Interest rates and money – what is the new normal?

On Monday I went to the annual City debate at the Mansion House. I was asked to debate the motion that “normalising” interest rates will cause the next financial crash. I spoke against the motion. A copy of my slides are available here: Returning to normal.14.02.14.

When a vote was taken before the debate 52% agreed with me in opposing the motion. By the end of the debate that had risen to 63%. Why did the pessimists lose?

I made two central claims. The first is the new “normal” on interest rates in the UK, US and the Euro area is not going to be very high rates like the 1970s and 1980s, nor even 5% rates like the last decade. As the Central Banks have made clear, their aim is to live with ultra low rates for a year or more from today. They plan to follow this with rates at around 2-3% thereafter, if the economies have continued to recover and are looking better. If not they will continue with abnormal monetary measures.

The second is there is no evidence of bubble type conditions in the US, UK or Euroland today.

When the Japanese bubble burst at the end of the 1980s, real estate values had reached higher than £40,000 a square foot in Tokyo and shares were selling on 100 times their earnings per share. Shares fell by three quarters, and property values fell by 90% when the bubble exploded.

When the banking systems of Ireland, Greece and Cyprus imploded debt levels and bank gearing were much higher than today. RBS has more than doubled its capital relative to its loans since the crisis.

Today in the UK property is a few hundred pounds a square foot rising to a maximum of £5000 a square foot in a few prestigious parts of central London where foreign buyers in the main pay large sums in cash for the privilege of owning. Shares are selling below their long term average, around 13 times earnings per share. Average house prices have risen 3% over the last year and real house prices are still below the peak of 2007-8.

In order to have a traditional boom/bust cycle like the UK 2000-2009 or the UK 1970-77 you would need much more extended bank debt and asset prices in the boom phase, followed by much tougher future monetary action than the current Bank has in mind. The Central banks seem to have learned from the mess they created in 2005-9. The new normal will be lower rates than before, whilst the current weak state of money growth means most asset prices are far from the bubble levels of Tokyo in 1989 or New York in 2000.

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58 Comments

  1. Lifelogic
    Posted February 20, 2014 at 6:31 am | Permalink

    Well what is the new norm? The markets think that for the UK government about 2.7% for 10 year money and 3.5 % for 30 year which seems about right to me. Rather encouraging too. It could be far better (with a government that would actually cut the state sector, regulation and taxes) but we have dim socialists in charge and more to come shortly.

    We also have Osborne, the Bank of England and the absurd Prudential Regulation Authority screwing up bank margins with their absurd system of “slotting” for bank lending. This is forcing perfectly sound banks to reduce lending and pushing up the margins on commercial, development and investment lending to about 3% minimum and often more like 10% over Libor & with large fees on top. This is damaging the recovery hugely. The authorities jumped from far too loose to far too tight, as always fighting yesterday battles. Taking long term interest rates to about 6%-13+% which is very high indeed with inflation at 2%. Banks lack of lending and high margins are the problem caused entirely by the idiotic government regulation.

    It is also forcing totally pointless expensive professional valuations onto borrowers every few years. Yet another pointless tax on them like the bonkers Energy Performance Certificates nonsense. Expensive totally nonsense certificates that no one ever even asks for and tell you nothing you cannot see for your self in a few minutes. Money down the drain as usual by government command.

    Just why are we so badly governed under Cameron & Osborne? Osborne call for the banks to lend more freely to business publicly and yet behind the scenes, through the PRA he is forcing them not to or to over charge on such lending. So they lend outside the UK instead.

    Yet again this dreadful government shooting itself in the foot.

    • arschloch
      Posted February 20, 2014 at 8:31 am | Permalink

      LL I can see now how you were sucked in by Equitable Life if you think British banks are “perfectly sound”. Yes they may be, if they can value up their assets in anyway they think fit. If it was not for the pesky PRA, FCA and Bank of England getting in the way, Chancellor Arschloch would be forcing them to do it on a “mark to market” basis and then we would see what they are trying to hide under the bonnet

      http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/9922668/British-banks-may-have-30bn-hidden-losses.html#disqus_thread

      Reply No-one lost money deposited in a UK bank during the crisis.

      • arschloch
        Posted February 20, 2014 at 8:46 am | Permalink

        Oh and another thing sound institutions do need to pledge all sorts of rubbish to the ECB in return for cheap money. Have a read of William Rees-Mogg’s “The Great Reckoning”. It was written in the 1990′s but even then he was right on the money with regard to trusting the banks

      • Arschloch
        Posted February 20, 2014 at 10:55 am | Permalink

        Yes the account holders did not but are you going to make another hostage to fortune and say the tax payer is not going to be out of pocket with RBS and how much went down the Swanee with NOrthern Rock?

