Interest Rates: Up or Not?

This Blog has always been an interest rate hawk. Indeed worse than that. I believe, unlike almost every economist anywhere, that control of currency and interest rates by central banks has been a mistake. It has had advantages for global business, but its impact on ordinary lives has been negative, the gap between rich and poor has grown and that squeeze on living standards is creeping up to the middle classes. That produces political unpredictability, unexpected election outcomes and a creeping tide of uncertainty, which in the end, is not only bad for business at every level, but bad for everybody else too.

At the heart of a well balanced economy must be the power to create new wealth. That wealth must produce a profit at the corporate level, but it must also show a profit for ordinary foot soldiers right across the economy. The surplus of income over living costs should in part be invested in improvement and part saved to provide for a rainy day. These savings are the source of new capital to finance further economic growth. But if the return on saving is tantamount to nil, it dries up. Instead replacement money is pulled in from international markets, most of which is now the product of quantitative easing by the US, UK and EU.

This is used not to create new wealth, but to pump up assets. That makes the rich richer and the poor poorer. The crunch comes when it begins to pull the aspiring middle backwards towards relative poverty. That is happening now. In the US it gave us Trump, France has Macron on a voter turnout below 50%, a shocking statistic for a democracy noted for high voter participation, and in GB it gave us first Brexit, then the shock outcomes of the Corbyn surge and the May humiliation.

It is imperative that interest rates begin their slow climb back to viability, as a necessary spur to saving and an effective lever of prudent economic management. Failure to act will create a combination of social and economic volatility which could easily slide out of control.