The pound question

If the Bank of England raises interest rates on Thursday, will the pound rise or fall?

Rise. As the markets 'know' that unless they raise rates they are intent on destroying sterling through edging towards hyper-inflation.... perhaps!

the pound would likely rise in the very short term , then fall drastically as every individual and business, small or large would see untimely increases in the cost on every single item of expenditure, over and above recent tax rises and those yet to be announce in or after the budget (which will see steep rises in oil and gas prices).

mortgage borrowers will go under, housing will crash further, larger investors will face increased borrowing and repayment costs.

whilst some importers may gain, they will not pass on their gains and exporters may well struggle

it may be called "a base-rate interest rise" but would be an unwelcome and untimely TAX on UK PLC and on all that breathe and live here, with the only business to gain - you guessed it, the banks and overseas hedge funds.

might be better if the BOE were to lend (at 0.5%) to the general public and cap all mortgages at say, 1% and energy costs at half their current levels for say 2years.

it would make for an incentivised work force, as it would be so popular, would reduce massively peoples overheads and encourage people to get out, work hard and maximise their opportunities.

but hey, that "pig is still flying"!

Inflation looks set to breach the 5% barrier, way above the 2% target, the fourth-quarter GDP figures showed that the economy is in a fragile state. The effects of cutting the public deficit haven't even started to be felt and unemployment is expected to rise significantly. With families already struggling with rising food, fuel and energy costs, raising interest rates as well could be catastrophic for those on the bread line,The last thing the government wants is an increase in repossessions - a likely outcome if rates rise. Rates are likely to stay put for now, rising in the second half of the year, and then slowly. We predict rates to hit 1% by the end of this year and 2% by the end of 2012.
https://www.mindfulmoney.co.uk/3158/investing-strategy/interest-rates-to-be-set-this-week.html

Stephanie Wrote:

In normal times, banks raise interest rates to stop inflation, which they expect to result from the economy growing faster than its long-run sustainable rate. A rate hike is thus a sign of economic strength. Assuming other central banks don't raise rates at the same time, you would expect investors to buy sterling in hopes of (relatively) higher returns and faster growth.
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This continues to puzzle me.

By what mechanism does "banks raising interest rates" stop inflation?

Inflation, by definition, is an increase in the price of stuff in the currency in which it is measured. This can be driven by too much demand, or not enough supply.

If an economy is growing - in the sense of "more wheat harvested this year than last" the price of wheat should go down, and the little people should get more to eat. If an economy is shrinking, there is less to eat, and the price of wheat should go up.

If an economy changes size by the same % in demand and supply, there should be zero effect on inflation.

The only link that mushroom can dimly perceive is that if there has to be a change in the quantity of money required to service a change in the overall size of the economy. (More people making more transactions, so more "cash" required.)

If the central bank chooses to devalue the currency by printing more money than any actual increase in production, it may "look" like growth in spending-based GDP, but actually it is only growth in the money supply.

If the central bank chooses not to print more money and money itself becomes rare and commands a higher price, then the whole idea of "money without intrinsic value" is shown to be a sham.

This mushroom is thinking that the BoE base rate has no effect on the real size of the economy, but only on the "buying and selling of money."

Is there an idiots guide somewhere to explain this?

One puzzled mushroom.

P.S. Since nobody except a favoured few can get ther hands on BoE base rate money, surely the actual loan rate has a bigger impact on real-world investments than the BoE rate?

The BoE will only put rates up here when the Euro rate rises, and it will shadow that rise maintaining the half percent differential.
For years, maybe forever, regardless of the state of our economy, our interest rates will be intentionally lower than the Euro's.
So high inflation will always be labelled 'temporary' even if it goes on for years.

Merv might be 'aware' of how we are all struggling under the rising tide of inflation, but he isn't going to do anything about it is he?
Why don't we all put in for a 10% pay rise and when Merv starts moaning say 'Don't worry its only 'temporary'...it'll drop out of the figures after a year'.

It is plain that we are at the start of a process that will see all of us getting poorer in relative terms. Both the government and the BoE will be happy for this to last for as long as they can get away with it.
In the end its up to you...you're getting poorer until your wages match inflation.

Keep an eye on the rates changing whilst investors read your blog (or some algorithm somewhere tries to measure sentiment in the media, and feed it back as a number). Now known as the "Flanders Effect" ?
You could compete with Peston.

I suspect that media "chatter" has more influence on the rate of exchange than a BoE announcement in the current economic landscape (and perhaps generally). Experts - is there a real name for this effect ?

Arguably the market will already be pricing in the possibility of a MLR /base rate increase ... and any change in the value of the GBP after Thursday's MPC announcement will reflect future GBP exchange rate movement.

Depends how much any UK intererest rate increase is applied ... 1/4% might mean that banks do not need to put up their rates immediately or by the same amount and will benefit from slightly higher cash deposits as the of saving money in a bank would be ever so slightly improved from being the current 'game for idiots'.

The 'safe money' is on a stronger pound if UK interest rates go up ... although as a rate increase on Thursday might have caught some off guard as many are probably not expecting the MPC to try and give sense to the weak enabling legislation that governs theirs' and the BOE's legal position regarding what it is the MPC is actually supposed to be doing.

A stronger pound would benefit the UK in many ways and British manufacturers need to have the vision and flexibility to sell to and supply the UK domestic market and not keep bleating about exchange rates. The govt can facillitate this in the budget by applying 'selective modern protectionism'.

The govt should put more pressure on the banks to work with those in arrears with mortgages of domestic properties if and when UK interest rates rise and look for and ensure more solutions likes shared equity arrangements etc and co-ownership with housing associations.

It is quite ridiculous that our govt still tries to manage our entire economy through a single main interest rate.

#2 sanity4all,

"might be better if the BOE were to lend (at 0.5%) to the general public and cap all mortgages at say, 1% and energy costs at half their current levels for say 2years."

Are you really being serious? What a recipe for disaster! We already have extraordinary levels of private debt and you wish to create an even greater problem.

Those on tracker mortgages have done very nicely since 2008 and there is a far stronger argument to bring their repayments slowly back to reality. We certainly do not need to either maintain the present housing bubble or to excite an even more inflated market.

However, there is a good argument in the value of government intervening in the energy markets (including petrol/diesel).

Damned if they raise interest rates, damned if they don't. They won't raise rates and not for some time either, it's the lesser of the two damnations in the banks eyes.

The bank got it badly wrong in 2008 by reacting far too late to the crisis so they'll accept 5% inflation because all the public will moan about is rising prices. Raising rates however will give the public rising prices and homelessness to moan about. Predictions are for inflationary factors to fall (not sure I agree there) and while those predictions remain current they will hold rates down and hope. Maybe a quick .25% hike to give the impression they're in control but not much else. Besides 2% inflation target is totally unrealistic now with speculators grubby hands all over utilities and commodities whatever the value of the increasingly humble quid.

What this dilemma does show is the reliance on MPC and interest rates to manage a modern corporatised economy is futile. Time for them to go. What is missing from Stephanie's blog is the possibility of a run on the pound if the MPC-Bank hang on to low interest rates for fear of the consequences for the domestic (housing) economy when expectation is for rates to rise.
Manufacturing is more likely to be constricted by a skills and liquidity shortage than a higher pound which is a reflection of the shameful neglect of this part of the real economy by Brown and Darling - undertakers to the engineering industry.

I don't want to see the banks taxed until 'their pips squeek'
No ... that is not enough ... I want to see the banks taxed until their executives produce their sandwich boxes!
Cheese, ham and pickle, Bob ... one of my favourites!

There is forever this winge about mortgage-holders "going under". Let's have less of it.

In the Eighties I and many were paying up to 18% in mortgage interest rates (having been obliged to find 25% deposit first) and we did not winge.

We were prudent then and now have savings, upon which we receive nothing, thus supporting those who mortgage themselves to the hilt throwing caution to the wind.

If interest rates rise we all will have a few quid to spend, thus helping growth.

I think it is time we were allowed to do that rather than constantly bailing out those who want want want.

We catered for our future and are being punished (and that started when Gormless McClown began stealing from our private pension funds). Those who did not so cater are doing very well thank you. What a fair and equitable system we have!

