Dec
18
At midday the Bank of England’s Monetary Policy Committee announced it had reduced the Base Rate by a quarter point from 5.75% to 5.50%, just as had been expected.
The more important questions are, “When will the next cut be?” and “Will rate cuts do much good to save the housing market and the wider economy?”
Commenting before the announcement Mark Stephens, of independent economic think tank in:specie™, said, “A 25 basis point cut is in the bag. Actually, they should cut by 50 but they won’t. That would smack of desperation. It was fear of being perceived as panicky that meant they didn’t cut in November and fear of the same will prevent them from acting decisively now”.
And that is the point. Plod-and-pause tends to be the mentality. A rate move here and then wait and see. When action and decisiveness is needed, the response is often procrastination and pontification.
If the goal is to fight inflation, and that is real inflation and not the discredited CPI variety, then rate cuts shouldn’t be happening. However, given what happened in August and September, Central Bankers seem to have given up on projecting the illusion of being inflation fighters. The job is to save a bloated economy, overly indebted and founded on speculation, from imploding. Or at least try to delay the day of reckoning a little longer.
If saving the economy is what is intended, postponing the retribution due for years of profligacy and wanton excess, then action needs to be taken. Unfortunately that action will require more than rate cuts, even if those rate cuts came in a timely fashion.
Governments may pump newly created money into the economy by creating fake jobs or squandering limited resources on pet projects and cash handouts to keep the voters placated. But the real volume of money in the system isn’t money at all it is credit. And that credit is created out of thin air by the banks. At the moment the banks don’t want to lend to each other, let alone the man in the street.
So for now Central Bankers cut rates. In recent days Australia has frozen rates and Canada has cut. Other countries are now looking to cut as the global credit contraction, particularly focussed on Western economies, continues to bite. On December 11th the U.S. FOMC is expected to cut rates by a quarter point.
Lowering rates, means a weaker currency. A weaker currency means higher price inflation as the cost of imported goods increases. Just what you need when the economy is faltering.
“Overindebtedness by both consumers and Governments, the U.S and the U.K being the most blatant examples, means that declining asset values combined with a credit contraction could lead to a deflationary depression”, said Stephen Rose director at Debt Advice Bureau™.
“It is possible that the multi-decade Debt Supercycle is at an end”, added Rose. “If that is the case then cutting rates won’t provide much comfort, even if there is a false dawn as people perceive a few months of respite”.
“If this is a Credit Crunch, all well and good”, continued Rose. “Another year or so, and things will begin to pick up. Credit markets will sort themselves out and confidence will tentatively begin to return”.
“If it is a Credit Revulsion, which it is starting to look like it is, then the impact is going to be a lot worse and last a lot longer than anyone thinks”, Rose concluded.
And that is the point. Credit Revulsions are rare but the effects are long lasting. Think the Great Depression. Think Japan, which has been suffering serial recessions for almost two decades. What happened between 1989 and 1995 in the UK was a mild little credit revulsion, no more than an appetiser. This time we may be presented with the main course.
For now it is difficult to get a clear picture as events continue to unfold. The only thing that appears to be certain is that it is all hands to the pump. If the Government and the Bank of England what to avoid the economy descending into the abyss then they have to do something about it, and that something needs to be more radical and more proactive than what they are doing now. It has certainly got to be more than the occasional, belated cut in the Base Rate.