Low interest rates are destroying our economy

We’ve written a lot here about the failure of the corporate world to invest. There have been a few attempts recently to suggest the problem isn’t that bad after all (subscribers can read a lot on this in last week’s roundtable). But most of the numbers economists look at suggest that business investment is still very low indeed. Why?

We are strong supporters of the story Andrew Smithers tells in his new book Road to Recovery. To him, the main problem relates to executive compensation – if we incentivise them to keep short term profits up (by paying them in share options) we also incentivise them not to do any of the things that might reduce short term profits – investing in new capital equipment being the obvious one.

But more recently we have also argued that low interest rates themselves prevent investment. That’s partly because of their effect on the liability calculations for final salary pension funds (see my post on this here). But having interest rates at a 300-year low might also be bad for confidence in general.

A note from the managers of the WDB Oriel UK Fund puts it like this: “As long as monetary policy is artificial, the climate for corporate investment remains sufficiently uncertain that companies seem deterred from committing capital; much easier, in the event of demand growth, to add capacity via additional labour especially in those jurisdictions where hiring and firing is relatively unconstrained by legislative diktat. Perhaps this explains the strength of private sector employment co-incident with continuing pronounced weakness in corporate investment.”

Take this a bit further and you see that as long as interest rates remain so low that a nervous corporate sector eschews investment, capital will remain plentiful, thereby underpinning equity and house prices.

However “the key intent of monetary policy – sustained, balanced economic growth” will remain elusive.

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13 Responses

  1. 11/02/2014, Bayard wrote

    Surely the “the key intent of monetary policy” is “underpinning equity and house prices”?

  2. 11/02/2014, Critic Al Rick wrote

    Why single out Interest Rates? There are several factors destroying our economy; the main ones, in no particular order, include:

    1) Balance of Payments Deficit

    2) Budget Deficit

    3) Hoards of Parasites (rich, poor and intermediate)

    4) Dictats from the EU

    5) The Bank of England

    6) The Government

    7) Globalisation

    8) Depletion of natural resources

    9) Mass immigration

    10) An overzealous Welfare State

    Any comments… ?

  3. 12/02/2014, Paul wrote

    The fact is Savers outnumber borrowers 6-1, some 24 million savers have cut their spending to such an extent because of BOE keeping base rates artificially low. If these rates were correct, and savers each spent an extra £40 per weeek, £2k per annum approx, this would generate an extra £60 Billion a year for our economy including the VAT element.

    Meanwhile, half of those mortgages given out from 2005-2008 and even beyond were what’s called Liar Loans which is unpunished fraud. The inept FSA, plus Gov’t and BOE all turned their blind eyes to this fraud, but worse still, the fraudulent borrowers have been allowed to benefit further by paying their low interest rates.

    All of which, is penalising the large group in Society of honest savers who could help the economy in real terms, whilst aiding the much smaller group of borrowers half of whom may have committed mortgage fraud.

    Iniquitous double standards by our Gov’t, BOE and Regulators to create a false property market bubble again prior to the general election. So, 24 million Savers should remember this fraud and abstain from voting or use their vote elsewhere other than this awful coalition.

  4. 12/02/2014, Boris MacDonut wrote

    Well low interest rates are here to stay….forever. Carney told us today that he expects base rate to NEVER go back to 5% and the new normal is 3%. Borrowers rejoice. savers grow a pair ,live a little and spend some.

  5. 14/02/2014, Tin wrote

    Since property prices move in the reverse direction to interest rates, a rise would jeapordise the ‘recovery’ (consumer spending based on house price rises) and more fundamentally the nation’s ‘wealth’ (also largely based on house prices) meaning political and economic suicide.

    Forward guidance is therefore a joke. If the BoE believe house prices are expensive (who thinks they are cheap?) allowing rates to rise would be a tacit acceptance that we as a nation are not as rich as we think we are. So they will simply keep them down as long as they can (as Boris says)

    Can somebody (MoneyWeek?) please explain what conditions would need to exist for this to happen? Is the deflationary pressure from our huge pile of debt enough to counter balance inflation? And what conditions might trigger the BoE to knee jerk out of the basement?

