The UK has moved on from creating new money to buy government bonds, but it’s still mighty fashionable elsewhere. Sweden has just announced a new programme. Japan lives by it. The Euro area is pumping out new Euros like there’s no tomorrow. Interest rates remain close to zero in the USA, UK, Euroland, Switzerland, Sweden, and Japan. At the Bank of England the Chief Economist muses about some future need to create money, impose negative interest rates, and drop the cash so it can be spent. In China the authorities still have scope to cut their interest rates and relax rules on bank credit to stimulate their economy. The economic world is summed up in the phrase lower for longer about interest rates.
Risk averse savers see this as a nightmare world, where they can get practically no return on their deposits. Other savers have made good money out of rising share and bond prices, as the official money created has been pumped into markets and pushed asset prices up. Borrowers have been benefitting from the low rates, with many able to borrow or refinance at low rates of interest for long time periods. The main winners have been most advanced country governments, able to spend and borrow large sums at very low rates of interest.
So how does this all end? Does it end? Is it just the new normal? Crisis low rates imposed in 2009 have been in place ever since in most cases. If the west is now more like Japan after her excessive boom and bust at the end of the 1980s, we can look forward to more of the same. Japan has had low interest rates and intermittent programmes of money creation for 25 years.
My problem with all this monetary experimentation in the Euro area, Japan and elsewhere is that it does not directly resolve the underlying problem. The main reason rates are low and these overseas economies are weak is the state of the commercial banking system. All the time the banks are weak or are made to be extra cautious by the regulators, there will be insufficient credit growth through the normal channels. If companies cannot borrow enough to expand, if individuals cannot borrow enough to buy new cars, homes and other major purchases, if the corporate sector is forced to run a surplus by prudent banks the economies do not grow. Too much credit is a bad thing. Too little credit makes it difficult to grow, stifles enterprise and stops people accumulating assets for the future. The UK banks are now in stronger shape and more capable of financing the recovery. The pity is they were not sorted out immediately after the crisis, and a bigger pity that Labour’s regulators allowed the mega mergers which created RBS and Lloyds HBOS in the first place. Now it’s the turn of other parts of the world to get their banking systems into recovery shape.