Is money going out of fashion?

I believe that I have mentioned before that I am not an economist.

So lets talk a bit about “austerity” and so on…

There are good reasons to believe that we are still in the 2008 financial crisis*. The emergency low interest rates are still in place and none of the real problems have been fixed properly. Few people have been arrested and even fewer convicted. Most importantly, we have seen a step change to the economy rather than a short deflection.

So we seem to be stuck with very low interest rates for the foreseeable future. Currently the Bank of England base rate is 0.25%

Then there is inflation. The inflation target is to hold CPI at 2%. CPI is what I call “bullshit inflation” (By which I mean inflation that is bullshit, not the inflation of bullshit**). In my view RPIx and then CPI were the government’s chosen measures of inflation as they ignored the housing crisis and gave lower figures. So as far as I am concerned RPI inflation is “real inflation”. Currently CPI is  2.9%. Currently RPI is 3.7%.

Hold up? Are you arguing that the only meaningful measure of inflation is 3.7% against a base rate of 0.25%?

Yes. That’s exactly what I just said.

So you contend that the real terms base interest rate is actually -3.45%?

Go to the top of the class.

But it is not like you can actually borrow at 0.25%. Last thing I heard Wonga were taking a bollocking for charging a lot more than that.

Correct. But consider the issue for people with money saved.

  • Money in the leading instant access savings account (1.25% gross pa) is leaking value at the rate of 2.45% pa and it is even worse if you have to pay tax on that interest.
  • Money in a typical instant access savings account (0.25% gross pa) is leaking value at the rate of 3.45% pa and it is slightly worse if you have to pay tax on that interest.
  • Money under a mattress is leaking value at 3.7% pa.

So money in the bank is money in a leaky bucket?

You’re on fire today. Are you sure you’re not an economist?

No. I’m you, just typing in a different colour.

Right.

Anyway, I’m not suggesting that money outside of the bank is a good idea though.

Are you authorised to give financial advice then?

Nope. And anybody who misconstrues this as financial advice will get exactly what they deserve. Now shut up and let me get on with it.

So what is really going on here?

Money is gradually leaking in value in a way that is not normal. Inflation is normal but you should be able to beat inflation with a savings account but instead all a savings account does is leak value slower.

Of course there have been occurrences of this in the past. The “stagflation” of the 1970s springs to mind but surely that is not what we want? It seems to me that we have gone way past the point where interest rates need to rise to stop this.

So why are we doing this?

This is all down to the cock-eyed view of “austerity” we have.

In 2008 a huge amount of perceived wealth was destroyed. A lot of that wealth never really existed in the first place but it was on the books and then it vanished. The smart thing to do would be to have taken the hit, restated any past accounts that were false, arrested everybody who was deliberately pushing fake wealth and made a fresh start. Nobody wanted to do that.

In 2016 a huge amount of real wealth was destroyed. Brexit tanked the value of the Pound creating a huge upward pressure on inflation (which we don’t want to admit to) and necessitating interest rate rises (which we don’t want to admit to). Nobody wanted to do that.

So instead of admitting that wealth has been destroyed we hid it and instead let money leak value in the hope that nobody would notice that they had slowly had their dollar chopped.

So austerity means:

  • Paying public sector workers salaries that fall every year in real terms. Not just pen-pushing civil servants but nurses and firefighters; You know, the people who keep us alive.
  • Allowing savers, many of them pensioners, to have their savings eroded every year in real terms.
  • Not doing anything about the housing crisis until it was far too late, and even then not enough, because it was the closest thing to a magic money tree (for the property speculators at least) that anybody could find.
  • Wondering how we are going to blame it all on the EU.

So rather than an end to austerity, I’m calling for and to this fake austerity that only hurts the innocent bystanders. It is time to put up taxes and interest rates, defend the value of the pound, help savers at least hold on to the value of their money and to let the people untouched by this fake austerity feel their share of the pain. Sure this will hit the innocent bystanders for a second time but this time there will be enough money coming in from the others which can be used to help the more vulnerable.

There needs to be an end to the culture of cheap credit. There needs to be protection for existing borrowers so that people who lent money to uncreditworthy people take their share of the pain. There needs to be an end to the culture where one person casually buys a coffee for £4 each day while another has to feed their whole family for that, and where that is considered perfectly normal. This is not normal. None of this is normal. The more it goes on the more it seems normal but it isn’t.

That’s not going to happen is it?

Nope. Politicians hope they can keep things going as they are long enough for the next election. Nothing else matters to them. Of course, normality will reassert itself and the longer it is denied the harder the snap on that snap back is going to be. Of course, Brexit is the ultimate time limit on this. That can not fail to kick the UK back into touch with economic reality.

Last year, I suggested to a colleague that interest rates could peak a little over 6% post Brexit. That is not a huge number. It is not even high by post-war standards. I wasn’t trying to engage in hyperbole. Even so, he was quite unable to conceive that this was even possible. He is older than I am but he had somehow erased from his mind any possibility that rates could be even half as high as they had been several times in his own living memory.

Yep. That snap back is really going to take people by surprise. But it is all OK. They will probably blame it on the EU. And being poor is fine so long as you have someone else to blame…

 

* – This is an idea I picked up from a real economist. If you have a few hours to kill I recommend Prof Jagjit Chadha’s recent series of lectures at Gresham College: Where are we after the Storm? The UK Economy in the Aftermath of Financial Crisis. Of course, he is not making the same argument as I am.

** – Inflation of bullshit is a completely different bad idea, which you can explore in a field, using a footpump, and without me. (Although I will watch it if you upload a video to YouTube.)

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July 8, 2017. #Brexit, Money.

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