There’s nothing much I can say that hasn’t already been said about the Bank of England’s decision to cut the bank rate to a 322-year low of 0.25%. The £70 billion stimulus package and the other measures won’t – in my view – do much to stimulate the demand for credit. They will, however, make life even more miserable for British savers and investors.
It doesn’t look like Carney is much concerned with British pensioners. Despite the stockmarket signals – the stockmarket being a leading indicator of the economy – Carney and his colleagues have hit the panic button. They believe early surveys of business and consumer sentiment signal a tough time ahead for the UK economy. Not wanting to appear timid or weak, he’s gone big and bold.
Good for him
But to close a week in which we’ve talked about the death of money as we know it and a final assault on your freedom of action with money, let’s go back to David Fischer and The Great Wave. In a section called “Learning to think of the long run,” Fischer writes:
We should learn to think historically about our condition. History is not only about the past. It is also about change and continuity. Most of all it is about the long run. The two leading errors of economic planning are to impose short-term thinking on long-term problems and, and to adopt atemporal and anachronistic policies which do not recognise that the world has changed. It is an axiom of military history that generals are trained to fight the last war. In economic history, planners and managers are taught to prevent the last crisis from happening again. The next one is always different.
Henry Hazlitt makes the same point in his classic book Economics in One Lesson. Policy makers always respond to what is seen. And they judge the success of a policy on short-term effects. What is unseen – and here Hazlitt and Fischer are both borrowing from Frédéric Bastiat – is always left out of the calculation.
What is unseen to Mark Carney is what will happen to millions of British savers and pensioners who will not earn money on their retirement pot now. Instead, in real terms, they’ll see it dwindle in purchasing power and even nominally. All of the virtues of saving and delaying consumption won’t have counted for anything.
Sacrifices must be made in war, of course
In the war on deflation, low interest rates may punish savers. But they are good for borrowers. If it just so happens that governments and large financial firms are the biggest borrowers in the world, well then so be it. Sacrifices must be made.
But as Tim Price has suggested, you can make sense of the present through the lens of the past. Carney, Kuroda and Yellen are fighting the spectre of deflation from the 1930s. But that deflation was due to a collapse in banks, which led to a collapse in credit and the money supply.
Today’s deflation is driven by demography, technology, and globalisation. They are fighting the wrong war with a weapon that doesn’t work. That’s why I’m increasingly convinced they’ll switch targets. Instead of targeting banks (who create credit) with lower rates, they’ll target you. Why?
You’re the one who spends money. You’re the one who can increase demand by borrowing and spending more. It’s you the one hoarding cash. You’re the one holding back GDP. You’re the one causing problems. And the problem is you keep planning for the future and living for today.
I’m not sure how it will end. But the trend isn’t encouraging. If you want people to live faster and spend more, maybe you have to let money die. And if money won’t die, maybe you have to kill it.
Category: Central Banks