Remember Prudence? Go on, think back, you know her. She was that fresh faced, well mannered girl. There was a time when you couldn’t miss her but she hasn’t been around for years now, which is a shame because we really liked her. Looking back, she never truly recovered after being jilted by that politician she was seeing. After being his long term companion, he grew tired of her worthy attributes, only to become infatuated with a reckless floozy who now makes his life hell. Poetic justice, some might say.
There is deep irony in how the great and good are proposing to fend off a global recession that deepens by the day. U.S. interest rates have been close to zero for some time but the Bank of England’s Monetary Policy Committee (MPC) has followed suit with base rate cut to 0.5%. Now, if reducing rates from 5.75% to 0.5% has yet to deliver the desired effect then it might suggest the MPC is barking up the wrong tree. The present situation has nothing to do with the cost of money and everything to do with the supply of it. Cutting rates faster than Sir Fred Goodwin can accrue pension benefits is pointless. The impoverishment of savers will do nothing to rectify this situation and is just another kick in the teeth for the prudent.
What the vast majority of the world’s policy makers fail to grasp, even now, is that economies based upon consumption are finished. I’ll précis the past ten years as consumers spending money they didn’t have by borrowing money they couldn’t afford to buy stuff they didn’t need. You don’t have to be an economist to appreciate, with only a couple of seconds thought, that this economic model is past its sell by date. If you are an economist, you may well require a couple of years to figure it out which is why the majority of them are so keen on ‘stimulus packages’.
Both governments and consumers are already groaning under the weight of debt (and the former will be adding to it) yet the antidote to this dreadful vista is to go shopping? Well, it’s an interesting thought but one that merely leads us to ask more questions. Would a doctor treat drug addiction by administering an overdose? Should the obese be prescribed doughnuts? Is more beer the answer to alcoholism? How can more government debt and more consumer spending lead us out of this mess?
The Bank of England (B of E) has, so far, copied the U.S. Federal Reserve, which is a worry considering the U.S. government is now racking up an interest bill of close to $2bn (two thousand million) per day. As the B of E starts quantitative easing (being simple folk, we call it money printing) that smell of ink gets stronger by the day.
John Newsome can be contacted on: 01423 705123 or email:firstname.lastname@example.org