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.