Tag Archives: interest rates

Does “Assume” Make an Ass out of U and Me?

Once upon a time our assumptions about interest rates were that they were always in plural digits. Now we accept near zero interest rates and some accept negative interest rates as normal as they have been around for about a decade.

What would happen if currently “normal” mortgage rates returned to their higher previous “normal” rates? What would happen to car sales and the like if we returned to the “old normal” interest rates? How can people and institutions save when interest rates are nominal and interest fruitful amounts of money are so vulnerable?

With near zero interest rates, is the stock market the only actual vehicle for investment income? Is it reliable for the many?

Another previous normal assumption was that massive money creation would result in inflation/excessive inflation. It hasn’t. (Assuming relevant data is accurate). Can we now assume that the massive use of money trees does not, in practice, affect inflation significantly?

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What is monetarism and what happened to it?

In the late 70s and early 80s economic monetarism was espoused by Margaret Thatcher and Sir Keith Joseph  who wanted a radical alternative to the prevailing Keynesianism of previous governments. The theory seemed to be simple enough. The idea was that the money supply was a key parameter of our economy. Therefore, if we wanted to control inflation, and it did need to be controlled at the time, all Government needed to do was control the supply of money. Inflation would then fall and all would be well. Very quickly the Government and Treasury economists learned that they could not actually do that. It was difficult enough to define what money actually was let alone control the amount of it. Is it base money M0, which is just the amount of notes and coins in circulation? Or is it M1 which includes travellers’ cheques and demand deposits? Or, maybe M2 which includes savings deposits? Or M3 or M4?  For anyone who cares to look it up they can find out what MZM means. There are lots of ways we can create money and lots of ways to try to define it. If I write out an IOU that is a form of money. As Minsky famously said, anyone can create money. It is getting it accepted which may be the problem.

But if we think about it, we can see that the money supply, no matter how we define it, does not tell us anything much at all. If the Bank of England were to, say,  create £10 trillion of banknotes and keep them securely in their vaults they would have absolutely no effect at on the economy. But if they were stolen and scattered around the country by dropping them from a proverbial helicopter then they certainly would have an effect. They would be spent. So it is not so much the amount of money that exists that matters. It is the amount of money that is spent.

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Opinion: Getting radical with the money supply

Last week the OECD forecast that Britain was about to experience a double-dip recession, for the first time since 1975. Vince Cable in his Centreforum paper Moving from the financial crisis to sustainable growth asks “How far should monetary policy now be expanded further in the UK to boost demand and head off a period of poor growth?

He goes on to say “There is no possibility for further meaningful interest rate cuts – real short term rates are now minus 4 percent. That means further recourse to quantitative easing.

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