Merryn's Blog

Low interest rates are destroying our economy

Our ultra-low interest rates are not just shafting savers, they're ruining Britain's economy too.

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.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

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."

Advertisement
Advertisement - Article continues below

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.

Advertisement

Recommended

Visit/516758/beyond-the-brexit-talk-the-british-economy-isnt-doing-too-badly
Economy

Beyond the Brexit talk, the British economy isn’t doing too badly

The political Brexit pantomime aside, Britain is in pretty good shape. With near-record employment, strong wage growth and modest inflation, there is …
17 Oct 2019
Visit/economy/uk-economy/brexit/600791/will-britain-close-its-doors-to-immigrants-post-brexit
Brexit

Will Britain close its doors to immigrants post-Brexit?

Details have not yet been forthcoming, but Britain will soon have a new immigration policy. What will that mean for businesses and investors?
8 Feb 2020
Visit/investments/property/house-prices/600795/uk-house-price-rise-brexit-bounce
House prices

Is the jump in house prices just a Brexit bounce, or is it more durable?

UK house prices rose sharply in January. Some of that is down to the end of Brexit uncertainty – but not all. There is a real risk that prices will ke…
7 Feb 2020
Visit/economy/uk-economy/600792/were-near-the-tipping-point-for-electric-cars
UK Economy

We're near the tipping point for electric cars

Demand for electric cars is soaring soared. And while the switchover will be expensive, we could be near a tipping point.
6 Feb 2020

Most Popular

Visit/investments/investment-strategy/600804/the-secret-to-avoiding-being-panicked-out-of-your-portfolio
Investment strategy

The secret to avoiding being panicked out of your portfolio

With the coronavirus continuing to occupy headlines, investors still aren’t sure how to react. But the one thing you mustn’t do is panic. Tim Price ex…
11 Feb 2020
Visit/investments/commodities/silver-other-precious-metals/600812/buy-silver
Silver and other precious metals

You should all own some silver. Just don’t expect it to make you rich

Silver is cool, beautiful and immensely useful. But for investors it's the most frustrating of metals. Dominic Frisby explains why you should own some…
12 Feb 2020
Visit/investments/investment-strategy/600772/just-five-assets-matter-for-investors-portfolio-asset-allocation
Investment strategy

Just five assets matter for investors. Here's what they are

Every investor’s needs are different – but most can be met by the right combination of five investments
11 Feb 2020
Visit/investments/commodities/600729/the-rare-earth-metal-that-wont-be-a-secret-for-long
Sponsored

The rare earth metal that won't be a secret for long

SPONSORED CONTENT – You can’t keep a good thing hidden forever; now is the time to consider Pensana Rare Earths and the rare earth metals NdPr.
31 Jan 2020