As the money lenders continue to hold shop in the temple the the purpose of the building remains secondary. The disconnect of financial services and the economy is only a benefit to the bankers. Corporations and banks are flush with cash and somehow that requires that the consumer should pay more for everything. The government continues to protect the wealth of the wealthy as the public faces higher taxes and diminished personal wealth. Nothing has changed regarding the causes of the crisis and those who benefited from the collapse continue to benefit as the government turns its head. Consolidated wealth does not create demand, it creates wealth for the few. When the government says that everyone must make sacrifices they don't mean the banks, financial services and wealthy investors...they only mean you. Higher interest rates mean higher payments on the debt, continuing the greatest transfer of wealth upwards in the history of the world.

Crunch time for BoE and Sterling. They can't keep putting off the inevitable - might as well go for a 'shock' 0.25% rise now and then see what happens. After all if we start to tank again the can always pile in with more QE.

0.25% will have little or no effect on the exchange rate.

Inflation is the real problem in the economy. I don’t agree with the export argument, a weaker £ may makes things appear cheaper in the short term but if the price of exports goes up in £, this cancels out the weaker £ in FX terms. Many of the drivers behind this are $/£ fx because oil/commodities (manufacturing inputs) are traded in USD. So the BOE’s commitment to targeting inflation should be upheld and the resulting strengthening of the pound will make the majority of UK population better off because pay increases probably won’t be in line with CPI. Effectively most people are taking a pay cut this year because the BOE is trying to inflate away government debt.

If the Bank of England raises interest rates on Thursday, will the pound rise or fall? Hmmmm, this is a tough one.
Generally a rate hike is a sign of economic strength or stronger currency.
I think we may be ahead of ourselves.
Is the Bank of England's Monetary Policy Committee (MPC) really going to raise its key interest rate?
When you check the Sterling Overnight Index Average Rate (Sonia), the average rate of all UNsecured sterling indicates the BOE should raise its interest rates in May, September and December.
So what's happening on Thursday in February?
It seems terribly fast that the BOE would interest hike when recovery is still wobbly and real wages are withering.
There is already being keenly felt
- higher food and energy prices
- less disposable income and
- weak consumer confidence...
And the VAT has just settled in!
Accelerating inflation is problematic; therefore, the MPC is talking rate hike. But I don't expect this to happen, but Sonia has a 25% projection that it could happen.
Bets anyone?

IMHO, I wonder if our currency problems are due to the fact that, compared to some other economies, people buy Sterling disproportionately for the interest rate return compared to buying goods, due to our relatively weaker trade export balance.

For economies where currency purchase is more even between rate return and goods purchase, the loss of investors as rates go down is more evenly compensated by the increase in exports as they become cheaper.

Just a thought...?

#4 stillpuzzled...

That sounds like sense to me.

I've always thought that raising interest rates to control inflation was like to trying to weed a flower bed with a lawn roller.

In this context one has noticed the strong attack by the NY Times on Mervyn King.
Is this part of the Obama anti Brit campaign? If so will this have an effect on GBP value following a Bank Rate change?

If UK business can't cope with a pound that is say 10% higher than it is now then they aren't running viable businesses. Yes it will have an impact but then we managed with that fluctuation in years when the pound was much higher. The problem at the moment is imported inflation through raw material and energy costs. A higher pound would help this and so 'add back' some of the loss we may make on margins. Gross profit will not be impacted by the full amount of the pounds rise.

SF: 'If the Bank of England raises interest rates on Thursday, will the pound rise or fall?'
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The other factors may be important but so is how the raising of rates is done and what are the other signals sent out.

It would be better to go up 1/4% or 1/2% this month and announce the likely trend to give GO a clearer field for his Budget and his thoughts on the economy. Doing it just before the Budget might be seen as the MPC elbowing in on GO.

Doing it in April might be seen as a comment ...

2. At 12:01pm on 08 Feb 2011, sanity4all wrote:

it may be called "a base-rate interest rise" but would be an unwelcome and untimely TAX on UK PLC and on all that breathe and live here, with the only business to gain - you guessed it, the banks and overseas hedge funds.
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If as is reported many businesses have been conserving cash and paying down debt AND banks are taking huge margins at the moment, a rise in interest rates will not hurt UK Plc and certainly are not a tax.

The big part of UK Plc that will benefit from a rate rise are the pensioners with cash - if savings rates go up. Eventually that may benefit the retail sector but only after utility and transport costs come down to reasonable levels.

UK = Japan 20 years ago.

The interest rates will remain low and private debt will convert to public debt.

On the strenght of the pound:

We only think it's weak because it hit $2.10 at it's peak. If you were to honestly look at what the UK does, and what stuff costs in other countries, then I think you'd say we have a strong pound now. I feel a true rate is about $1.50, and euro 1.10

Really we need to get used to imports costing a lot, our wages rising to compensate a bit, and our exports being competitive in the world market, rather than expensive.

It's like everything we've all said before on these blogs, a "strong" pound is a false indicator and causes an import "bubble", and stops this country working for itself. A realistic pound creates UK jobs and UK sufficiency. Surely a good thing for the long term?

Hmmm....I'm not sure we need to be having this debate so early in the year, although sitting at 0.5% it seems to me that the only way is up. Much of the basis for current inflationary pressures comes from external sources, something you mentioned in a previous report, rather than wage increases as you pointed out above. The economy is hardly overheating. However, I think the reason for the gradual strengthening of the pound lies in expectations of changed conditions elsewhere e.g. India and China and the rising costs of borrowing in those markets, consequent effect on demand and subtle (and some not so subtle) shifts in supply of certain commodities. Other production-driven economies are also experiencing a similar build up of pressures that are acting to squeeze govt revenues and expenditure and consumer spending. My expectations are for this to continue and to offset to some extent the pressure to raise the BoE base rate.

1. At 11:54am on 08 Feb 2011, John_from_Hendon

Nice to see you regained your No. 1 slot LOL

You know I said I would say when I think it is time to raise it, well I think you may get your wish. But not because of interest on saving or inflation But as an intent to show the banks who is really in charge here. I suspect 0.25%, not a great deal but enough to show this intent.


12. At 1:16pm on 08 Feb 2011, greatBobFrance wrote:

“There is forever this winge about mortgage-holders "going under". Let's have less of it.

In the Eighties I and many were paying up to 18% in mortgage interest rates (having been obliged to find 25% deposit first) and we did not winge.”

I remember it well but 5% of 100K is greater than 13% of 25K and that’s the issue!

All the talk of rate rises increasing the value of the pound and therefore reduce import prices and accordingly inflation is just that - talk. Inflation will only decrease if the stronger pound results in pricing stability, it won't, corporate greed will have its way and win the day. Whatever the price of oil we will never see petrol below 110p again the standard has been set, likewise with all other commodities and utilties, we have new pricing standards and they will set the base for prices and hence inflation.

Conclusion, the effects of a moderately higher pound will not filter through to the high street and the UK can presently only afford a moderate increase.

You print money, you get inflation - 't was ever thus.

Why did they stop giving us M3 money supply figures? Could it be they don't want us to be able to work out the real inflation figures?

UK inflation is Tax and Import generated at the moment - commodity and food price inflation will persist ( Globalisation of Chinese Inflation ). As home based inflation will remain weak ( wage demands weak due to high unemployment & redundancy threat high ). Raising interest rates ( if mortgage rates follow ) will lower ( already weakening )domestic demand, reduce imports and marginally strengthen sterling ... may help balance the economy but will not help growth .... so only if domestically caused inflation starts to appear should interest rates be raised - otherwise, say goodbye to growth ... and any chance of a deficit reduction

Stephanie,

A simple question from a simple man.

Given all the economists in the world; academics; highly paid financiers; bankers; and other fincancial pundits.

How is it that no-one appears to have the slightest idea how to get us out of this mess.

Should the London School of Economics (LSE) now be subject to cuts in public spending? Perhaps we could save a few quid by cutting 'economics' courses in universities, because they appear to be a complete waste of everyone's time and money.