      • Lifelogic
        Posted February 20, 2014 at 1:19 pm | Permalink

        I am not saying all uk banks are sound. Nor that they do not need some regulation but the BOE Osborne/ PRA slotting system is poorly designed.

      • Lifelogic
        Posted February 20, 2014 at 1:37 pm | Permalink

        I was not sucked in it was my wife’s small early investment. I keep control of my investments, without middle men where ever possible. I tend to avoid insurance too and self insure, far better in general I find.

    • Denis Cooper
      Posted February 20, 2014 at 1:40 pm | Permalink

      “the bonkers Energy Performance Certificates nonsense”

      What, do you mean those certificates bearing the EU symbol and referring to Directive 2002/91/EC?

      http://en.wikipedia.org/wiki/File:UKHomePerformanceRatingChartsVertical.png

      • Leslie Singleton
        Posted February 20, 2014 at 2:19 pm | Permalink

        Denis–But these things are WONDERFUL. As I agreed with the Head of a well-known and famous Estate Agent recently, the WORSE the score the better, at least for old houses, because the worse the score the more likely the house hasn’t been buggered about with (by in particular, but not solely, potentially dangerous filling of cavity walls, which were (cleverly) constructed many years ago as they are (were?) to allow free (drying) movement of air. Extra specially important if floods involved.

        • Leslie Singleton
          Posted February 20, 2014 at 2:21 pm | Permalink

          PS–Oops–missed off last bracket

      • Lifelogic
        Posted February 20, 2014 at 5:43 pm | Permalink

        Yes a complete waste of lots of people’s time and money for something no one ever asks for and tells you nothing of any use what so ever. Often wrong too.

        If there were any use they would not need to force people to have them would they?

    • Richard1
      Posted February 20, 2014 at 4:05 pm | Permalink

      I think we should ask the bishops to set interest rates. I see some CoE bishops have jumped onto Archbishop Nichols’s silly criticism of welfare reform. If all these bishops know so much about the right welfare policy,why not ask for their views on monetary policy as well?

  2. Mark B
    Posted February 20, 2014 at 6:45 am | Permalink

    For savers and pensioners this is not good news. For Banks that charge 5.1% for a personal loan yet, only give 1.29% for an ISA, means that they are making some serious money out of other peoples misery.

    Savers and pensioners, who were the ones NOT responsible for the current mess, are being hit hardest. At one end we see the savings rate so low as not even being able to keep pace with inflation, and on the other QE destroying the value of their savings and investments.

    The very kind of people that would identify themselves as Conservative, are the very ones this coalition Government have harmed.

    Think about that, and about this – Those same people, have very long memories and will not so easily forgive, whatever weasel words are used.

    • Posted February 20, 2014 at 8:47 am | Permalink

      MarkB,

      Well you could get that 5% yourself if you lent out your money via P2P on-line lending. You’d need to accept some risk of course.

      In fact I would possibly offer you that myself if you were interested in discussing it!

      PM

      Reply P2P lending can be risky and should not be lightly entered into.

    • Lifelogic
      Posted February 20, 2014 at 9:19 am | Permalink

      Cut out the middle man rip off banks and charge 5%+ yourself but take good security and a legal agreement. Or perhaps just buy equities.

    • Mark B
      Posted February 20, 2014 at 6:43 pm | Permalink

      I came here to post a comment on a subject that will affect many, NOT to get financial advice from people I do not know.

      Bloody cheek !

      • Lifelogic
        Posted February 21, 2014 at 2:25 pm | Permalink

        Well we did not charge anything!

  3. Richard1
    Posted February 20, 2014 at 6:58 am | Permalink

    Over time it would seem the right risk free interest rate is approx GDP growth + inflation. It is difficult to see that a rise to this sort of level would cause a financial crash as you say. What is a concern at the moment is that in our free market economies central banks are setting the price of money – at a level clearly below where the market would put it. It must therefore be the case that there are distortive effects – investments being made which would not be but for the price of money. Perhaps its not all that much in the private sector given most people and businesses don’t actually have access to these ultra low borrowing rates. But we should be very wary of calls for large scale government investment based on current low state borrowing rates.

    • Bob
      Posted February 20, 2014 at 11:11 am | Permalink

      @Richard1

      But we should be very wary of calls for large scale government investment based on current low state borrowing rates.

