Err, yes

There is plenty of discussion in the financial media this morning on whether or not this will be the week when the Bank of England finally raises interest rates above 0.5%, which has been their ceiling for near enough a decade. The broad consensus is that they will. The broad agreement as to the reason is that pride requires that they do so.

OK, so, why shouldn’t they?

The savings ratio is at an all-time low as households are under threat of being unable to make ends meet.

Tuberoso betrays his lack of economic knowledge again.

As Keynes pointed out, the paradox of thrift. In a recession people logically save more. But that’s bad for the economy as a whole. So, we actively desire to lower the savings rate to get out of the recession. The policy has now worked, huzzah. But then that means we’re out of the recession and should be raising interest rates in order to raise the savings rate, no?

17 comments on “Err, yes

  1. Firstly, higher rates encourage savings so if you worry about savings ratios being at an all-time low, increase interest rates.
    Secondly, the spending-income balance is increasingly distorted by Student Loans which are not classified as income so it is inevitable that the bottom x% of “households” are spending more than their income because they are spending their grants/loans. As fees go up then so does, phased over three-four years as it doesn’t affect students already studying, the amount of spending in excess of income.
    Thirdly, the baby boomers (the real ones, not the secondary ones born in the late-50s) have almost all retired and *should* be gradually dis-saving.
    I would say that “firstly” was a no-brainer, except that might imply that Murphy had a negative quantity of brain.

  2. Why in the world would people put money out at 0.5% unless they couldn’t think of anything better to do with it?

  3. Tim

    It’s the TRUK equivalent of the Koh-i-noor – check out his latest post on the BBC:

    ‘We need press freedom. That includes the right to make informed comment on news broadcasting. The BBC should have no right to stop that and no interest in doing so. But it has, and it clearly intends to do so.

    Worry, a lot.

    Next there will be a ban on clippings from the press. The law to achieve that goal is already on its way, whereafter this blog could simply disappear. I could never eliminate all the quotes I have used in the past. And dissenting voices will disappear from view.’

  4. Apparently private pensions are not invested:

    ‘teflon don says:
    ‘July 30 2018 at 1:44 pm

    But zero interest rates encourage the effects you complain about…
    Reply

    Richard Murphy says:
    July 30 2018 at 1:53 pm

    Low interest rates encourage investment, not saving

    It is investment that creates value for pensioners

    Savings have nbever done so

    And the vast majority of pension fund money is saved and not invested

    So it has almost no economic value at all’

    I sometimes think that we have reached peak stupidity from Murphy and then an even more ludicrous level of ignorance is reached. In a civilised world he would be detained in a safe facility, both for his own health as well as that of civil society – absolutely barking mad.

  5. van Patten

    “And the vast majority of pension fund money is saved and not invested”

    Well, that’s clearly nonsense as far as private pensions are concerned, but maybe he’s including public pensions in his thought (I know!) process.

    But then public pension funds are neither saved nor invested as there are no ‘funds’, they being merely paid out of current expenditure.

  6. John 77. You’d think the retired Boomers would be spending their savings, however it seems they’re not (rainy day money, especially if you’re expecting things to get worse) – one of the Treasury’s grouses.

  7. “You’d think the retired Boomers would be spending their savings, however it seems they’re not”: they are probably familiar with the chilling expression ‘care homes’.

  8. As a retired boomer I’ve spent some savings by supporting the kids in their need for housing. The rest is rainy day money, hopefully not dwindling too fast as we do interesting stuff before we’re too old for it. I’m glad my former employer did invest the pension fund, though it’s still in actuarial defecit.

  9. Actuarial defecit. Join the club. On the plus side, quantitative easing – asset inflation – has done wonders for most funds this past several years.

  10. One day the lack of savings is good because we are out of the thrift paradox zone ….. Next day it is worrying because (undeclared reasons). One day savings are neo liberal and the result of rent seeking. Tomorrow they are the working person’s goal. Don’t set your compass by Captain Potato

  11. @ Bernie G
    The actuarial deficit is *caused by* QE.
    The lower interest rates have more impact on the value of liabilities than of assets as the liabilities are longer-dated (also because the value of equities, which might seem to be ultra-long-dated and so a hedge have not responded fully to the negative real interest rates on government debt because the Equity Risk Premium remains positive relative to an attic full of baked beans which has a zero real rate of return).
    The price of equities has gone up but it does not do anything nore than double if you reduce the return on equities from 6% (ERP of 3% and return on gilts of 3%) to 3% (ERP of 3% over baked beans when return on gilts is -2%) while the valuation of liabilties more than doubles.

  12. I’m getting an increasing number of online ads and mail shots offering equity release. As I’ve said before, quite a lot of boomers of my acquaintance have their pension tied up in their property and we’re going to see some interesting economics playbout over th next 20 years or so.

    I know one guy in his 70s who’s had to go back to work in Sainsbury’s and is desperately trying to sell his house. His wife went back to work at M&S.

  13. BiND – how desperately trying to sell his house?
    If desperate enough he will sell. Otherwise he’s not that desperate and it will stay on the market until a buyer comes along.
    Which could be years.

  14. Martin,

    He’s got his sale, its just the desperately slow nature of house selling in this country that’s the problem.

  15. @BiND

    “I know one guy in his 70s who’s had to go back to work in Sainsbury’s and is desperately trying to sell his house.”

    Equity release does offer an alternative.

    I’ve no interest in leaving anything to anyone when I die and intend to draw down on my house when I retire. What’s the point in spending all those years paying for it otherwise?

    Phase 1 sees me drawing down on it, phase 2 selling it and renting. Phase 3 probably sees me on the streets in a cardboard box drinking special brew but I’ll be well into my 80s by then.

  16. The savings ratio is at an all-time low

    Amazing that someone could mention interest rates at 0.5% yet not make the connection.

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