Last week, to the surprise of absolutely no one, the Bank of England decided not to raise interest rates. As Martin Wolf explains in his column for the Financial Times, cheap money is the order of the day:
“High-income economies have had ultra-cheap money for more than five years. Japan has lived with it for almost 20. This has been policy makers’ principal response to the crises they have confronted. Inevitably, a policy of cheap money is controversial. Nonetheless, as Japan’s experience shows, the predicament may last a long time.
“The highest interest rate charged by any of the four most important central banks in the high-income economies is 0.5 per cent at the Bank of England. Never before this period had the rate been below 2 per cent.”
This is a policy with winners and losers:
“In general, governments and non-financial corporations have gained. Insurance companies, pensions providers and households have been among the losers.”
Of course, within these categories there’s a great deal of variation. Most significantly, the effect of ultra-low interest rates has been to shift money from (typically older) people with savings to (typically younger) people paying off debts.
Given the less than ideal choices on offer, Martin Wolf argues that governments have gone for the least worst option:
“…the richest 10 per cent of Americans own about 90 per cent of all financial assets. Thus the main losers are relatively prosperous people who depend on interest income…
“This policy, however unpopular with some, is better than the available alternatives. Keynes even had a phrase for it – the ‘euthanasia of the rentier’. In a world of abundant savings, the available returns ought to be low; this is a consequence of market forces to which central banks are responding.”
One has to ask where in the world these “abundant savings” are coming from. Given the indebted households and governments of the West, the answer would appear to lie further afield – China, for instance. If this is the case, it would have less to do with “market forces” and more with the power of the Chinese Government to monopolise the savings of its people (and to force them to save excessively by limiting the number of children available to support them in their old age).
Furthermore, Western governments have gone out of their way to provide a home for this money by borrowing to finance unsustainable deficits and by conniving in reckless lending to the private sector.
Martin Wolf wonders why, with all that money sloshing around, it isn’t being used more productively:
“Why is private investment not stronger, given that the non-financial corporate sector is apparently so profitable?
“Perverse managerial incentives are one explanation. The weakness of the financial sector is another. Then there is the vicious circle from weak demand, to sluggish investment, and back to weak demand.”
Here’s another explanation – ‘cheap money’ policies, which seek to suppress interest rates – distort incentives. They create the expectation that the price of fixed assets – especially property – will go up, attracting the sort of speculation that begets further speculation. This starves the productive economy of talent and investment; so workers lose out. It drives up property prices; so younger people lose out. It reduces returns for ordinary savers; so retired people lose out. Those who benefit, however, are those with the capital, luck and ability to stay one step ahead of bursting bubbles.
Thus Keynes was wrong. Cheap money doesn’t mean euthanasia for the rentier, but a shot in the arm for speculators and pure poison for the rest of us.