Saturday, 19 September 2015

Just shut up about interest rates!

…because you don’t really know what you are talking about!

After six years of endless predictions for when interest rates will start to rise, a lot of people are now gradually realising that many economists and central bankers don’t really know what is going on. Banks and investors have been pencilling in rate rises for years.

We have had Forward Guidance from the Bank of England which has proven fairly useless at giving anyone a clue when interest rates will begin to rise. There is always an excuse not to raise rates; inflation is too low, volatility in Chinese equities, a central banker wears a strange tie, etc. Will there ever be a right time?

In the six years that rates have been held at near zero in the UK, US and Europe there has been an additional $57,000,000,000,000 of debt added to the world economy. Debt which can never be repaid. We see bubbles around the world, from property to stocks.

By keeping interest rates so low for so long and injecting trillions of dollars of liquidity into the banking system, central banks have sown the seeds of the next financial meltdown. They seem so out of their depth that they spend their time reacting and adjusting to the rapidly changing developments in the markets and are incapable of making real assertions about the right policies for the future.

In the U.S. the reaction of the markets to positive employment data has been negative. Good news is bad news. This shows how dysfunctional things have become. Banks are addicted to cheap money and the highly leveraged want rates to stay low forever; they know that their debt is unaffordable if rates should return to the long term average.

Recently there has been two conflicting comments from the Bank of England’s Monetary Policy Committee. Kristin Forbes said that if you linger too long in the sun you could get burnt. She was concerned that if rates did not rise soon it could undermine economic growth. Meanwhile Andy Haldane has indicated that the next move for interest rates could be downwards! He is so concerned about another economic crash that he would consider making rates negative and even the abolition of cash to stop people hoarding. Good luck everyone!

No comments:

Post a Comment