ultranomics

Here in autumnal UK, it seems we are certainly living through one of those accursed ‘interesting’ times as per the clichéd old chinese proverb.

On the face of it last week’s 1.5% base rate cut (down to a 53 year low of 3%) by the Bank of England should put a smile on the face of every mortgaged person in the country. Lets for a moment put aside the poor pensioners who were relying on a reasonable savings rate to get them through the winter (do I detect a reversal in the declining trend of extended asian families living together?)

Thankfully for us struggling ‘homeowners’ and small business owners (who should have saved for a rainy day anyway) most of the high street banks have agreed to pass the cut on. The Nationwide, Lloyds TSB, Abbey, Scottish Widows, RBS and NatWest said they would be passing on the full 1.5 per cent rate cut. They were followed – eventually – by Bradford and Bingley and the nationalised Northern Rock. A monthly mortgage of £150,000 should reduce by £138 to £887. Bargain.

But by dropping rates are Central banks merely making the same mistake as Alan Greenspan during his time as the US Federal Reserve chief? They are trying to use a drop in real interest rates (nominal rates minus inflation rate) to convince consumers to spend their money instead of saving it. In other words they are attempting to keep the credit bubble inflated, or at least to stop it from deflating any further. This isn’t good monetary policy in the long run as ultimately encouraging people to save, e.g. by giving reasonable rates of return from savings vehicles is the only way to wealth accumulation. The road the bankers would have us take is the road to poverty via debt-servitude; i.e. take out a car loan, get another credit card, remortgage the house. The life of the average Javed and Jameela is thus burdened with paying back interest for trinkets, e.g. lcd tvs, overseas holidays, luxuries, that they could ill-afford in the first place. This is wealth transference from the many to the few.

Sure there is ‘the economy’ at large to worry about and if we as consumers aren’t motivated to spend our money instead of keeping it in our accounts (or safer still, under the mattress) then companies left, right and center will be on the decline and jobs will be lost. Unfortunately though dear readers that is nature’s way. Bloated companies and unlikely ventures should not be saved by artificial means. If a company is competitive and well run it will get through and be stronger in the end. Those that are not must meet their demise and make way for fresh enterprises with new ideas and new jobs. The easy credit of the last 10 years allowed unhealthy risk taking to flourish in business, and Javed, with his imagined new wealth from credit cards and rising house prices bought into the myth of unlimited prosperity disconnected from true wealth-building activities, otherwise known as “hard work” (I apologise to all the hard working Javeds out there – I don’t mean you!)

Our hope here at the Ultranomics desk is that Javed and Jameela, as well as the rest of us with mortgages and loans, will take this opportunity given to us by the fall in rates to use the monthly drop in our payments wisely. Now would be the time to use that extra cash to pay off more of the loan capital where possible. The trinkets can wait! For those with no mortgage to pay but some money in savings accounts, sorry. But hey, cheer up and treat yourself to some new shoes for being such clever people.