@30. At 3:29pm on 08 Feb 2011, EuroSider wrote:
"Should the London School of Economics (LSE) now be subject to cuts in public spending? Perhaps we could save a few quid by cutting 'economics' courses in universities, because they appear to be a complete waste of everyone's time and money."

Fear not! I'm sure they will suffer accordingly. Mmmm.....economics.....surely not a complete waste of everyone's time and money. I mean, some people aren't interested.

"A simple question from a simple man.

Given all the economists in the world; academics; highly paid financiers; bankers; and other fincancial pundits.

How is it that no-one appears to have the slightest idea how to get us out of this mess."


I'll give you one (but then I’m not on your list):

Let's inflate our way out of it.

It's been tried and tested. And it works. And furthermore, as someone has already pointed out in another part of the blogosphere, it will likely solve the obesity problem.

#26. common_man_123 wrote:

"1. John_from_Hendon

Nice to see you regained your No. 1 slot LOL"

Entirely accidental I assure you, I had just responded to a posting on the previous blog and noticed this one. I was having a look to see what was going on with my morning coffee and biscuits.

I must say that if rates go up the week (as Stephanie seems to be preparing us for), and given the proximity of the budget and the need to manage money without seeming to respond to Christmas Sales (or lack thereof) it will be either this month or May. The Bank has shown it hasn't the slightest idea what it is doing economically and it only reacts to politics so political timing will probably run the economy - a very bad thing, but the 'Fools' are the 'Fools' and this would be par for the course. Watch this space for an economic collapse caused yet again by the 'Fools'! Too little too late as usual.

#30. EuroSider wrote:

"How is it that no-one appears to have the slightest idea how to get us out of this mess."

Answer your own question - because all options are unpalatable!

As I see things when this is the case, the very worst option is delay and indecision. We have to get rid of the debt and the debt junkies as that is the cause of our economic constipation. But everyone is scared of even saying so let alone of doing anything - yet after every deep recession/depression this is what happens before a recovery can get under way.

A poised and balanced and stylish blog today Ms Flanders.

#30 Eurosider

You can't look to economists, bankers or the like to get us out of this mess. Whatever theoretical or accounting "pixie dust" you sprinkle on it, the situation is extremely simple.

We have over borrowed as individuals, as companies and as Governments and rather than invest the money in wealth generating activity we have invested it in consumption. It has now been consumed - and we are left with the debt.

We have consumed rather than produced, and in doing so we have run a trade deficit in the tens of billions for years: relying on the growth of emerging markets like China to keep prices and inflation down.

This economy was propped up by asset price inflation (especially property prices) which created an artificial level of security for that borrowing. Now, we have reached the point at which we cannot borrow any more: result - no more growth.

There is only one way out. To invest in producing stuff, get everyone working for a living rather than borrowing, and get out there and sell the stuff we produce. It's not rocket science. The only problem is that the required level of investment, commitment and skills is proving elusive.

Will the pound rise or fall? It could do either in the short term, but in the long term, if our economy cannot pay its way, then it will fall until it finds its own level.

#29. Ian1965Taylor wrote:

"Raising interest rates ( if mortgage rates follow ) will lower (already weakening) domestic demand"

Not necessarily as there are ten times more savers than borrowers and as these make up the vast majority of the potential spenders if they start to feel that the interest rate bottom has been reached then when the money starts flowing back into their pockets then they may spend.

Expecting a small minority of overstretched debt junkies to bail out the economy is simply bordering on the insane.

#30 Eurosider
"How is it that no-one appears to have the slightest idea how to get us out of this mess."

You have only partly phraseed the question. the real question is "How is it that no-one appears to have the slightest idea how to get us out of this mess while retaining the present economic system." As long as there is a class of people having vast amounts of cpaital which they use to extract wealth from the rest of us through sheer financial muscle (ever tried negotiating with a bank or a privatised utility?) and able through their economic clout to corrupt government and democracy such that we always end up with the same policies regardless of which party we vote for, we will not get out of this mess.

I have maintained before that we need to conmtrol capital and that means building and strengthening those instituations within which capital is controlled by other interests, workers, consumers, tenants etc.

Take action now, if you dislike banks and bankers then move your savings to a mutual, shop in co-operative stores, buy from worker co-ops (or even set one up) and bank with the co-op Bank. Once we are all disengaged from the financial system as it is then next time we can happily let it collapse.

Actually market interest-rates have been rising in the UK for some time now.If you look at the interest-rates on our government debt this has been rising steadily in 2011 as have fixed mortgage rates and other measures.
Therefore there are two points to consider. One is that the recent rally in the pound's exchange rate is probably in response to the higher interest-rates now available in the UK. The second is to consider how much influence a move in the official UK base rate has. My contention is that its influence has declined a fair bit over time.
So this article is based on a mostly false premise.

I believe Merv & Co. quietly dropped their principal raison d'etre - keeping inflation to 2% - over 2 years ago.

So if interest rates do go up on Thursday it'll only be to appease the markets, not as some genuine attempt at inflation control.

My guess is he'll keep the status quo til the budget's declared, and then use whatever BOE influence he can on any 'market forces' that come to bear as a consequence of that budget.

Powder dry for the time being.

22. At 2:21pm on 08 Feb 2011, Up2snuff wrote:

The big part of UK Plc that will benefit from a rate rise are the pensioners with cash - if savings rates go up.
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Snuffy...my high-street money-retailers are offering short term savings bonds with 4% and above.

If I could only get hold of some of that BoE money at 0.5%...I'd be sorted. It doesn't make sense that the lender of last resort advertises an interest rate which is below the retail market rate for savings.

Which is how come I cannot see any connection between BoE base rate and "inflation". No obvious sign of increase in domestic demand, and no way to stop internationally driven price hikes from being passed on to the British public.

Mushroom is suspicious that the existence of a "special rate" which is totally disconnected from the High-street must be for "special purposes", (such as re-capitalisation of the banks, perchance?) In those circumstances, Upping the BoE base rate would probably make a few TBTF's squeal, but I can't see why it HAS to affect the rest of us, unless we get programmed by the media to think that mortgage rates have to go up.

Anyway, since I have to go to the high-street money retailers instead, I thought I'd check...

My favourite mutual are offering a headline unsecured loan rate of 7.2% and their base mortgage rate is 2.5% (capped at Base Rate + 2% until 30th April), and 3.99% (with no upper limit afterwards.)

So there you might have your answer as to what's in the wind. It doesn't smell nice at all.

You be careful too...

Any rise in interest rates will lead to a reduction in house prices (not a bad thing many would argue). If interest rates rise significantly then then house prices will plummet as repossessions increase and others look to sell to ward off repossession.

House prices remain below the 2007 peak, so many who bought or borrowed further around then are already in a negative equity situation. Push house prices down further and more will follow, creating more toxic debt for the banks. They will respond by further tightening lending to businesses and hence the private sector recovery that we are waiting for will not happen.

Interest rates must rise in the long term, but I doubt that this will begin to happen yet.

@40: error in data...the interest rate change applies to the expiry of fixed rate products reserved before April 2009, not to rate changes applying from April 2011.

My bad.

#38 Notayesmanseconomics. My word an economics article from the BBC that is based on a false premis. Knock me down with a feather.

I wonder how many of you remember the days of the bank rate being at 10%+ and the inflation rate that then existed?

I do. For many items I buy on a regular basis, I am seeing regular price rises. It feels just like those days of old.

The inflation rate is just a statistical measure across a wide range of product types. At best its a crude average. The problem at the moment is that for many, the products bought most frequently are those now suffering the highest rises. At least, this is the appearance to me.

The bank rate has been used in the past to control inflation, but its a crude way to do it. It pushes up costs across the board. The consumer can then just respond by buying less, particularly when their income is stagnant. Surely, in the short term an interest rate rise will cause a fall in output. Isn't this exactly the opposite of what is needed?

Or have I totally misunderstood the way the system works.

#36 John_from_Hendon. It is not the numbers of savers and debtors that is relevant it is the absolute level of net debt - and that level is huge, something like 300% of GDP - maybe more depending how much more is hidden in PFI and an awful lot more if you start counting unfunded liabilities.

The level of debt long since passed border control and is freely rampaging in a land called insane - and there is no way this occurred by accident.

