It is Obvious

Chris Rick has got altogether too much to say

Find me an economist

Posted by chrisrick13 on April 3, 2011

It is obvious: logic in inescapable

I know very little about economics, in common with the MPC members.  I advertise this fact less publicly than them but at greater length.  What I do a little better is logic.

The MPC and the government have a problem.  Inflation is rising.  I know it has only been temporary for the last two and a half years.  I know it is only 1% now according to the BoE predictions.  I know that government and BoE policy is based on these accurate predictions.  The way to cure inflation is to raise interest rates.  However there are problems.  Everyone seems to think that raising interest rates will stop the recovery.  I would first ask what recovery?  Then I would ask how this ‘everyone’ knows this.  The recovery is based on people spending money.  It they are paying more for the money they have borrowed then a ‘recovery’ will not take place.  However there are two sides to this.  People in debt will reduce spending…what about those with savings?  People in debt are not spending anyway.   It is not that clear cut.  It never is.

Perhaps the biggest factor that is causing the BoE to keep interest rates low, rather than do the one thing they are mandated to do, is to prevent people who have no spare cash each month and large mortgages from going bankrupt with increased mortgage payments.  Just a one percent rise will put a lot more households in trouble and case a lot of people to lose their homes.  House prices would decrease.  We would all be a lot poorer as our assets (houses) decrease in value.  It could be the start of a spiral down in house prices.  That would mean that the banks would have a lot of loans on their books that were none-performing and a lot of houses would be sold at prices below the loans secured on them as people defaulted, realising debts that the banks would have to admit to.  Banks might need rescuing again.

In short, interest rate rises would cause a major problem and this is why the MPC has done nothing for such a long time much as it might like to and jolly well should have done.

So why have the markets, economists, economical commentators in the press and just about anyone you might talk to, factored in a rise in interest rates during this year?  They will have the same effect on households next month as they would have done last month and the month before, and the month before…

Raising interest rates would be a disaster for the UK…so why is it going to happen this year, why did it not happen sooner?  It looks like we are going to have the disaster it is just a matter of timing.  Perhaps, crucially, at the point where interest rates do go up what conditions will exist that did not exist in the months leading up to the increase?

It is obvious: logic in inescapable – except when there is none.

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