      Doe’s that include HS2?

      • Richard1
        Posted February 20, 2014 at 3:56 pm | Permalink

        Yes that is an excellent example.

  4. Posted February 20, 2014 at 7:26 am | Permalink

    Mr Redwood,

    You could be right. Its too early to say for sure but there are signs that there is a mini-bubble just starting to form in the UK property market. The risk of a boom/slump is more connected with the willingness of the banks to lend than the level of interest rates at present.

    You might want to take a look at the sectoral balances of the UK:
    When the private sector move sharply towards deficit, trouble won’t be far away.

    Reply As the government deficit falls so the private sector surplus falls – or the trade balance changes.

    • Posted February 20, 2014 at 12:57 pm | Permalink

      Yes your reply is exactly in accordance with the concept of sector balances. Is this concept, pioneered by the late Prof Wynne Godley, more widely understood and accepted, now would you say?
      If it had been better understood a decade or more ago, particularly with respect to what was happening in America would you agree that the GFC could have been avoided?

  5. Lifelogic
    Posted February 20, 2014 at 7:41 am | Permalink

    Indeed looking forward things look rather encouraging in the main both for the UK and much of the World in general. All that is needed is far less government, fewer regulations, lower taxes, no EU and some cheaper non religious energy.

    It is just a shame Cameron has blown it with his lefty, fake green, pro EU, tax borrow and waste agenda and thrown in the towel on the next election.

  6. Narrow shoulders
    Posted February 20, 2014 at 8:02 am | Permalink

    Sounds complacent to me. “No more boom and bust”.

    Sound money is the way forward and allowing banks to make a margin on (almost) limitless made up money will only end in tears (again).

    When banks (and government through QE) can create and lend limitless money savers can only get shafted yet the uncertainty of existence demands individuals hold less debt and more savings. Only the banks can win and when policy is set for only one group (banks and their borrowers) festering resentment will follow.

    Let us not disregard the fact that the latest bust was not allowed to collect all the failure too, capitalism requires an occasional cull.

  7. arschloch
    Posted February 20, 2014 at 8:05 am | Permalink

    This is not “a traditional boom/bust cycle like the UK 2000-2009 or the UK 1970-77″ its something worse. Keynes if he were alive today would identify it as a depression i.e. a continued period of sub-trend growth. The central bankers have learned nothing and have nothing to offer more than a prescription of money printing e.g. in America “operation twist”, QEs 1 & 2 (with 100% taper) and QE 3 with no defined schedule of tapering but still printing $65 BILLION per month. Everyday brings another lurch in tactics e.g. Carney now not linking the speed of the printing press to unemployment.

    Curiously you do not mention the continued high levels of personal and corporate debt, perhaps that is why Carney will not pull the trigger? However he may be pushed into it quicker than he thinks. The deficit reduction schedule is going to go to pop if money is needed to pay for all these flood defences. Check out this week’s “File on Four”. How is the UK a great place to do business, if as BMW nearly found out, that their investment could be under water? There is also another over looked feature of low interest rates. How long is it going to be before an insurance company goes asking for help because low coupon payments mean it is having trouble meeting their liabilities i.e. buying a new pension and paying out the current ones. That is something else for the retired to contemplate if they think their private pension is rock solid.

    Reply Private sector debt has fallen since the crisis and the corporate sector is in much better financial shape, with large companies often cash rich.

    • arschloch
      Posted February 20, 2014 at 8:39 am | Permalink

      Yes but there is still lots of it and now we have companies taking advantage of “record low interest rates” to borrow money to buy their shares back or pay divs. Well thats another superb example of Anglo Saxon short term thinking. Proper companies (not internet based ones with P/Es of around 500+) are finding it hard to make profits, so where is the money going to come from to pay this new debt? What is the balance sheet going to look like when these newly acquired shares have not maintained their value let alone go up and up?

      • Sebastian Weetabix
        Posted February 20, 2014 at 1:05 pm | Permalink

        Eh? Corporate borrowing is extremely low, and many of them are sitting on mountains of cash with excellent profit figures. What do you base your “hard to make profits” comment upon, exactly?

      • Richard1
        Posted February 20, 2014 at 4:00 pm | Permalink

        It is perfectly rational for companies with more cash than they can productively invest returning it to shareholders in the most tax efficient way possible.