#30 Eurosider. There are plenty of people who know how to get out of this mess. The problem is they are not part of the captured mainstream media and hence you never get to hear what they have to say.

It is all fairly simple we need to free ourselves from the tyranny of debt probably by way of a debt jubilee, and ensure that the law is enforced such that criminals are identified, investigated and prosecuted. Convicted criminals should be imprisoned and criminal corporations should be shut down.

Once that is done you can refocus the economy on the only possible things that create wealth - making things, growing things and extracting things.

#38. The second is to consider how much influence a move in the official UK base rate has. My contention is that its influence has declined a fair bit over time.
So this article is based on a mostly false premise.

I agree, and think that Merv may be scared of taking any action as he knows he will just be "pushing on a string".

I cannot see that the crazy 0.5% rate can be justified any longer. It should always have been an emergency rate for 6-9 months {Not, in Madagascar humour, 69 months).

I cannot understand how people on this Forum can defend the 0.5% rate to "save people from repossession". If someone is anywhere near repossession with rates this low and they haven't spent the last 2 years sorting their situation out, they don't have anyone else to blame.

Ultimately the BofE is saying "Sterling is almost worthless" by making it available almost for free. This is continuing to undermine any long term stability of our currency and economy.

With borrowing and savings rates bearing no relation to the Bank Rate, what relevance to the real economy is the Bank Rate?

If the Govt wanted to boost the economy they should do something about cutting the margins banks are making on every pound they lend. They are raking it in and that is why the performance of the economy is so sluggish.

This comment was removed because the moderators found it broke the house rules. Explain.

#47 jonearle.

Your comments would hold water if the rates charged by banks had decreased proportionally with the reducion in BoE rates. Lenders were in fact increasing rates without base rate rises prior to the crash, the differential between base and lending rates is consequently large enough to cause stress to borrowers. Some of the BoE rate cuts following the crash were not passed on, it will be interesting to see if some of the forthcoming increases are not passed on in return.

The low base rate isn't for the borrowers benefit, it's to keep banks in business and retain mark to fantasy accounting. A glut of repo's and they'll have to mark to value and booooooooom.

#48 Busby

Precisely.

The only value to raising interest rates will be in money trading.

"My strong sense is that most members of the MPC would not welcome a rate rise in the UK any time soon. "

They are all economists, aren't they? They don't even pretend any more to manage the monetary system as central bankers - they are now all economists with grandiose ideas that they manage the economy.

A central banker would manage the monetary system, focussing entirely on the relative value of the money versus primary commodities (especially food and water).

Economists think that they are managing the whole economic system through monetary policy.

Consequently Economists are putting at risks Monetary Systems of the Central Banks.

There MUST be a separation of duties between economists and central bankers.

@ 12 greatbobFrance - Absolutely!

@ 26 common-man-123 - Yes I can see borrowers can be in serious trouble by borrowing too much even at low interest rates. The end of the 2 or 3 times salary multiple; self certification; and 125% mortgages were all invented by lenders - who should have known better. To put householders in a position were they will be in financial trouble if the Base rate rises off the floor is scandalous. How on earth did they manage 30 months ago when the rate was 5% ??


@ 36 JfH - It might be that any Base Rate rise would be passed on in full to borrowers, but not too savers. For example, First Direct's Savings Account currently pays .05% I can't see a quarter point Base Rate rise having much effect on that.
I think Mushroom has it right (post 40). The Base Rate is a mechanism to help restore the banks' balance sheets.
"Things" will not get back to normal until the Base Rate reaches 2%. In fact, they may never get back to normal- such is the enormity of the problem. The US sub-prime disaster exposed a giant debt-fuelled ponzi scheme here in the UK.

#53. The-itinerant-ex-pat wrote:

""Things" will not get back to normal until the Base Rate reaches 2%. In fact, they may never get back to normal- such is the enormity of the problem."

Quite so - but that is the repeat of the Long Depression of the 1870s as I have long been banging on about. However, what the 1930s(shorter depression) can teach us if we look at in the right way is that if and when we overcome our fear of the enormity of the debt and start taking steps to deflate it - then we can stimulate and accelerate the real recovery but first we must get rid of the debt and the best way (and probably the only way!) to do that is the bankrupt the overly indebted and this can best be achieved by sticking up interest rates. The other benefits of putting rates up are that the Bank regains control of the money supply, and it becomes valuable for the prudent to save and invest once again. But not doing anything about the debt gives us the prospect of another Long Depression which will outlast most of us! I want to see interest rates up for medium and long term economic reasons, but we have to take the hit first.

I wonder what the secret was to Germany's (post WW2) success?

They had a stable currency. The Mark's value was not constantly eroding. They had a growing economy and manageable inflation. Ask any German - currency stability was top of the list.

Over here the Pound has steadily (sometimes not so steadily) lost value since 1945.


Maybe we should get rid of the BoE and get the Bundesbank in.
The Mark is the answer to the Pound Question, Steph.

Steph,
It's okay, the CPI will be back below 3% within 6 months due to the sudden drop in demand that is about to hit. This will be caused by:

- Wages not keeping up with the price increases
- VAT, duties etc increasing and taking away consumer spending power
- Job Insecurity and rapidly accelerating unemployment
- A new wave of company insolvencies making the unemployment worse

In response to the lack of cash-backed demand, retailers will have to either lower their prices, or go bust.

So the high CPI is temporary just like the BoE have said. The CPI increase last happened during the initial crash in 2008, and it is only the high budget deficit which has delayed the inevitable down-turn to come.

#54 JFH

While I agree with your principle regarding interest rates no government will willingly bankrupt a population fed on debt by unscrupulous money lenders. The populace see banks as public enemy number one irrespective of their own complicity in the debt fuelled boom, if banks start bankrupting the people on the back of bailouts and bonuses there will be civil war let alone revolution.

No matter how correct your policy is it aint gonna happen for some considerable time I fear.

Even many of the posters on this site such as JFH that I usually agree with still seem to think that if we get rid of our debt then economic growth will readiliy return.

How can economic growth return when we have a growing population (particularly a growing affluent BRIC's population) demanding an ever larger amount and share of finite world resources that can not keep pace with this growth due to energy, key mineral and food supply constraints?

The economy needs redesigning around the inevitable lack of growth and likely shrinkage that will be our reality until we invent the matter/anti matter warp drive and perfect growing food with less water, fossil fuel energy, fossil fuel fertiliser, and fossil fuel pesticide input.

OPEC are very close to their peak output of oil right now. This limit will be tested and found wanting in the next three or four years if not sooner. Then the world will realise that for all our talk of substitute energy supplies the reality is that "Houston we have a problem" and no amount of sticky tape will solve it like it did for Apollo 13.

I thought inflation was going up firstly because the price of petrol has been shooting up, and secondly because the electronic consumer goods which have been distorting the inflation figures for the last 10 years have finally reached the bottom (LCD TVs and laptops are as cheap as they are going to get).
Exclude electronic goods and inflation has been well over the target for years.
I doubt raising interest rates will have much of an effect.

The link between SWAP rates and the Bank of England base rate has been broken for a long time. The price the banks pay for money has little to do with the lender of last resort.

Per Morgan Stanley the price financials are paying for funds decoupled from the rest of the market last November. The days of cheap money are over.

#57. NorthSeaHalibut wrote:

"#54 JFH

While I agree with your principle regarding interest rates... No matter how correct your policy is it aint gonna happen for some considerable time I fear."

You are right to fear .... The sociology of change, is it also called group-think, prevents correct actions for far longer than it should and this is one of the main reasons behind Depressions. Almost everyone knows that the wrong thing is being done, but the sociology of the group cohesion prevents the group from doing the right thing - think of the apocryphal lemmings and the cliff!

However, I take the heterodox view - just because almost everyone else wants to do the wrong thing does not persuade me to go along with the patently incorrect analysis.

Given that inflation is zooming up, way above target, then a decision to 'do nothing' rather than 'raise interest rates' would be quite risky and adventurous. A risky experiment, hoping that workers, seeing a worryingly high RPI, will just accept pay restraint. The knowledge that the bank did not seem to care how high inflation goes would strengthen feelings that a tussle over pay was worth the pain.

