Broken Capitalism /brokencapitalism 09 May 2017
Not much in the way of actual economic improvement? Drop interest rates. It's an easy way of kicking the economic can down the proverbial road - forcing the price of debt to be set centrally rather than based on a free market between those who wish to borrow and those who wish to lend. This has a slew of benefits:
- Big business can borrow a ton more money for the same annual outlay (though I note from experience that small/medium businesses do not share in this bonanza)
- Governments spend less of their money on repayments (as indeed do other debtors)
- Monthly mortgage costs drop, the maximum amount people can borrow rises and house prices go up
What's more, everyone gets excited at asset prices (esp those generating returns) going UP, as some of that extra business cash goes into share buy-backs, and dividends charge downward to find some sort of equilibrium with the reduced returns from savings.
The only negative politically is disgruntlement from savers - whose "asset" does not grow with other asset inflation (and is thus devalued, relatively) and non-home owners (who do not realise it is interest rates causing the run-away asset inflation, as they mostly get gaslighted by talk of supply and demand).
HOWEVER - here's the big kicker. You can't ever raise them again. Once you've used this wonder drug, a dependency quickly develops and to take it away means almost certain re-devaluation in asset prices (including stocks and housing) which in turn produce an inescapable economic collapse. Why? Think of it this way:
Imagine interest rates go back up to 5%. Why would you hold risky shares that pay dividends of 2%? Why would you cling to a £500k buy-to-let property that returns less than £25k/yr before expenses (& which is also falling in value)?
Of course, you don't. So the likely political move is to KEEP 0% rates indefinitely. The consequence of that? Nothing; so long as we can think up another wheeze for simulating economic "growth" and keeping us developed nations looking relatively wealthy compared to the rest of the world.