      • libertarian
        Posted February 22, 2014 at 6:44 pm | Permalink

        Dear Arschloch

        I’ve read all of your posts on this thread. You are consistent. Wrong, ill-informed and completely unknowledgable about business and banking. At least you are consistent though. Makes it easier to not have to read your posts as I know they will be wrong before I start.

    • Anonymous
      Posted February 20, 2014 at 9:47 am | Permalink

      A new norm of low interest rates simply doesn’t make sense to me.

      Why were they ever higher then ?

      Reply Because we used to have stronger banks that could create more credit than we have now

      • Anonymous
        Posted February 20, 2014 at 9:54 am | Permalink

        PS, Arschloch

        The deficit reduction plans could be revived with the cancellation of HS2 and the redirection of the foreign aid budget.

        Populist maybe, but if we don’t get this then people will want to know why. That’s democracy.

        Flood defences are more critical to our economy than either HS2 of FA. And how about some EU relief funding while we’re at it too.

  8. Andyvan
    Posted February 20, 2014 at 8:46 am | Permalink

    Interest rates will not rise if governments can prevent it because if they do it would expose the giant ponzi scheme they are running. A rise of even a few percent would mean large spending cuts just so they could service the national debt, most of which is hidden in off books accounting frauds. If governments were subject to the accounting laws they impose on business most would be bankrupt and we’d live in a fairer society. As for a “bubble”, we’ve been in a public sector bubble for so long people can’t even see the wood for the trees.

    • Bazman
      Posted February 20, 2014 at 6:44 pm | Permalink

      You will find if you stop your delusion, we are in a banking bubble and have been for some time. Massive subsidies to banks to fund the housing market instead of industry. As I have pointed out before, Labour spending on welfare did not create the financial and cost of living crisis. the banks did by stifling work and trying to make everyone a speculator for their own profits and ends.

      • Edward2
        Posted February 21, 2014 at 3:44 pm | Permalink

        You are wrong there is no banking bubble.
        Funding for business is rising as is funding for property investment and purchase, but there is no mad rush and lending criteria is strict.
        Look at the Bank of England data on lending trends.
        I realise that bankers are the current pantomime villains for the left but your comment that banks stiffled work etc is ridiculous.

  9. Iain Gill
    Posted February 20, 2014 at 9:14 am | Permalink

    I think the era of central banks setting interest rates is coming to an end. Its too easy for folk to save and borrow peer to peer on the web, for example.
    Real interest rates are nothing like the rates being set centrally anyways. The relationship between central bank rates and real world rates given to savers and borrowers is breaking down.
    Property here is in a bubble, I am surprised that you continue on your fantasy view of the world. Current prices are completely unsustainable. Remove the state rigging of the market and we would quickly have a correction which would be the best for all of us in the medium to long term. As much as anything we will have large scale emigration to other places where property is affordable if nothing is done, it will become routine to leave college and move abroad leaving your student debt and the fantasy house prices behind.
    And I think the time when its electorally acceptable to rob from savers, rob from folk in private rental accommodation, using low interest rates, inflation, and a wide range of other tricks… in order to prop up an every bigger state subsidised “social” housing sector, an ever larger over mortgaged class, and the banks and public sector… well I don’t see the democratic process allowing this cosy easy get out for the politicians for ever. At some point the savers will rebel, probably sooner than you think.
    So time to think again I feel.

    • Sebastian Weetabix
      Posted February 20, 2014 at 1:13 pm | Permalink

      I agree property prices are dreadful, but it is not simply a bubble. If I recall the long term average price of a house is 3-3.5x average earnings. It’s about 5x now. This has in my opinion been entirely driven by three things: reckless credit expansion by the banks, unlimited mass immigration, and house building at stupidly low levels. I cannot see prices coming down at all without a huge increase in supply.

      • Iain Gill
        Posted February 20, 2014 at 4:41 pm | Permalink

        You forgot rigged low interest rates, and government manipulation of the market such as right to buy, and the way the benefits system penalises anyone holding their capital in liquid assets yet is happy to pay out to anyone with significant wealth in a house. All this government manipulation drives the prices to where they are. Yes immigration is a problem too. So is the fact that getting a decent school places means you have to live in the correct postcode, meaning many house prices are more to do with the quality of the local schools than anything to do with the house. The planning system also adds significant mostly wasted costs onto house building. All of this state manipulation should be rolled away.

        Compared with similar countries our housing is way overpriced. Forget about the incomes multiple here and look at comparisons with similar countries, its hilarious how blinded Brits have become to the obvious.

        There will be a price crash at some point, the government manipulation cannot put it off forever.