Clearly the pound would rise a bit if rates went up but drift back downwards again (as inflation is still high making sterling assets less attractive).

Following countries with higher interst rates usually pays off in the longer term, so that would be consistent with rates up, pound up. BUT one 25 basis points rise won't do it, it would look too much like tokenism. 12 consecutive months of a quarter percent would begin to make a start, but that would still only reach 3.5% - if the BoE don't start raising and continue the stagflation will go from bad to worse.

Although house prices need to come down most owners will be robust against a few percent of rises. Take home pay from the median salary for one individual is roughly the same as 12% interest only on the median house price.

#26 >>I remember it well but 5% of 100K is greater than 13% of 25K and that’s the issue!

In order to compare like with like, 5% of 100k of depreciated quids is still less than 13% of 25k of "old money" !! A tenner in "those days" was probably more valuable than £50 now !! And most people earned a lot less in monetary terms than now !!

Just thought I'd level the playing field a tad !!

#27 >>Whatever the price of oil we will never see petrol below 110p again ....

FYI, the bulk of the cost of petrol is actually government tax !! Therefore, for the price of petrol to fall, it's simply a reduction of government taxation !! The same applies to booze and fags !!

It's no good blaming the corporations when the same litre/gallon of petrol varies wildly from country to country, depending on that country's attempts to tax its citizens to death !!

Get this straight - the housing market is teetering on the edge right now - first time buyers are now aged 35+ - new mortgage lending is collapsing and the prospect of hundreds of thousands of public sector jobs going can only sap confidence even further.

Living standards are being squeezed by imported inflation from Sterling's fall and wages are not rising.

To put up interest rates in this climate will cause a meltdown in house prices and drive the econopmy over a cliff.

The inflation we are experiencing has nothing to do with the domestic economy - its entirely cause by rising energy, food, manufactured goods & raw materials prices on the world market which are magnified by the Pound's effective devaluation.

In the UK a very high proportion of individual net worth is in our houses - if the OECD are right and house prices are 40% too high, then we are talking about virtually halving the typical individual's net value, or in the case of those with large mortgages, precipitating a tidal wave of negative equity and repossessions on the US scale.

This in turn would cause a second banking crisis similar to that in Eire.

Suicide - pure and simple.

#49 >>Add in the perverse perception of 'investors' (an economy on the ropes means cheap labour so that surplus value can be created - to be realised later)...

Do you mean, for instance, building lots of homes that no one can or will buy in the hope that the housing bubble will re-inflate at a later date ?? I believe the Irish tried something along those lines....

What a load of rubbish. Real interest rates are not 0.5% as anyboby with an ounce of brain can see. Real rates are 5 to 10 times or more higher and the banks are profeteering. Our government and the BOE are trying to inflate away our debt.
A base rise of 0.25 to 0.5 pc will hurt no one but it will signal a new cycle as far as interest rates are concerned (ie trend upwards).
This is an emergency rate and cannot stay forever and 4 to 5 pc interest rates are the norm.
To the bank of england I say get on with your real job and control inflation.

If the inflation rate we are seeing was related to "domestic" issues such as wages, property prices etc then raising interest rates would help slow that and would make sense

However the majority of the inflation we are seeing ( apart from government tax rises, notably VAT and fuel)is due to world commodity prices exacerbated by the relative devaluation of sterling of 20% from the exchange rate of 2 years ago. The BOE could put interest rates up to 100% and it would have zero impact on the world price of oil, wheat or iron ore etc.

The only solution to that is making the British economy grow by improving its competitiveness and thus raising the value of sterling in the longer term. ie Earning our way out of the situation. Interest rate rises now won't help that and will have little impact on the current cause of inflation.

Nice to see that individuals are waking up to what is really happening, 'We are all in this together', means exactly the opposite, we are not all in this together. In this case ordinary sensible savers are being asked to subsidise individuals who have borrowed too much and probably made a lot of money on ridiculously inflated house prices, but this has always been the case. Anyway wait a minute, why are the banks charging customers the biggest 'spread' in interest rates there has ever been?, and why are they complaining to the Tory government that they intend to tax them for their ill gotten gains? Wake up Britain to what is really happening to you, we are not all in this together, the rich have never been richer, look at the sales of luxury cars, they are going up, whereas the sales of ordinary cars are going down, why?

66. At 05:29am on 09 Feb 2011, richard bunning wrote:

Richard you are all contradictions here and you are wrong.

"Get this straight - the housing market is teetering on the edge right now - first time buyers are now aged 35+"

We have a generation who are going to be locked out of home ownership if rates don't rise and the market corrects - of course this will cause pain for many on the inside looking out but that is no different to the pain already being caused to people on the outside looking in. If we are lucky this may happen gradually and a small rise now and again in the months to come is more likely to acheive that than holding off until it is too late and rates have to climb rapidly.

It also is not fair that people who want to buy a house to live in are being locked out by amongst others property speculators who are being facilitated in their greed by low rates.

Until the housing market corrects this economy is going nowhere.

"Living standards are being squeezed by imported inflation from Sterling's fall and wages are not rising."

So, raise interest rates and Sterling will rise relaxing the squeeze from imported inflation. Ultimately the squeeze is going to happen either by interest rates or inflation and this will affect whether or not people can afford their mortgage - but don't think that just nod raising rates is going to save is - it won't.

"The inflation we are experiencing has nothing to do with the domestic economy - its entirely cause by rising energy, food, manufactured goods & raw materials prices on the world market which are magnified by the Pound's effective devaluation."

Apart from our waek currency no it's not. It's money printing pure and simple - and it's coming out of the US in waves and will keep on coming and keep on hurting until some saniity is restored there as well.

"Suicide - pure and simple."

Hobsons choice - if you don't want the bust don't have the boom.

Interset rates need to start rising - slowly but need to start tomorrow - 250 basis points is good enough for now then again in June/July

#66. richard bunning wrote:

"Get this straight - the housing market is teetering on the edge right now... put up interest rates in this climate will cause a meltdown in house prices and drive the economy over a cliff...This in turn would cause a second banking crisis similar to that in Eire. Suicide - pure and simple."

But, Richard even George Osborne said yesterday in his opening response to Ed Balls "The UK has had a bigger housing boom then the USA or Ireland". So whilst you may be factually correct in your historic view what you cannot be correct in is your pessimistic view looking forward - as house prices have to tumble as rates rise that is a necessity for the economy and the Nation. Neither the corrupt and bankrupt bankers nor their saps who borrowed too much can be saved from the consequences of their own actions. That is how the market works.

No rise in the BoE's repo rate is imminent because..
..the only brake on further GDP declines is the UK's exchange rate versus the Euro that's kept below its equilibrium rate of c €1.4.
Our Euro exchange rate of €1.18 inhibits both our imports and us taking European holidays. And it encourages European businesses to buy more of their supplies from UK sources, and suggests to curious Europeans that they should spend some of their holiday money in the UK.
Our low sterling exchange rate is also doing wonders for exports of our Scotch Whisky and motor car industries. Those are the main bright spots in our otherwise dismal economy. And their revivals will work through into higher Corporation Taxes, which is what we need much more than cuts.

For all of those reasons - and more - the BoE will continue to fret about inflation and will wait for the ECB to move first.

December 2009 RPI = 218.0
December 2010 RPI = 228.4
Inflation = 4.77%

If you are able to obtain a rate of return on your savings of 4.77% (after tax) then the value of those savings is not diminishing.

It was of course entirely possible for the average Joe to do this until June of last year.
National Savings and Investments offered RPI linked savings certificates which paid RPI + 1%. Which, when you think about it, is not such a bad deal, because they’re tax free.
Sadly they’ve been withdrawn.

In any event as far as I can see, it makes little difference whether you’re a currency trader or an average Joe, unless you could achieve a rate of return (after tax and transaction costs) of 4.77% or higher, then the value of the money invested must be diminished by inflation.

I was discussing pensions with a friend of mine recently, and he concluded that despite his best efforts, if he had simply bought RPI linked savings certificates throughout his working life he would have been better off than the various complex schemes into which he’d been enticed.

