A year ago I called for much lower rates of interest to ward off mass redundancies and bankruptcies. The Monetary Policy Committee decided to keep rates high, leading unavoidably to recession.
Now we are getting the bankruptcies and job losses that were the inevitable consequence of their decision, they strangely panic and slash interest rates. This would usually be the right course of action, but in the meantime the government has decided to increase the amount of borrowing it needs to do by a huge amount.
This means the government needs people to save more to send the money to the government through National Savings, direct bond purchases and investment in bonds through unit trusts and pension funds. The governemnt also wants foreigners to buy its bonds, which means it needs to worry about the continuous fall in sterling which will put off foreign investors.
The government seems to believe borrowing an extra £16 billion to make up for lost VAT receipts is reflationary. If that money is saved by other UK people, they will spend less, so it has less reflationary effect than they think. In the meantime, if they are serious about borrowing such large sums, they need to offer the saver a reasonable deal. If the MPC carries on slashing rates from here without a thought for the huge deficit the government has foolishly decided to run, there could be trouble ahead. It’s even worse now we own RBS, as the deficit will swell if they lose more money. If they lose just 1% on their assets that’s another £20 billion the state needs to borrow.
December 3, 2008
Very good points…i would further like to ask whether the govt has provided a likely loss estimate for the bank assets the taxpayer has taken on their books. I understand it is common practice in the financial industry to undergo risk assessments (not that they worked) and some sort of collateral be held as position risk requirement. Banks have to do this by way of capital adequacy requirements of course. The taxpayer being the ultimate owner of these bank assets must have some idea of likely losses over the current cycle. For RBS alone, if what you say is correct – each 1% decline in assets leads to a £20 Bill loss (requirement for new funding). There is a common view that house prices have yet a long way to fall. What sort of erosion in % assets is expected and shouldn’t the govt be preparing contingency for such an outcome. Indeed shouldn’t this be taken into account in the governments potential borrowing requirement. Remember this is just one bank…what about Northern Rock et al. These figures seem essential to me and of course question the validity of any further spending by govt. Maybe i’m misunderstanding the situation. If i am right, the govt is acting rather like the reckless hedge funds they now despise. Reckless borrowing is as dangerous as reckless lending.
December 3, 2008
Why invest money with the government when their solution is going to be inflation?
Nick
December 3, 2008
Secondly, where is the money for saving going to come from when the government is taking it in higher taxes, and running up huge debts on ‘our behalf’?
Nick
December 3, 2008
Why move to national savings when its pretty clear that they are going to print money and cause inflation?
December 3, 2008
On a related issue:
It appears that at least one European leader DOESN’T agree with Brown that the way to deal with the current economic crisis is thru a fiscal stimulus reliant upon excessive levels of public sector debt. Angela Merkel seems to be having reservations, speaking out against tax cuts and a spending splurge.
In the words of the Wall Street journal:
“The root of the global financial and economic crisis is known to every Swabian housewife, Ms. Merkel said: “You can’t keep on living beyond your means.” A lack of thrift in advanced economies caused the crisis and can’t be its cure, she said.”
The link is here if anyone wants to read further:
http://online.wsj.com/article/SB122816734631570097.html
Maybe I am thick but I don’t see how this squares with Mandy’s/the BBC’s portrayal of Brown as the political superhero/Moses figure who is leading the way for the rest of the world in how to deal with this crisis: Brown acts and the awe struck millions follow in his wake – much like lemmings as they follow each other over the edge of a cliff. Mandy’s euloly of Brown I understand – he’s a party hack and is economically illierate. But the BBC’s? Surely some measure of objectivity is called for here?
I appreciate my comment about Merkel is a mere debating point but surely this is worth throwing back in Mr Brown’s face the next time he ridicules David, George and the Conservative party for being the only voice in the world counselling caution in the wake of Brown’s stimulus package …? As with climate change Labour are seeking to claim that there is no disagreement on the policy strategy they are attempting to follow. And in both instances they being a tad economical with the truth.
December 3, 2008
Ending taxation on savings would be a fair move. Investments and savings are made from after tax income, money that has been taxed once already.
Ending this double taxation would really encourage saving and give those of us saving for pensions a better range of options.
In the short term though any government will have to plan tax rise, spending cuts or more likely both.