, the deceased husband or wife had more SS benefits due than we ourselves did, so we may choose to collect his or her SS benefits (The Gov then gets to keep our own). In logic, then, it seems to me that such SS benefits should amount to life-insurance.

    Since the SS benefits are insurance, does that mean they’re not taxable? Here’s what our Friendly Social Security Administration has to say about that, because here again we see that these alleged “payments” to the afore-mentioned Evil Seniors are not quite so hefty as is believed:

    No one pays federal income tax on more than 85 percent of his or her Social Security benefits based on Internal Revenue Service (IRS) rules. If you:

    file a federal tax return as an “individual” and your combined income* is
    between $25,000 and $34,000, you may have to pay income tax on up to 50 percent of your benefits.

    more than $34,000, up to 85 percent of your benefits may be taxable.

    [ ... Numbers if you file jointly]

    *Note:
    Your adjusted gross income
    + Nontaxable interest
    + ½ of your Social Security benefits
    = Your “combined income”

    When you hit age 70 1/2, you MUST withdraw a percentage of your IRA holdings each year. All withdrawals are taxable as earned income. So the withdrawals from even a medium-sized IRA can easily push you over $ 34,000 of income.

    “The Elderly” do not get as much out of SS as people seem to think.

  6. Yes Julie.

    And a private insurance enterprise (commercial or mutual aid) must have the money to cover its polices (its promises) or it goes bust (although not in “Bailout Nation” – witness that bailout of AIG, a company that grew to be vast by ignoring the traditional principles of private insurance companies).

    The government “insurance” schemes just have government IOUs (government debt paper) no real investments at all.

    Sadly rather than government giving up its spendthrift ways – the “private sector” has been encouraged to adopt them also.

    Everything is just so depressing – it is hard not to despair.

    Oh well – at least the Mormons have large families, with children (and their Church) dedicated to looking after the old and sick.

    So even if private investments are destroyed (by the general economic collapse), these people will carry on. As may other strong, independent faith communities – such as the Southern Baptists and the Orthodox Jews.

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