Assuming a reasonably constant transaction speed:
Overall price level of all items = (Total amount of money) / (Supply of all available items to purchase)

It would seem reasonable to conclude that there must be 4.77% more money in December 2010 than there was in December 2009. Which in turn suggests that the average rate of interest of all Government and private debt is 4.77%.

• 64. At 05:15am on 09 Feb 2011, ishkandar wrote:
#26 >>I remember it well but 5% of 100K is greater than 13% of 25K and that’s the issue!

In order to compare like with like, 5% of 100k of depreciated quids is still less than 13% of 25k of "old money" !! A tenner in "those days" was probably more valuable than £50 now !! And most people earned a lot less in monetary terms than now !!

Just thought I'd level the playing field a tad !!

XXXXXXX

No not really! Items where the same price or higher than now – that’s a shock! A pair of school trousers £15, a pack of two shirts £10, etc. So no “A tenner in "those days" was probably more valuable than £50 now !!” is not correct. So they where not the good old days. But did we moan – yes! but everybody acted together; I’ll explain:

5p was put on the price of beer, so everybody cut down or stopped buying, this was reduced to a 2p increase and everybody bought again, this was between 1978 and 80. How do I know, because my second job was in a pub. It is a pity that we cannot work collectively now?

@74 Dempster

"In any event as far as I can see, it makes little difference whether you’re a currency trader or an average Joe, unless you could achieve a rate of return (after tax and transaction costs) of 4.77% or higher, then the value of the money invested must be diminished by inflation."

No tax on forex usually just the spread - no wonder it is increasing in popularity considering the low returns on offer. Gold is the obvious option if you don't want the risk.

With regard to what you say about pensions it's no wonder everyone turned to property - at least is was something they (thought) knew about.

I amy be well off the mark but I thing allowing access to money purchase pensions before 55 - some sort of flexible retirement/savings may be the new wheeze to get us all spending again. Such as allowing people to buy residential property to live in themselves using their own retirement fund - might be the last roll of the dice for the UK, give us another little boom?

Interesting piece on Radio 5 this morning, talking about food inflation and tracking the production of a loaf of bread from wheat field to supermarket. Lots of interviews with people informing us that prices are rising sharply across the whole supply chain (as if we didn't already know) AND YET absolutely no fundamental discussion regarding the real cause of this inflation.

As so often with economic matters it was presented as something that just seems to be happening beyond anyone's control, like gravity or the changing of the seasons. Why won't the media tell the general public WHY we have high and accelerating inflation? OK, sometimes it might be touched on briefly on Newsnight, but those who watch Newsnight probably have a clue already. When a channel like 5 Live - a NEWS channel with a fairly broad listenership - won't tell us the truth you have to wonder whether this is a deliberate ploy. What are they afraid of? Are they afraid of the riots and protests in Tunisia, Egypt, Yemen etc being repeated here?

I would suggest they are very wise to be afraid because if the mass of the British general public ever understood why they are forced to suffer this DELIBERATE inflation and reduction in living standards then the tanks and petrol bombs won't only be in evidence on the streets of the Middle East. And if you don't know why - here's some random phrases you can consider... get rich quick, short term profit, banker bonuses, uncontrolled credit, excessive debt, asset bubble, inflate away, QE, commodity speculation, tax havens, protect the rich, wealth disparity etc. etc.

Great - an increase in the trade defecit. So, much for the weak £ helping to rebalance the economy. That's another £5Bn we are in hock to the rest of the world for..........

Nice to see Germany enjoying record exports and falling imports - isn't it time the EU stepped in to redress this balance on an intra EU basis? Perhaps there should be balance of trade thresholds between EU countries and once they are exceeded a rebate has to be paid from the exporting nation to the importing one to avoid impoverishment of once state for the enrichment of another - surely this is fair - or are we all moving to Germany to work?

• 76. At 09:31am on 09 Feb 2011, StartAgain wrote:
With regard to what you say about pensions it's no wonder everyone turned to property - at least is was something they (thought) knew about.

I may be well off the mark but I thing allowing access to money purchase pensions before 55 - some sort of flexible retirement/savings may be the new wheeze to get us all spending again. Such as allowing people to buy residential property to live in themselves using their own retirement fund - might be the last roll of the dice for the UK, give us another little boom?
----------------------------------------------------------------------------------------------------------

Based on the retail price index RPO2 (all items)
£100.00 in January 2011 has the same purchasing power as £3 15s 1d in 1951.

Based on the RPI the value of the pound has fallen to less than 1/26th of its value.
Inflation is the ‘dark destroyer’ of savings and pensions unless you’re fortunate enough to have them index linked.

So why are there 26 times more £’s now than there were sixty years ago, and where on earth have they all come from I wonder?

Other stats for the last 60 years:
One troy ounce of gold in 1951 was $34.72
One troy ounce of gold in 2011 is currently $1362.92
Increase 39.25 times in $’s

Average UK house prices in 1951 = £1,875.00
Average UK house prices in 2011 = £163,244.00
Increase 87.06 times in £’s

66. At 05:29am on 09 Feb 2011, richard bunning wrote:
=========================================================================
Is the answer buying British and only borrowing what you can afford and living within your means or is that not just being British?

"77. At 10:11am on 09 Feb 2011, davidbrent wrote:
Interesting piece on Radio 5 this morning, talking about food inflation and tracking the production of a loaf of bread from wheat field to supermarket. Lots of interviews with people informing us that prices are rising sharply across the whole supply chain (as if we didn't already know) AND YET absolutely no fundamental discussion regarding the real cause of this inflation."

They also missed out the baker! We heard from grower, miller and retailer but not the baker!!!! So, I am not surprised they completed missed the fudamental discussion you mention. I like 5Live but it's a bit lightweight, not sure they are trying to conceal anything though...

66. At 05:29am on 09 Feb 2011, richard bunning wrote:
if the OECD are right and house prices are 40% too high, then we are talking about virtually halving the typical individual's net value,
=========================================================================
So what you are saying is that we should artificially keep house prices high so individuals net value is not affected. Well surely keeping house prices artificially is affecting their net value as the cost of supporting a mortgage of £100k is a lot more than that of a £60k one isn't it?

You appear to be caught up in the value of ones possessions rather than life itself. Its about time we all realised that we need to live within our means as individuals and as a country.....

79. At 10:20am on 09 Feb 2011, Dempster wrote:

Good stats - do you also have average UK house prices in ounces of gold for the same period - and the price of gold in £ for the same period as well.

As you point out what a terrible place Sterling is to store your wealth - it may take another year or even two but unless rates rise all faith is going to be lost in GBP it could really happen very quickly - and it won't be pleasent. Maybe it's time to get into the wheelbarrow business?

From the BBC:
"The UK's trade deficit in goods and services widened in December to its highest level since August 2005, official figures have shown.

The deficit - the difference between the UK's exports and imports - grew to £4.831bn from £3.947bn in November, the Office for National Statistics said."

------------------------------------------------------------------------

Is this a recovery on the rise or in decline? Is confidence building hence we're buying more and need a stronger quid, or is our maufacturing base undersubscribed by UK plc and we need a lower quid to attract export buyers? Or is China just steamrolling all over us and we need massive economic devaluation to compete? I know what I think and it aint an economy on the rise.

To be honest all this is smoke and mirrors anyway the bigger picture will be decided in the summer when Spain, Protugal, Italy and the ECB try to hold their nerve, interest rates will be an insignificant side show if that goes wrong.

Average weekly earnings January 2000 = £314
Average weekly earnings November 2010 = £441
Increase = 40.4%

Average UK House prices January 2000 = £83,976
Average weekly earnings November 2010 = £163,244
Increase = 94.4%

1404/1944 = 72.2

Therefore the average person can buy around 38% less of a house than they could in January 2000. Unless they borrow 38% more money to compensate for the same.

And I’ve absolutely no doubt that some statistician somewhere will correct me.

"The pound question" is the title of Stephanie Flanders' blog.

The last time the conservatives were in power, mortgage interest rates rose to 15% leading to broken families caused by financial distress and high levels of repossession in the 1980s.

