Bank of England lowers interest rates

The Bank of England has lowered interest rates from 0.5% to 0.25%. This is a historic low, historic in that interest rates has never been this low in the 300 year history of the Bank of England.

Conventional wisdom has it that this will stimulate the economy.  Conventional wisdom is wrong.

I can forecast the weather. The weather will do whatever the weather desires to do. If I get it badly wrong, I am made to look a fool.

If the Chairman of the Fed makes s crass remark, markets will go into free fall.

During the EU referendum, we had economists talking down the economy, idiot Chancellor of the Exchequer  doing the same, the Treasury publishing a dodgy dossier, the IMF, they were all at it.  No surprise then, businesses  confidence low.

When a business decides to invest, they do so on the basis the economy is growing, in effect, they are guessing other businesses are thinking the same way, that they too think the economy will grow, in other words, they are all second guessing each other.

These decisions are not predicated on interest rates being low, or wages being low, these are secondary benefits, if a decision to invest is made, then the cheaper the money borrowed the better, the cheaper the wages the better.

If the Bank of England drops interest rates, this sends a signal that the economy does not look too good. If wages are kept low, less money to spend.

Thus the exact opposite impact to that desired.

A game.  Three people. Each can put ten pounds in a pot. If all put ten pounds in the pot, win one hundred pounds. If one does not put ten pound in the pot, all lose their stake.

If I put ten pounds in I have to be sure the other players will do the same. If I have doubt, then I play safe, and do not put ten pounds in the pot. The other two players in turn are are reliant upon my decisions and each other.

For a successful outcome, each player has to be certain of what the other players intend to do.

There is no correct answer or logical solution.There is no way of knowing what the other player will do.  It simply illustrates how the economy functions.  Each layer is dependent upon every other player.

The Bank of England has now backed itself into a corner. It is like a gunman with one round of ammunition left. The Bank of England has no room for manoeuvre. It has only one shot left, drop interest  rates to zero. What then?

There is also to be more discredited quantitative easing. Good for property bubbles, inflating stock markets, bonuses for greedy bankers, but very little leaks down into the real economy.

Far better, hand money to people on benefits. They go out and spend in the real economy because they are desperate.

Try removing the discredited Bedroom Tax.

But at least UK has a Central Bank. Countries in the eurozone do not even have that room to manoeuvre.

John McDonnell has correctly called for infrastructure investment. But it has to be appropriate spending. That excludes expansion of London City Airport, additional runways at Heathrow and Gatwick, Hinkley Point C and HS2 gravy train.

It has to be investment in green infrastructure, investment in publicly owned railways creation of community owned and controlled local energy grids, high sped internet.

We need to create community owned local area grids. Into which feed renewables guaranteed a fair price. Consumers would pay a  fair price. Any surplus energy would be fed to other local are grids via a publicly owned National Grid.  Any monetary surplus would either be fed back into the local grid or used to finance community projects, watering of the collaborative commons.

At a stroke, these local grids would put out of businesses the Big Six.

In parallel, the local energy grid, could create a local high speed Gbit per second network.

This high speed network used for smart metering, load shedding to match the variable outputs from  renewables, sun does not shine at night, wind does not always blow.

To put these high speeds in context, attempting to download Bowie Prom to tablet over wifi, connection speed 65 Mb/second and estimated hour for 1.3 Gbytes. On a 10 Gbit per second network somewhere around 10 to 15 seconds. An 8 GB game downloads in two minutes.

These infrastructure programmes are long term, do not lead to immediate injection of money into the economy, but what they do do, is change the perception of where the economy is heading.  And thus change the perception of the players of our game.

 

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2 Responses to “Bank of England lowers interest rates”

  1. Gary Cook Says:

    But surely, putting “…out of businesses the Big Six.” would put a further strain on the economy as everyone who works for them is suddenly in need of financial aid.

    And what about Capitalism? What you propose is much closer to the Communist ideal of Marx and we all know, historically, that that doesn’t work.

    I’m all for renewables but this ‘one fell swoop’ method is surely not workable.

  2. keithpp Says:

    The most successful economic period was post-WWII when we had planned economy.

    Putting Big Six out of businesses, may lose jobs, but more jobs are created elsewhere.

    Money is retained and circulated within local economies.

    Renewables feeding into local grids, shares the load, and surplus fed to other local grids shares the load.

    Does not work. Try telling that to the several hundred successful community owned and controlled local grids in Germany.

    A couple of years ago E,ON to German financial press said could not compete with community owned and controlled local grids and would go out of business.

    We have never had Marx, therefore we do not know if works or not.

    During WWII, US had a planned economy,, and was very successful.

    Fastest growing economic sector is collaborative commons, open coops.

    Capitalism has already ended, it is just not many have woken up to the fact.

    A basic tenet of Capitalism is that the market self-corrects.

    It does not, as we saw in 2008. The banks had to be bailed out, two out of the three US car companies had to be bailed out.

    In the US, wages have flat lined since 1971.

    Anther basic tenet of the free market, is price, price determines supply and demand.

    Classic Marx, cost of stuff

    – land ie materials
    – capital
    – labour

    We now have a fourth factor

    – information

    Information flows freely, only restrictive and repressive copyright law prevents its flow.

    Information content is highest component of cost.

    Cost of stuff is tending to zero.

    To be strictly correct, marginal cost is tending to zero.

    When this happens, have no price signal for a market to function.

    Since 2008, we have been in a post-capitalism phase.

    No one knows where we are heading.

    But because we are in a transition phase, we have to act to ensure it heads in the right direction.

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