  10. Posted February 20, 2014 at 10:09 am | Permalink

    Surely it is not a question as to what the gross interest rates should be but what the net interest rate should be after taking inflation and taxation into account. At present it is impossible to even get a tax-free ISA which gives a net return after allowing for inflation. This removes any incentive for long term saving which is surely to the detriment of the country, and encourages people to buy consumer goods which might produce a short term feeling of prosperity but produces more problems in the longer term.
    For pensioners such as myself, I would suggest the inflation figure in so far as our expenditure is concerned is considerably higher than the published national figure; our purchases don’t include many of the things, such as white goods and computers, where the price inflation is low. I would suggest that interest rates would need to be in excess of about 4% before I would break even on any savings.

  11. Mockbeggar
    Posted February 20, 2014 at 10:15 am | Permalink

    If I remember rightly, the two boom-bust periods (2000-2009 and 1970-1977) you mention were both periods in which the (Labour) Governments at the time were also spending far more than the tax they were receiving. Both deficits had to be corrected with ‘austerity measures’; the first by the IMF and the second by the present government – interestingly in the teeth of opposition from, among others, the French head of the IMF. Did these deficits cause or merely contribute to the ‘busts’ in each case?

    Reply The bust in 1976 was largely about the state overspending. The bust in 2008 was more about overexpansion by the banks encouraged by the authorities, but the excess state borrowing and debt made it worse.

  12. Leslie Singleton
    Posted February 20, 2014 at 11:06 am | Permalink

    Isn’t it naive to say there is no evidence of a bubble? OF COURSE there isn’t because there NEVER IS this early: past experience surely means it is obvious that by the time evidence manifests itself it is too late.I don’t have much faith in the workings of economics as you may have noticed: far too much cleverness and no commonsense. It seems to me that any policy that is trying hard and gratuitously to wipe out such a large and prudent cohort of the population–and a part that has been here for decades (nudge nudge) just beavering away and building up savings over the years rather than rely on the State–is bound to be and to go wrong. Low rates are one thing but these rates are ridiculous. Economists will be moaning soon, desperately surprised, that savings ratios have fallen. There are plenty of other ways to relieve and encourage business. And I note that the really crazy are saying that we risk deflation. Total baloney. The target for inflation should be zero (it’s called “sound money”) or perhaps just a smidgeon above. This is another of those things that is simply obvious and economists should belt up about. Comparison with Japan is not warranted: things could not be more different there–they could be on a different planet.

    • Colin
      Posted February 20, 2014 at 2:06 pm | Permalink

      “The target for inflation should be zero (it’s called “sound money”) or perhaps just a smidgeon above.”

      Surely a smidgeon below, as technological progress improves productivity and makes things cheaper?

      • Leslie Singleton
        Posted February 21, 2014 at 12:52 pm | Permalink

        Colin–Great sympathy for your comment but (against the grain) I was trying to be flexible and to pay at least a smidgeon of attention to the idea that people will stop buying stuff because of future deflated price–for whatever reason

  13. acorn
    Posted February 20, 2014 at 11:46 am | Permalink

    The “natural” rate of base interest is zero in a sovereign fiat currency economy with free floating exchange rates. We stopped using a convertible (to Gold) currency at a fixed exchange rate in 1931 and finally altogether in 1971.

    There is no longer a natural rate of interest in such economies. Likewise, there is no natural rate of unemployment or a natural rate of inflation; these are now all political constructs based on the current government ideology. Unfortunately, the planet is still littered with politicians and bankers who still use fixed exchange rate, Gold standard thinking, that continues to impoverish nations and peoples. Particularly those who are dumb enough to be using someone else’s currency, like the Eurozone.

    The Central Bank sets the short term (policy) interest rate in its own currency, not the markets. The latter is allowed to set the spread for long term money, based on maturity and default risk. A UK interest rate of 2 – 3% in the next couple of years will likely wipe out the private household sector. Household debts are still far to large and require too much disposable income to service, even at current interest rates.

    The last six years have demonstrated that monetary policy has done little or nothing for the real economy, it has just stuffed commercial banks with “reserves” for them to use as collateral. Commercial banks don’t lend reserves except to other commercial banks, for interest if they can get it, in a zero sum game. To many reserves to lend, like now after QE, means zero interest on interbank lending. (Unless the Central Bank decides, for policy purposes, to pay interest on reserves, like now, to stop the rate going to zero; but that’s another story).