Gas, electricity, water, hospital cleaning, BT, research centres for animal disease (remember the last foot and mouth), railways and all public transport was privatised - yet still funded by heavy subsidies from the tax-payer while UK public transport prices are the highest in Europe.

Bizarrely, we can swap and change our gas/electricity suppliers - but not our so-called public transport.

So, fully remove all tax-payer subsidies from 'public' transport - and call it, simply what it is - private franchise transport companies, and their shareholders, taking the rise out of those who HAVE no choice but to commute via these groups of disingenous highwaymen who are raking in higher fares, plus tax-payer subsidies - whether central government or local?

You are a private company or you are not - you cannot have it both ways?

It will continue its long term trend - a brief blip upwards as the interest rate looks intersting followed by continued long term decline as the country slides ever deeper into the mess.
The ONLY way to reverse this trend is a three pronged attack:
a) Government and its agencies should revise the way it calculates 'best value' when buying. This calculation should include the benefits of buying British in terms of reduced unemployment (reduced benefits), increased employment, increased export opportunities, increased taxation, long term increased investment and long term export and profitability. If our government prefers to buy American tanks to British ones will anyone else buy British - or Chinese uniforms to British ones, or BMW's in stead of Jags.... every time the British government or its agencies makes a foreign purchase it stabs British industry in the marketting, profit, employment and investment hearts.

b) Change policy so that personal or sales taxation is used IF (and it isn't the case at the moment) personal demand is causing inflation. The use of interest rates means no business can make a long term investment plan becuase no business knows what interest rates will be next year or the year after. This is one of the many reasons why only small short term investments are possible.

c) Use our ownership of two major banks to reduce the cost of business banking and business loan interest rates. When the base interest rate is 0.5% banks are currently charging 7, 8 or more for a business loan and on top of that a HUGE raft of fees. This means investment is JUST NOT POSSIBLE. This is why Barclays can claim to approve almost all business loan requests - it isn't telling lies, BUT what it doesn't say is that with the huge costs involved very few companies are applying for investment loans.

55. At 7:25pm on 08 Feb 2011, The-itinerant-ex-pat wrote:

I wonder what the secret was to Germany's (post WW2) success?
~~~~~~~~~~~~~~~~~~~~
I have a suspicion that the sovereign default that they were permitted by the "London Agreement" of 1953 might have had a lot to do with it.

That, together with the fact that NATO took over their defence budget so that the only domestic investment available was in civilian engineering.

If you add in the strong pride in their cultural identity and the social model of policy making (National Socialism sat well with the country's ideals...)

You get a recipe for a hard-working nation who are proud of their achievements and most importantly are unencumbered by the consequences of their past.
################
Compare and contrast with the UK?

(does anyone else remember "til death do us part"?)

Forced to use immigration to shore up missing labour who were killed in the war.
In hock to the US since 1945 for arms and equipment spent fighting the war.
A class-ridden society in which ownership of land is the ultimate statement of wealth, hence the aspiration to home-ownership.
A leftist workplace culture of "management vs. workers".
Deliberate policies of multiculturalism which undermine any pride we might have had in being "British".
A policy of devolution rather than integration.

The UK looks to this mushroom like a sick society, not a happy healthy one.

Now, lets have a think, the creators and sustainers of this "culture" are...?

Bond prices always rise in low interest rate climates.

With so many years of artificially low interest rates, combined with reckless lending and uninformed borrowing - in combination with hedge funds and Ponzi schemes; stock market traders watching sophisticated computer programs doing their work - running on vapour - we should all question the tax-payer bail out of banks?

Apparently, the tax-payer bailed out banks with real money, and is still subsidising the banks and supporting a system that failed with no real money in the first place?!

Can we safely assume -

1)Investment banks and 'traders' are still operating on vapour?

2)tax-payer subsides are funding bonuses?

3)banks use working people's salary funds paid into their bank accounts, to invest on speculation - but without knowledge of that bank account holder knowledge?

Therefore, like millions of others, if your salary or wage is paid into your bank account - your bank will use that income, hourly, on 'investment opportunities'. This information is not new, and has been in the public domain for many decades.

Banks don't want to lend because they don't have any capital or 'real money' except from tax-payer subsides. So, the collaboration between banks and government still depends on the merry-go-round of tax-payer subsides?

74. At 09:03am on 09 Feb 2011, Dempster wrote:

National Savings and Investments offered RPI linked savings certificates which paid RPI + 1%. Which, when you think about it, is not such a bad deal, because they’re tax free.
Sadly they’ve been withdrawn.
~~~~~~~~~~~~~~
Closing NS&I index-linked was the "trumpet of the apocalypse" that told me the storm was coming. If Govt. can not support its own savings scheme in line with RPI (or CPI etc.), then uncontrollable inflation is a certainty.

After a very small amount of asking questions here and getting only a few sensible responses, I went and looked up "deflation" to see what nobody was talking about.

There be dragons! (At least, for the government and the banks, if not for the little people.)

Reduced production costs of the scale seen through globalisation should have made us all richer by far.

But the big bad ogre of deflation had to be avoided at all costs. In the 1870's US banks defaulted on savings accounts! What do you think the deposit guarantee was for?

So "consumerism" and "devaluation" have been the control method used to avoid deflation.

Create artificial demand and simultaneously print more money to reduce the value of the pound in your pocket. All this specifically to keep prices stable.

Now that offshoring costs have bounced, the deflationary "threat" is going away, and the question is what control method the UK can have over spiralling global costs. Answer...not much. Mushroom thinks BoE base rate changes are a waste of effort.

UptoSnuff seems to think fiscal policy is the answer. I partly agree. It has to be better than the monetarism being practiced by the BoE. But I am not sure there is sufficient domestic demand to turn the tide of domestic production.

Apart from the wizards of Canary wharf turning valueless fiat currency into asset-backed profits by "magic" (= ripping off the little people). The biggest contribution to the strength of the pound would be improving the balance of trade, which as noted above, is going the other way.

Happy to be enlightened, as always.

#72

The market does not work, and the banks will not be allowed to fail.

You refer to "saps" who borrowed too much. They borrowed due to the failings ofthe market. For many years we have had a shortage of housing. Consequently, those needing a house for their family were forced into bidding wars for the housing that was available (the workings of the market - supply and demand). In years gone by, the extent of those bidding wars would have been limited by the prevalent 3 X income maximum mortgage, however the banks responded to the demand for mortgages by increasing the income multiples. This allowed buyers to continue outbidding each other until they reached the new maximum, driving up prices. This was supplemented by the buy-to-let "investors" furthing driving up house prices (and rents for those who chose not to buy).

This was surely the market working as the market was intended to work. The market value of an asset is he price that someone will pay for it.

The British "economic miracle" was finally recognised as yet another bubble. The market itself causes these bubbles. If we burst this bubble in one go then the whole economy will suffer for decades to come. House prices collapse - the banks collapse - pensions collapse - SMEs collapse - employment collapses etc. Instead, the bubble (property prices and rents) must be gradually deflated.

Successive governments have already set out their stalls showing that banks will not be allowed to fail. For this reason I can't forsee interest rates being any higher than 2% by the end of 2012 and probably beyond that.

88. At 12:49pm on 09 Feb 2011, stillpuzzled wrote:
Compare and contrast with the UK?

(does anyone else remember "til death do us part"?)

=================================================

You're still puzzled, mate.

"Forced to use immigration to shore up missing labour who were killed in the war."
Britain suffered fewer casualties than France, Germany and Italy during the war. And relatively fewer than many other European countries like Netherlands, Poland, Hungary etc. Immigration came in 1950s due to the post war boom and full employment.

"In hock to the US since 1945 for arms and equipment spent fighting the war."

True, since lend-lease 1940

"A class-ridden society in which ownership of land is the ultimate statement of wealth, hence the aspiration to home-ownership."
Class-ridden due to the greater inequality of wealth and opportunity found in UK than nearly any other major western country. In this country, unlike Germany, you have basically pauper's rights as a tenant. So home ownership was/is the only means of securing your family's shelter.

"A leftist workplace culture of "management vs. workers".
A synmptom due again to the wide inequality and lack of social mobility that was/is prevalent in this society.

"Deliberate policies of multiculturalism which undermine any pride we might have had in being "British".

