Back to Queen Anne - and then some
A few years ago BT used to have its own Economics Advisory Department, and I met some extremely talented economists who worked in it. They circulated regular bulletins to the forecasting and planning community within BT and one of my professional pleasures at the time was reading some of the fascinating articles which the head of the department, a master both of the subject and of the English language, occasionally wrote with his views on the state of the economy.
Of all those articles, the best was called "Back to Queen Anne!" which was published just after the Minimum Lending Rate fell to the record low of 5%. He referred to the "anti-usury" laws which were passed from the middle ages through Tudor and Stuart times in vain attempts to restrict the rates of interest which lenders could change, gradually passing lower and less realistic legal ceilings on interest rates, until in Queen Anne's time a law was passed attempting to outlaw interest rates above 5%.
In the present circumstances, the Federal Reservce Board in the US has dropped some rates to 1% and some economists, who in my opinion should know better, have been calling for interest rates to be dropped below 2% on this side of the Atlantic as well.
Such desperate measures are all to likely to merely increase the risk of panic, but worse, they look at only one side of the equation.
Yes, such rates will help lenders - in fact, if the rate of interest is below the rate of inflation, that amounts to a negative real rate of return - effectively it means that people are being paid to borrow, and charged for saving.
And that's why negative real interest rates are counter-productive in the long term. One of our major problems as a society is that we are not saving enough - the most serious valid criticism of Gordon Brown's economic record is that many of his policies, from the £5 billion a year raid on pension funds and over-complicated pensions credit through to punitive means testing on many forms of state support, have wrecked incentives to save.
If we then pay people less in interest than the amount by which inflation erodes their savings, we eliminate what little reward for saving has been left. That is really not a good idea.
Of all those articles, the best was called "Back to Queen Anne!" which was published just after the Minimum Lending Rate fell to the record low of 5%. He referred to the "anti-usury" laws which were passed from the middle ages through Tudor and Stuart times in vain attempts to restrict the rates of interest which lenders could change, gradually passing lower and less realistic legal ceilings on interest rates, until in Queen Anne's time a law was passed attempting to outlaw interest rates above 5%.
In the present circumstances, the Federal Reservce Board in the US has dropped some rates to 1% and some economists, who in my opinion should know better, have been calling for interest rates to be dropped below 2% on this side of the Atlantic as well.
Such desperate measures are all to likely to merely increase the risk of panic, but worse, they look at only one side of the equation.
Yes, such rates will help lenders - in fact, if the rate of interest is below the rate of inflation, that amounts to a negative real rate of return - effectively it means that people are being paid to borrow, and charged for saving.
And that's why negative real interest rates are counter-productive in the long term. One of our major problems as a society is that we are not saving enough - the most serious valid criticism of Gordon Brown's economic record is that many of his policies, from the £5 billion a year raid on pension funds and over-complicated pensions credit through to punitive means testing on many forms of state support, have wrecked incentives to save.
If we then pay people less in interest than the amount by which inflation erodes their savings, we eliminate what little reward for saving has been left. That is really not a good idea.
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