    Fiscal policy (taxes and government spending) is extremely effective in a “demand side” recession like ours. “Help to Buy” for instance is a fiscal stimulus, camouflaged to look like a monetary (BoE) stimulus. It is funded by Treasury issued Gilts that never actually leave the DMO, so it does not add to the government’s deficit or to the BoE balance sheet.

    That’s the beauty of sovereign fiat currencies issued (spent) into existence by governments, that governments don’t want you to know about. Oh, if they tell you that taxes physically pay for services, don’t believe them, every pound the government spends is a new one, fresh out of a Treasury keyboard, the taxes were shredded by the same keyboards seconds after they arrived at the Treasury.

    • Posted February 20, 2014 at 1:21 pm | Permalink

      Yes, this is pretty much my view of economics too. The significance of removing the link between a currency and gold , or some other commodity, and also removing a fixed link between one currency and another wasn’t appreciated as it happened in the early 70′s and indeed for many years afterwards, not just by the general public but many professional economists too. It’s taken the GFC to shock the economics profession into a rethink and even now the mainstream are resistant to the profound implications of that recognition.

      The stark fact is that all modern currencies are no more than IOUs of government, or governments in the case of the Euro. Governments have to take their own IOUs back in tax payments which is what gives them a value. So you could say they are just tax credits!

    • Denis Cooper
      Posted February 20, 2014 at 1:56 pm | Permalink

      “Oh, if they tell you that taxes physically pay for services, don’t believe them, every pound the government spends is a new one, fresh out of a Treasury keyboard, the taxes were shredded by the same keyboards seconds after they arrived at the Treasury.”

      Well, then from the point of view of transparency it’s a pity that we’ve moved away from using paper currency to electronic transfers to such an extent, because if the government was still collecting taxes as banknotes and coins and paying out in banknotes and coins then we’d surely notice whether it was always paying out in crisp new banknotes and shiny new coins, having instantly destroyed all those it had got in as taxes.

      • acorn
        Posted February 21, 2014 at 12:19 pm | Permalink

        The BoE shredded £18.2 billion worth of notes last year. Issued £13.7 billion worth of crispy new ones. Notes and coins are currently a small fraction of M0 at circa £58 billion. Would just about pay a tenth of the nations tax bill. Crispy new ones available at several thousand ATM machines.

        • Denis Cooper
          Posted February 22, 2014 at 12:04 pm | Permalink

          As you say, it is the Bank of England doing that, not the Treasury; and as the average lifespan of a £5 note in about a year once it has been put into circulation, while higher denominations have longer lifespans ranging up to maybe five years, replacing about a third of the banknotes every year would be about right.

          That is not the same as the scenario of the Treasury shredding all the banknotes that it receives in taxes and printing new ones to pay the government’s bills; and I expect that even in this electronic age the Treasury will still handle banknotes to a small extent. After all, if somebody insists on paying their taxes in legal tender then by definition the Treasury is obliged to accept that.

      • Posted February 21, 2014 at 1:47 pm | Permalink

        Denis,

        Some of those who, like myself, subscribe to this view of economics make slightly too much of this argument. IMO

        If I paid my taxes with coins for example, I’m sure they wouldn’t be destroyed. With a piece of paper it doesn’t make much difference whether its destroyed or recycled.

        A £5 note is a government IOU. If I receive back my own IOU I’d just tear it up. I suppose I could put it in my drawer and use it again on some future occasion just to save me the trouble of writing out a new one. That’s all it means. If I were running a casino my IOUs would be in the form of chips which would incur a cost to replace so I probably would recycle those unless they were scratched and worn.

  14. Gary
    Posted February 20, 2014 at 1:34 pm | Permalink

    “I was asked to debate the
    motion that “normalising”
    interest rates will cause the next
    financial crash.”

    Ah, here’s an admission. Rates are abnormal.

    We have a monetary Politburo that never saw the 2008 crash coming lording over the “abnormal ” price of money. Guys who demonstrably don’t have a clue are in charge.

    There is a bubble, they just cannot see it. It is a 300 year record bubble in the largest market in the UK : gilts. More evidence they don’t have a clue. And that is being charitable.

    What they are experts at is looting the prudent and handing the loot over to the feckless.

    God help us.

