You can print money, but you can't print wealth...
YOU MIGHT expect it be big news when the Bank of England's Monetary Policy Committee announces it will splurge a sum greater than the UK's annual defense budget on what business secretary Vince Cable calls a "very imperfectly understood... experiment".
But the announcement of another £50 billion of quantitative easing last month received scant media coverage, writes Simon Rose of Save Our Savers.
Even though, as Dominic Lawson put it in the Sunday Times, it is "robbing pensioners to funnel more billions into the banks".
That makes a total of £375 billion – almost as much as our social security, education and health budgets combined – conjured out of thin air. Yet there is little evidence it has done anything but boost the reserves of Britain's banks, while the National Association of Pension Funds reckons that the first £325 of QE has cost the nation's pension funds £270 billion.
You can print money, but you can't print wealth. If you could, every poor nation on earth would do it.
The British Chambers of Commerce and the Item Club have called for base rate to be cut to 0.25% or even 0%. Ridiculous? Many commentators believe it might happen before long, bringing further misery to the UK's savers, who have already lost over £100 billion through low interest rates.
After over three years at a record 0.5% low, surely we should be asking if low interest rates are exacerbating our economic woes. In a crisis caused by excessive cheap debt, why are the government and the Bank of England encouraging still more at cut price rates.
Far more serious than the fiddling of LIBOR rates is surely the Soviet-style manipulation by the Bank of England of base rate. Driving it steadily lower over the years, encouraged by successive chancellors more interested in votes than long-term prosperity, the free functioning of the economy has been warped and distorted to breaking point.
Andrew Haldane, executive director for financial stability at the Bank of England, has just admitted that most economists got it wrong ahead of the crisis:
"I think one of the great errors we as economists made was that we started believing the assumptions of economics, and saying things that made no intellectual sense. We started to believe that what were assumptions were actually a description of reality, and therefore that the models were a description of reality, and therefore were dependable for policy analysis. With hindsight, that was a pretty significant error."
If a patient is misdiagnosed, it does not matter how much medicine you pour down their throat. You won't cure them and you might even make them sicker.
We are told we will need still more "stimulus". We have had £375bn of QE, 0.5% base rate, a massive devaluation of the pound and over £500bn of government deficit spending in four years. That's a heck of a lot of stimulus yet the economy is more feeble than ever.
Household income is at its lowest level since the second quarter of 2005, proof – surely – that too much spending was wasted, fuelling bubbles instead of being invested in the future.
Wealth is created by using investment capital to increase productivity and facilitate innovation. Where does that capital come from? From savings, from people prepared NOT to spend their money immediately, but to defer it to a later date.
Money saved is not wasted or idle. On the contrary, saving provides the capital that businesses need for equipment, for expansion, for innovation, for improvements in productivity and for boosting jobs. Yet we are saddled with a low interest rate policy which discourages savings and tempts people further into debt and deadening economic growth.
As Einstein said, "Insanity is doing the same thing, over and over again, but expecting different results." The inmates are clearly in charge of the asylum, for the same "stimulus" policies are now repeated so often that the media and public barely notice any more.
While interest rates may remain low for the time being, any loss of confidence abroad in the UK will lead to the bursting of the gilt bubble and cause rates to rise. The government and the Bank of England must know this. But they refuse to admit it. Having made the economy utterly dependent upon cheap money, and by pretending that rates will never go up again, they have ensured that the shock when they do will be all that much greater.
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