Rubbish, in fact the opposite was the case. Jingoism from being an empire, or like all little englanders have you forgotten the British Empire? Yes, that institution that once fancied Britain to be the motherland of a worldwide empire of 450 million citezens of empire. Where British institutions ruled side by side with indigenous cultures. Sounds a bit like multiculturism to me. Ever wondered why it was Indians, Pakistanis, West Indians, Hong Kong Chinese, Irish and Malays who overwhelming came to Britain in the 1950s and not Mexicans, Columbians, Indonesians, Italians or Koreans? Multiculturism, whose institutions still exist today, wholly due to the historic role of being centre of a Bristish Empire and not some nefarious group you allude to.

"Now, lets have a think, the creators and sustainers of this "culture" are...?"
Erm, the British people themselves. Their elites? You enlighten us.

I think the more subtler points of Til' Death Do us Apart were lost on you.

It's all going to end smelling of Roses.

The pound will collapse, we will not be able to buy imported Oil, food, toys, go on foreign holidays etc, etc. The few exporters remaining will carry on, yielding a few jobs (no thanks to the banks). We will grow our own food (or be hungry), get about on bicylces or electric cars (if you are wealthy). If the government has read the runes accurately it will have invested in electrifying the motorways and railways for moving freight. The welfare state will have collapsed because the wealthy taxpayers will have left the country or gone on strike and once again the country will be competitive, and belong to the people, (the ones left after the anarchy has killed off the excess). Maybe the sea level will rise, making us a smaller island than now.

But there again, this scenario will probably happen in every country in the world, the world population will be back down from 6,000,000,000 to 200,000,000.

The only real question is, what timescale are we viewing?

A rate rise now would have the effect of pushing on a string.

The BOE base rate is 0.5%, the Yorkshire building society standard variable rate (which is usually two% above base) is 4.99%.

In other words the only people who are profiting on the low base rate are the banks who have raised their margins by 225%.

Borrowers aren't benefiting and savers aren't benefiting.

Re: the effects on mortgages and property prices only.
I am one of the 'lucky ones' who got onto a tracker mortgage at the begining of 2008 and so benefitted from the fall in rates, up to a point. The rates continued to fall until my mortgage hit the bottom collar at which point further drops did not have any effect. Interest rates could rise by than 1.5% before they get back to the bottom collar, and I am faced with increased payments. Many others I know are trapped on fixed rate mortgages which never benefited from the drop in base rate.
I wouldn't know where to start looking, but can anyone tell us how many mortgages will face repayment rises for each 0.25% increase in base rates. There must be a tipping point where the pain starts to cut in and I'm sure it's way above 0.5% for the majority of mortgage holders.
As for house prices, surely when the rates go up and people eventually start to see increased repayments then that will just take up more of their fixed incomes, and slow the market down even further. People not moving houses does not bring the prices down, it just means people won't move house until the prices climb up again leaving the prices to stagnate. The only thing that I can see bringing prices down by 20/30/40% is if there are surplus houses made available where people want to buy them. However the property builders have invested vast sums of money on over priced land that they cannot afford to build low cost houses on, understandably they would rather sit on the land than make a loss.

92. At 1:41pm on 09 Feb 2011, Reticent_Trader wrote:

You're still puzzled, mate.
~~~~~~~~~~~~~~~~~~~~~~
Yep...still puzzled. Kept in the dark and fed a load of $£%$£.

still puzzled about how a country that invaded, bombed, shot and gassed its nearest neighbours, (and was then let off any financial or political consequences,) can be seen as a shining light of economic recovery.

still puzzled about how a labour MP was once famously vilified for daring to suggest that "multi-culturalism" is not the same as "multi-ethnicity".

still puzzled how the moneylenders can trade monopoly money among themselves, yet extract asset backed value out of the rest of us, without the public being informed of the scam.

still puzzled how we can believe in a political system that says "vote for me and I will represent your interests", when it is clear that politicians represent many other interests ahead of those of their constituents.

still puzzled how we can claim to be a sovereign nation when international agreements limit the scope of policy available at our borders.

But, thanks to yours and many other contributions on here, I am learning.

Have a good day "trading", OK?

#91. NoNoNumpty wrote:

"If we burst this bubble in one go then the whole economy will suffer for decades to come. House prices collapse - the banks collapse - pensions collapse - SMEs collapse - employment collapses etc. Instead, the bubble (property prices and rents) must be gradually deflated. "

We have no choice in the matter....

Further: unless interest rates rise substantially pensions will collapse as the annuities they use to pay pensions will be usable to keep up with contracted pensions! So the one thing we can be certain is that pensions are for it! And house prices and rents too.... either rapidly or quickly. I'd opt for rapidly as getting the pain over is better than having a leg sawn off slowly!

In essence if we do not burst the bubble all that you predict will come to pass...

To 97. At 2:40pm on 09 Feb 2011, John_from_Hendon

My personal experience in the Northwest

Typical buy to let flats down on average 40%
Typical buy to let houses down on average 30%
Typical owner occupied flats down on average 20%
Typical owner occupied houses down on average 10%
Commercial property generally down around 40%, with offices hit harder than most.

Commercial years purchase multipliers are falling back to traditional levels, but haven’t actually got there yet, likely due to demand deposit interest rates being very low.

Sought after owner occupied houses and commercial properties, no measurable change from 2007.

However from 01.04.2011 onwards, it is likely that commercial empty property rate relief is to be scaled back from RV £18,000 to RV 2,600

Which in essence means that if you own empty commercial property with an RV higher than £2,600, then after the usual three months grace period, you’re going to get hit with a full occupied rates bill.

Since 01.01.2011 I’ve witnessed commercial landlords prepared to let empty buildings for approximately half the usual market rent to avoid being caught paying full occupied rates from 1st April onwards.

This property bubble is deflating, and the rate of deflation is picking up speed.

@78 "Nice to see Germany enjoying record exports and falling imports - isn't it time the EU stepped in to redress this balance on an intra EU basis? "

I don't think the EU should have anything to do with this.
Our government is at fault here. If you look the cabinet are driven in BMW's (with the exception of the PM), your local dustcarts are merc, your local police in bmw, your local councils work vans are merc, your local ambulances are merc, your local fire truck is probably merc (or volvo)... We have killed off most of the British vehicle industry and are continuing to stab the corpse in case anything survives. We are doing the same with defence (buying American tanks), textiles (Chinese army uniforms), IT (Indian and American system development), and just about everything else.

Looking at a successful economy - Germany - they buy GERMAN for all those things. Why? Because it keeps their tax payers money in their country, cutting benefits, recycling in person tax, being spent in their shops, being invested in better and more competative products. They ALSO have their banks under better control with more stable and lower long term interest rates than we have here. This means their companies have access to local markets and cheap capital, they use this to create and improve products so that they can compete on the world stage, and win, the more they win the more they invest, the better they get, the more they win.... bit like the Chinese.

You don't NEED to be the cheapest, nastiest, dirtiest in the world to win you need to invest - and invest in plant, design, machinery, peoples training.... not in huge bonus payments for the lucky 10 at the top.

Our companies are BADLY run by a self supporting 'elite' that move from failure to failure getting ever richer. This is provable, just look up ANY former CEO of ANY FAILED British company - whether its HBOS or Symbian - or anyone, look them up and see which company they are now in charge of at an inflated salary. For the top people failure is seen as fine. For the rest of us we have to put up with redundancy, seeing our jobs shipped abroad (by our employers, the government or both) or - if we are lucky - ever reducing standards of living.

#98. Dempster wrote:

"#97. John_from_Hendon

My personal experience in the Northwest
Typical [property] down on average..."

Sadly in London: Property prices are stable, or up, on the peak of the 'boom'. 3 bed flats in SW3 go for £1.8M. 1 bed are £0.5M+. 2 bed are about £0.9M-£1M. Outer Suburbs 3 bed semi £375K - £475K. Still way out of reach of a teacher or even a policeman.

In the other Hendon (perhaps the real Hendon!) 2 bed flats seem to sell for £80K whereas in Hendon (London) they still sell from £300K to £600K What chance mobile labour with these extremes!