Nikolay makes the point that people are becoming more concerned about the return OF their money, than the interest ON their money. So money-holders will limit demand for their cash by being picky about who they'll lend it to; control by quality screening, not by price.
Also, if people who habitually live on credit become frightened - and I think they are - then they will start trying to live within their means.
And discretionary expenditure could be reduced and/or redirected, not necessarily towards the cheapest end. I was listening to someone in the UK fashion industry on R4 yesterday, and they said far from everyone turning to Primark, the trend was to buy better quality, less of it, and make it last longer. Note that it's budget airlines like XL (competing on price) that are in danger of going down - they don't have much "fat to survive the winter".
From another angle, as the supply of cash and credit is dwindling, so are prices of houses and many other big-ticket items - look at the deals on cars and computers.
So it's possible to imagine that the contraction in credit may be approximately matched by a contraction in demand for credit, at least for a time. Bankruptcies and house repossessions will burn off a lot of debt, so we'll see a lot of ordinary people cleaned out and possibly more bank failures, especially as (in response to reduced expenditure) unemployment grows.
Thus we could see a recession in which the government tries to stimulate consumer demand by cutting interest rates - and this may not work, because many won't want (or be able to afford) to take on debt at any price; and those who do have cash and are watching prices fall, will hang off, waiting for further falls - as happened in Japan.
But Jim himself has acknowledged that rates may be cut in the short term. What about the longer term?
More unemployment, lower profits etc will shrink the tax base and increase the benefit burden. The budget won't balance without cuts in the public pay sector (= even less tax, even more benefits) or more government borrowing - I don't see how we in the UK could be taxed much more. So there's a danger that while consumer debt leads the way into recession, increased government demand for debt (and increased concern about government creditworthiness) may then lead the way to higher interest rates on State bonds.
When the State has more dependents, it will also find that not everything is going down in price. Food and fuel are must-haves, so benefits will have to be increased to cover the cost of such items. There will be more poor, and they will each need more. And the government will have to borrow more.
Or start devaluing the currency. Then all bets are off.
So here's a scenario: interest rates kept low, or cut; then government borrowing rises, while the economy burrows into a slump; then the real "credit crunch": the moment when the government, like an ad-man under pressure, needs a feelgood episode and, despite having sworn off it for life, reaches for the booze or the white powder, in this case inflation.
More and more, Michael Panzer's dire financial drama seems plausible.
8 comments:
If the BoE lower rates then we're doomed. Now that US financials have leprosy we need to be interest[ing].
You think an interest rate cut would be inflationary, at this stage?
Hi Sack
I beg to differ, if every financial institution had to mark to market all of their losses, 80% of the depositors in the world have no funds left. They are gone.
It's a little like an embezzler taking a vacation at the same resort as his victim. The only difference is, the embezzler knows who's money he's spending (there's no reason to ruin anyone's holiday). They will both have a very good time. After the vacation, its a different story.
That's just what happen in 1929. You had money in the bank one moment, the next, the bank was gone. Your money had been spent.
Once the losses become apparent, interest rates will rise, because of a real lack of money.
The present interest rates pretty much confirm that the losses have not trickled down to the people that put the money in the bank--yet.
You still have time to withdraw your funds--its a little like trying to sneak out of a movie theater when you smell smoke. Make sure you have a clear shot at the exit before you yell "fire!"
Hi, Jim, and thanks. Surely what you say shows why it can't be permitted to happen, so the government will eat all the debt it has to and then charge us, maybe by making our money worth less but not worthless.
I think interest rates in the UK will rise towards 10%, perhaps even more. The reason for this is that traditionally 10% or more is where banks can make a reasonable return on the loan itself, without getting into a situation where they have to explode the lending. At 5% the banks have to force debt into the public domain at a rate of knots to make money on the VOLUME of loans sold rather than the interest on each individual loan. In the UK these low interest rates have been crazy for years - but remember they have been set by the BoE which doesn't actually play in the market itself- hardly laissez faire is it? So now we see the market decoupling from the crazy low rates of the BoE as the banks have been forced to stop playing the BoE game. The game is UP with the BoE - they no longer have any inflence over real interest rates. The market has re-asserted itself and so LIBOR has risen to 6.5% and will continue to rise in my opinion. I think it is important to remember that the banks are in it for themselves but the BoE are playing a game with the banks to benefit the economy. What has happened is that the banks have now discovered that the BoE goals contadict their own at the present time. The BoE may put interest rates up in order to regain some faux credibility by getting closer to LIBOR, but really its game over. The free market has finally turned around with a big stick and beaten the central government control of interest rates to death. Maybe it will never retunr as the BoE will lose all credibility.
Naturally the decoupling of mortgage rates will but millions of people out of their homes, but that isn't the banks problem as such.
It's going to be hell out there, it really is. The question only remains: what sort of hell? Do I pay off my mortgage and sit tight, or do I keep my savings liquid to do a runner overseas if all hell breaks loose here?
I'm shitting myself I really am. I don't want to get caught in the cross-fire of someone else's financial fuck-ups and I don't want to see my sons drafted to fight some crazy nationalistic war. But lets face it, that's what happened back in the 30s and it sure as hell could happen again. Putin is exactly the kind of nationalistic loon we need to give us a reason to draft our sons into some mad European war.
You know, Sackers, we have both predicted the knd of path of financial desturction we are on and we both know enough about history to know where it is likely to lead, but do you feel we can't quite really believe it enough to do anything about it? I have often wondered why the Jews didn't just collect their possessions and run when Hitler came to power, but maybe they were in denial. Maybe this is what it feels like to be in denial to such an extent. We are trapped between the fear of inaction and the fear of action.
Your last para truly chimes with me, Ryan. It's the "this can't be happening" that has you rooted to the spot as the gang trots towards you.
If unattached, I'd sell all, rent and keep myself below everyone's radar.
You missed the point Sackers, inflation be damned we need a reason for investors/customers to put money in a bank and a more stable income stream for the banks. Its more important at this juncture to sex-up bonds.
Where we going to go Ryan? This is global meltdown.
I often DO miss the point, Wolfie, but if interest rates are jacked up doesn't this also cause more problems for the borrowers and so call into question the security of the loans and so the income stream?
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