Why free money has very real costs
LOW interest rates are great, high interest rates are bad – that, at least, seems to be the general message from politicians and the media, who almost invariably welcome easy money and decry rate hikes. The problem is that the public doesn’t agree – not a bit, in fact. The latest YouGov research on the matter reveals that just 23 per cent of the public agree that “low interest rates are good for my personal finances”, while 36 per cent believe that they are bad and 31 per cent don’t think it makes a difference either way.
If you are stuck in the Westminster or media bubbles, or are a mainstream economist, and are conditioned to believe that everybody loves easy money, these are truly shocking and counter-intuitive results; in the real world, of course, they make sense. Savers, pension funds and those trying to purchase annuities are being hammered by rock bottom interest rates (and price signals are being hugely distorted); the great winners are those who have a lot of debt with interest rates linked to base rates.
Capitalism can’t work properly with state-imposed negative real interest rates. The only age group which supports low rates – and 36 per cent to 21 per cent is hardly an emphatic endorsement – are 25-39 year olds, who have lots of debt and big mortgages. Tory voters especially hate low interest rates. The public also dislike inflation far more than the political classes usually understand.
The Bank of England will do what it believes is right when it meets today, regardless of public opinion. But the reason I am highlighting these fascinating surveys is that monetary policy is much more complex – and far more political – than even the politicians themselves realise. They like low rates because they hope they will boost growth and jobs, and forget that manipulating the price of credit can be extremely dangerous, but there is even more to it than that.
Take quantitative easing (QE): in today’s Britain the distinction between fiscal policy (the Treasury’s job) and monetary policy (the Bank’s) has broken down. Under the guise of counter-acting the negative impact on the money supply of new banking regulations, the Bank of England is helping the Treasury finance spending to an astonishing degree. In October 2011, the Bank bought £16.9bn worth of gilts, compared with £17bn raised by the authorities – the entirety of the budget deficit that month was monetised. It was even more extreme in November 2011: the Bank bought £23.9bn of gilts while the Debt Management Office (DMO) issued “only” a net £11.9bn. In December, the Bank bought £15.3bn against an issuance of £13.4bn. In 2012 (up to 2 February) it has bought £23.9bn worth of gilts, against issuance of £16.1bn. Concentrated bouts of QE have benefits as well as costs, of course – but among the latter must be included reduced discipline at a Treasury that no longer needs to worry as much about levying taxes to fund spending.
Monetary policy has a huge effect on growth, jobs and inflation. It also has immense distributional effects – helping borrowers and hurting savers – and huge political effects. There is no doubt the UK would have lost its AAA-rating in the absence of mass gilt-buying via QE. If the Bank decides to go for more QE today, it will mean Sir Mervyn King has agreed to do George Osborne’s job for another few months. The chancellor will be delighted, of course, but that’s not really the point.
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