  15. Antisthenes
    Posted February 20, 2014 at 3:03 pm | Permalink

    To be sure that the right policies are being followed and to even out boom and busts so that they do not have such a damaging effect. It seems to me the way to do it is not by government and it’s appendages deciding on much other than having a regulatory structure to ensure honesty, fairness and to curb excesses. We all know that government bodies make decisions based on a few albeit experts(so called) calculating and divining what millions of individuals want and need. This surely has to be a recipe for disaster and I believe has been amply demonstrated as such in the past the 2008 crash a prime example. The only place that millions of peoples individual needs can be properly assessed is one where those millions do the assessing and it is called the market.

  16. bigneil
    Posted February 20, 2014 at 4:15 pm | Permalink

    “What they are experts at is looting the prudent and handing the loot over to the feckless.

    God help us”
    You missed a bit out of the middle – - “stick a good portion in your own pocket”

    But totally agree on the last 3 words

  17. Posted February 20, 2014 at 5:07 pm | Permalink

    Human beings are robots. They’ve been brought up to believe that adjusting interest rates is a good way of adjusting demand. So that’s what everyone believes. If they’d been told to count angels on pinheads, they’d do that.

    All the evidence is that interest rate adjustments have very little effect. But no one is interested in evidence. And even if interest rates did influence demand, they’re a poor way of doing it because interest rate adjustments influence a narrow range of economic activities: borrowing, lending and investment.

    Postive Money and a few others have worked that one out though.

  18. Lindsay McDougall
    Posted February 20, 2014 at 5:37 pm | Permalink

    Thank you for speaking on the right side of the argument. I’m glad you were successful in presenting your case.

    However, there are one or two things that are not quite right. Although house prices have not reached 2007 levels, the ratio of average house price to average income is still way above the long term trend. We do not need it to rise any further.

    Inflation, in the sense of a meaningful index for the purpose of controlling money supply, is not 1.9%; it is higher. A sensible index would exclude VAT and excise duties; these are Government imposed on-costs that have nothing to do with the underlying price level. It would include some measure of house prices. So if we look at CPI, whenever there has been a VAT hike, underlying inflation has been less. Whenever house prices have fallen, underlying inflation has been less than CPI, and whenever they have risen, underlying inflation has been greater than CPI.

    Taken together, these suggest that you have understated your case.

    As for RBS, it has just turned in an £8 billion annual loss and has set aside £3 billion for additional liabilities (and the rest – American legal rottweilers are not going to let off RBS so lightly for its sins in the LIBOR market). Of the big six (big 5 banks + Nationwide), it has the largest ratio of number of branches to share of the mortgage market and the largest ratio of number of cash machines to share of the deposit market; both of these ratios are measures of INefficiency. Nor is its share price too bonnie. So when is RBS going to be sold? If we are to wait until the share price has recovered to what Gordon Brown paid, we may wait a very long time. I think that we have come to the end of the time for which Government ownership of RBS has been useful.

  19. waramess
    Posted February 20, 2014 at 6:04 pm | Permalink

    Perhaps, looking in the rear view mirror everything now looks rosy however, that is what the clever guys have said before each burst bubble and they always deny a bubble until it has burst.

    Look ahead for a change and you will see that low interest rates are affecting the very structure of our society.

    Very rapidly young people are less able to afford to purchase their own homes and are being forcd to rent. This is providing the buy to rent crowd with an ever growing rental market and which fuels further the demand for properties.

    This is one of the principal causes for the increase in house prices and appears to provide the rentiers with a sinecure for making profits and for banks to lend to them. As house prices rise rentiers increase rents and young people will eventually be forced into smaller and smaller properties.

    No doubt this is indeed a bubble and it is likely to do untold damage if interest rates continue to be held down.

    Interest rates should be a matter between savers and borrowers for the natural laws of supply and demand to take effect: that is where the “normal” interest rate should be and not where a bunch of “clever” guys who call themselves monaterists say it should be.

    The banks are in the main bust and their deposit base is becoming less stable but how on earth could you prove this either way. Certainly not through their financial statements.

  20. Posted February 21, 2014 at 8:12 am | Permalink

    Meet the new normal — economic dynamic: destructionism; it is emerging, as investors are derisking out of debt trades, and out of currency carry trades once again just yesterday on Wednesday February 19, 2013.

    Destructionism is replacing inflationism as the world’s economic dynamic; this comes from the bond vigilantes calling the Interest Rate on the US Ten Year Note, ^TNX, higher from 2.48%, beginning on October 23, 2013, and investors derisking out of World Stocks, VT, and Nation Investment, EFA, as well as Global Financials, IXG, on January 22, 2014, on fears that the world central banks’ monetary policies have turned money good investment bad. The benchmark rate is headed ever higher.

