It is Obvious

Chris Rick has got altogether too much to say

Where have all the elepants in the zoo gone?

Posted by chrisrick13 on March 4, 2016

It is obvious: I am not a conspiracy theorist

Stunned and amazed.  Lord King the previous governor of the BoE has written a book…and people are buying it.  It reminds me of two candidates going for a job as a stockbroker.  One got his stock recommendations right about 60% of the time.  The other got them wrong 95% of the time…so they employed him.

I see comments about economic theory and the right way to run an economy.  A lot of it is Keynesian which was developed by Keynes and practised by him in the first half of the 20th century.

Does any of that body of theory work now?  I would suggest not when interest rates in this country are lower than they have ever been before.  There may well be some theories about what happens but it has never happened before so things are at best theories…and there are plenty of those.

One that I find particularly amusing is interest rates.  It has been the case that in an economy that is ‘over-heating’ (who said) that you put up interest rates.  People and companies can’t afford to borrow.  Those who have borrowed are short of cash.  (It goes to the banks.  It’s supposed to go to the lenders but that never seems to happen.  With huge ratios the banks are getting interest on £100 and only paying out interest on £5.  A licence to print money.  Oh that is what they are doing.)

The obvious thinking is that if you want to ‘heat’ an economy up then you drop the interest rates.  That is what happened in 2008.  Unfortunately the effect is not symmetric.  If you put interest rates up, in general, economic activity goes down.  There is less money to spend and putting it in the bank gets a good return – not sure who from.

If you drop interest rates people borrow and spend.  No.  The psychology is not the same.  If interest rates are low then obviously the economy is in trouble, people think.  So they cut economic activity and save ready for the economic hardship to come.  You can’t fool me is the universal thought.  You are doing this for a reason.  Within a certain band dropping interest rates a little give the ‘feel-good’ effect.  Beyond that it has the opposite effect.  I don’t believe that central bankers can’t see this.  So low interest rates are for another reason.

Negative interest rates are hard to think through.  I have premium bonds that pay out based on a nominal interest rate.  If that goes negative do we have to pay in each month?  Does one lucky person get to give National Savings £1m each month?  But if interest rates are negative there are plenty of things I will do that I won’t with positive interest rates.  I might buy gold.  I will hold a lot of cash.  I will perhaps buy a lot of cigarettes which were a universal means of exchange in the second world war.

Hold on a minute did I say I might hold cash?  The bank is charging me (say) 1% a year to hold my money but I can hold it for 0%.  Perhaps insuring cash and burglary will be two growth industries.  So any efforts by the government to stop us holding cash are preparing for that.  Look at two European countries that are putting limits on what cash can be used for (France and Sweden).  Why do you think there is a move to remove high value bank notes?  So the central bankers have thought this through and are preparing the ground.

The other reason for low interest rates and a bunch of other measures, in this country at least, is the housing market.  We are in a bubble.  Not debatable.  There are still millions of people in negative equity – they have bought something for a price that is much more than it is worth (they now realise).  There are a lot of families that are managing to spend what they earn at the current rates of interest.  At a higher rate of interest they will rapidly move to bankruptcy.  If interest rates go up then a lot of families will lose their homes.  Enough that there could be a break-down of society.  Imagine when the first person to who is about to be re-possessed put the bar-wire up and when bailiffs and even police turn up and everyone in the local community comes along and resists.

A house price crash is unthinkable…but it will happen.

Here is a quote from the FT via Moneyweek:

As the FT recently noted, more than 50,000 apartments in the £1m-plus target market are either being built or are in the pipeline. This is despite the fact that less than 4,000 such flats were sold in 2014, generally considered to have been a very good year for the London property market.

Foreign money is not arriving at the same rate as it has over recent years.  The government is making buy-to-let a lot less attractive with huge increases in taxation.  House price value falls are going to happen.  Beware if you already have a property and it is mortgage free then keeping it is probably a better strategy than putting into any other investment I can think of.  Even if you just hold large amounts of cash it is in a bank and it is just bits in a computer…

So the choice is between incompetents like King and Carney, well-meaning people following economic theory that does not work and others with a (not so) ulterior motive.

Invest in yourself and buy a shotgun.

It is obvious: I am not a conspiracy theorist – I don’t need to be


One Response to “Where have all the elepants in the zoo gone?”

  1. Mark said

    I fear the cost of holding cash is not realistically 0%.
    You would need to buy a large safe and have it concreted in place.
    As you say, without a shadow of doubt, burglary would increase massively. I don’t believe it is possible to insure cash, for obvious reasons.
    So you only have to get burgled once to wipe out all your capital.

    Even having a safe only ups the ante. If violence was threatened against a family member, one would have little choice but to open the safe.

    I’m quite anti-bank too, but we have failed to acknowledge they perform a tremendously valuable service; holding our cash safely and enabling payments to be made securely.
    Traditionally we have expected to have that service not only for free, but to receive interest too.

    Negative interest, which as far as I can find has not been applied at ANY consumer current account, would be the cost of that service.

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