    • 15/02/2014, Boris MacDonut wrote

      I think they are cheap. It has not been this cheap to buy a house since 2002 and before that 1996. On that basis we are at a one in seven year opportunity.

      • 19/02/2014, Tyler Durden wrote

        Sigh……… A house that is demonstrably several times greater than most peoples’ salaries, and productive output more to the point (income without productivity is debt as Mark Burry was proved right), does not make for a happy ending.

  6. 20/02/2014, Paul wrote

    Donut thinks property is cheap, try London, Oxford, Bath, Surrey and many other hotspots with average prices in many of these areas at huge multiples to earnings, there’s always one, Lol

    Another bubble in London already and another burst to come, oh, if the Tories have convinced voters that they are all rich on house prices. Meanwhile £300 Billion lost to the economy in spending by robbed savers to support minority borrowers almost half of whom had Liar Loans, (yes fraud Donut) and still milking low interest rates to pay their mortgage payments.

  7. 26/02/2014, Pensiion60 wrote

    The poor are not parasites. Neither are pensioners. Nor any other convenient scapegoat for the failings of out of touch politicians to understand the world about them.

    Raising interest rates would bring a Weimar Republic crash. Ask Moneyweek.

    You cannot have economic growth when the bulk of the population are having less and less spending power.

    Only 3% of the benefits budget goes on unemployment.

    Half of benefits bill goes on the working poor paid far below a living wage and so feding the kids from food banks.

    Other half of benefits goes to pensioners, with a state pension only 30% of average wages and so the lowest in the developed world, bar Mexico.

    Income tax only brings in 26p in the pound to government tax coffers.

    75% of all personal taxation comes from stealth taxes, even on food, we all pay, in or out of work, and however long we live.

    So the poor, pensioner, disabled, sick, more than pay for themselves and are the footfall in the high street that has been lost, whilst the admin of Welfare Reform has caused as much national debt as the last government and threaten the nation with a Weimar republic economic crash.

    See who loses most or all state pension, when half of women 60-66 are within the working poor, whilst care commitments to perhaps disabled husband, care of grandkids and elder parents:
    https://you.38degrees.org.uk/petitions/state-pension-at-60-now

    And blog at: http://newpensionerparty.blogspot.co.uk/2014/02/flat-rate-pension-2016-even-worse-loss.html

    • 26/02/2014, Critic Al Rick wrote

      Broadly speaking, my definition of a ‘Parasite’ is someone whose remuneration is appreciably greater than it would be in a fair and just society with an uncorrupted playing-field.

      On the basis of that definition there are Parasites at all levels of remuneration, including some supposedly poor ones fraudulently or otherwise claiming undeserved benefits and some pensioners on corruptly derived pensions. And both of these classes have largely been created by politicians’ nefarious activities.

      Indeed, were it not for politicians ‘feathering their own nests’ by ‘being bought’ or ‘by buying (with public money at that)’ favours in one way or another, there’s no reason why the playing-field of an uncorrupted Democracy should not remain reasonably level.

      So, there’s every reason to blame politicians for the proliferation of Parasites. Furthermore, if it were not for the unethical activities of Parasites (especially those of the very rich) interest rates would never have deviated far from the long term mean.

      Unfortunately the rot, I fear, is too far gone to be of a reversible nature. Indeed, it is self-perpetuating. Self-perpetuating self-destruction.

      • 13/03/2014, CKP wrote

        Hang or guillotine the rich parasites, seize all their assets, put the poor parasites to work in the fields and factories, decide centrally on what each parasite is “worth” to society and reward accordingly. I believe this has been tried quite a few times already with limited success.

  8. 02/03/2014, Paul wrote

    Previous MPC member Andrew Sentance gave a speech last week in critique of current MPC policies and a good read it is:

    http://www.sentance.com/the_hawk_talks.html

    With people like Merryn, Andrew and Ros Altmann, the huge group of honest Savers might get necessary back-up as opposed to current policy of helping the minority borrowers almost half of whom had obtained Liar Loans but benefit form low interest rates whilst savers get robbed!

  9. 02/03/2014, Paul wrote

    The link above should be: http://www.sentance.com/the_hawk_talks.htm

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