    Destructionism is forcing the Small Cap Pure Value Stocks, RZV, to fall faster than the Small Cap Pure Growth Stocks, RZB, and destructionism is forcing the Large Cap Value Stocks, JKF, to fall faster than the Large Cap Growth Stocks, JKE, as is seen in their combined ongoing Yahoo Finance chart, suggesting that value cannot be found in investing.

    The bond vigilantes in calling the Benchmark Interest Rate, $TNX, higher from 2.48%, and the currency traders following in selling the Major World Currencies, DBV, and Emerging Market Currencies, CEW, have created two extinction events, the first the death of fiat money on October 23, 2013, and the second the death of fiat wealth on January 22, 2014; these twin extinction events terminated the age and paradigm of liberalism and have introduced the age of authoritarianism.

    Meet the new person: the debt serf; he is emerging via diktat money.

    Just as the woolly mammoth was made extinct by a sudden ice age extinction event, liberalism’s investor is being made extinct, as the dynamos of liberalism, these being creditism, corporatism, and globalism, are winding down.

    Furthermore the investor’s habitat, this being democratic nation states and banks, are being literally obliterated; Benson te writes Thailand hit by a bank run; and he writes Kazakhstan’s devaluation triggers bank runs.

    The nature of personhood is changing, given the extinction of liberalism’s investor and his investment choice, and the death of fiat money and fiat wealth, … the new person is emerging, … that being the debt serf, and his economic activity, that being debt servitude, through the creation of diktat money.

    Inasmuch as democratic nation states are crumbling, new regional sovereign authority is rising establishing the debt serf’s habitat, that is a regional gulag of regional economic governance and totalitarian collectivism; the Eurozone is ground zero for this new habitat, with European Voice reporting Eurogroup sends Troika back to Greece. No decision on further financing for Greece until the summer, says Eurogroup chief.

    An inquiring mind asks, who is one going to be?

    No one wants to be a debt serf; but liberalism’s singular dynamo of regionalism, operating within economic fascism, is producing authoritarianism’s person.

    There are two options, one can have fiat identity and experience within libertarianism.

    Or one can have elect identity and experience, as is presented by the Apostle Paul in Ephesians 1:4, within dispensationism, or perhaps better said, within dispensation, that is the economy of God as is presented by in Ephesians 1:10.

    • Edward2
      Posted February 21, 2014 at 9:04 pm | Permalink

      Whatever you do in the future please keep taking the tablets.

  21. Terry
    Posted February 21, 2014 at 2:34 pm | Permalink

    Surely, Interest rates are aligned to Gilt Yields? If there is a massive sell off of Gilts then their respective yields will soar and all other interests rates would rise in proportion.
    Should the Bond market collapse, interest rates will have to rise regardless of what the BoE and Government plan might be.
    Attempting to hold a fixed yield level with yet more QE will do nothing but frighten Bond investors even more, so we may end up with the Government printing even more money to loan to itself. And that will do wonders for the Pound won’t it? Collapsing faith in our currency will cause yields to rise even further and all other interest rates with them. In the end, the Market always assumes control but it will be the little people that suffer.

  22. Ex-Tory
    Posted February 24, 2014 at 12:13 am | Permalink

    Every time someone mentions interest rates I’m reminded of how your party have deceived pensioners and savers and the fiancially prudent to favour and bail-out the overborrowed, the financially feckless, the banks and BTL landlords, with ZIRP, further QE, “funding for lending” and the latest “help to buy” nonsense.

    Your party has deceived your core voters, delayed my retirement hopes by many years, and ruined the prospect of my children buying a home. I’ve been punished for being financially responsible.

    Trying to hoodwrink traditional tory voters with lies, deception and spin – the latest trick is sending Martin Weale out to talk of rate rises “maybe in 2015″ is a joke. We know the game now. You really do take us for fools.

    People are turning to UKIP not just because of Europe you know. You have hurt a great many many decent hardworking people and retirees with your theft by financial reppression tactics to help out the overborrowed and the feckless. It’s gone on for *far* too long now.

    Come election time you will pay dearly for this. Roll on the next election, it’ll soon be countdown. It will also be the first time ever that I will have never voted for your party, and I will never vote for your party ever again. I am that angry for what your party has done.

  23. Never more LibLabCon
    Posted March 1, 2014 at 6:46 pm | Permalink

    I can’t think of anything to add more than Ex-Tory…sums my feelings up exactly !

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  • About John Redwood

    John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College, and has a DPhil from All Souls, Oxford. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.
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