By Neil Patrick
Unless you are particularly interested in the financial markets or economics (as I am) you probably didn’t pay too much attention to the news that the Mervyn King shaped hole at the head of the Bank of England had been filled (partially at least) by Canadian Mark Carney.
Mr Carney has a very good record we are told, having steered Canada’s economy skilfully around the economic crisis that swamped the US, UK and the Eurozone from 2008 onwards.
He’s wasted no time either in putting his stamp on the way the Bank of England conducts itself, and the first of his measures is the announcement that from now on the Bank will issue what he calls ‘forward guidance’ on its plans for interest rates.
Carney used the same ‘trick’ in Canada. On the face of it, it’s no bad thing; it allows businesses and markets to get a greater level of confidence over the medium term environment and consequently plan better and have fewer short term shocks to cope with. So in principle, I think this is a good thing.
But in practice, right now in this climate, it’s quite another. That’s because he’ll almost certainly be telling us all to expect near-zero interest rates for many years to come.
What he should be saying is that interest rates will have to rise one day, that the government is too deep in debt to keep most of its promises and that as soon as the cheap debt disappears i.e. as soon as any sort of economic recovery starts to happen, real wages will not rise for years.
So was Mr Carney really the saviour of Canada whilst the rest of the west fell into recession? The Bank of Canada first used the forward guidance idea in 2009. Carney slashed interest rates promptly but also pledged to Canadians that this low rate environment would remain in place for a long time to come.
The policy was credited with helping Canada steer its way around the recession and paved the way both for the creation of Carney’s reputation as one of the world’s cleverest central bankers and ultimately him getting the transfer deal from Ottawa to London.
But I suspect that the true value of Mr Carney’s measures have been massively over-hyped. The reality I think was that Canada’s salvation was as much due to the innate conservatism of its banks, high commodity prices and the fact that Canadians carried on happily spending and borrowing, as it was by anything that the central bank said.
To put it another way, are we really sure we are comparing apples with apples here?
So whilst I think this question remains open to debate, I am quite definite that this forward guidance obscures the emergence of a really dangerous situation for most working professionals.
Let’s not forget that 0.5% interest rates are an aberration. They have not been this low for the last 300 years. At some point in the future they MUST rise again. So if you’ve become used to paying your mortgage or business loan or whatever at today's rates, try doubling or trebling that monthly cost and ask yourself how comfortable you’d be in that situation?
If the answer is 'not very', you need to start doing something about it right now.
Next, let’s not forget either that the Bank England does not control the prices that you pay for the financial products and services you buy. UK banks have had a hard time as we all know, and whilst you may smugly argue that they got what they deserved, the fact remains that they will be using every trick they can muster in the coming years to generate profits again. The demise of free banking is already on the horizon and you can fully expect that as central bank base rates rise, customer prices will rise at least as fast and probably faster.
The next point is that as we all know, the UK government is in a state of near cataclysmic debt. It has the biggest deficit of any country in the developed world and simply cannot expect to continue without huge future reductions in spending. And as you’ve probably guessed, this means you can expect to see the costs of pensions, education and healthcare increasingly passed on directly or indirectly to you.
Last but not least, the growth of the last two decades in the UK was based mainly upon debt and house price growth which meant almost everyone felt they were getting richer. We weren’t, it was an illusion and only the ongoing supply shortage and of course the latest government house buying subsidy madness is keeping house prices from collapsing to their true value.
Only one thing really creates real wealth growth and that is rising productivity, and whilst some recent reports point out that this has increased slightly in recent months, it’s a far cry from being any sort of major turnaround. So, without the artificial stimulus of rising debt, real wages are unlikely to rise any time soon and may even continue to fall.
Couple this with the outlook for living costs I’ve outlined above and you can see that if you want to see any sort of improvement in your standard of living, or even just maintaining the one you have now, you’ll need to have a plan to earn a great deal more money over the coming years.
Of course no-one in the government or the Bank of England wants to highlight these points – after all who wants to hear this sort of truth? The reality for most of us is that we will have to work harder, save more and spend less. That’s the sort of forward guidance that Mark Carney ought to be giving us.
But in practice, right now in this climate, it’s quite another. That’s because he’ll almost certainly be telling us all to expect near-zero interest rates for many years to come.
What he should be saying is that interest rates will have to rise one day, that the government is too deep in debt to keep most of its promises and that as soon as the cheap debt disappears i.e. as soon as any sort of economic recovery starts to happen, real wages will not rise for years.
So was Mr Carney really the saviour of Canada whilst the rest of the west fell into recession? The Bank of Canada first used the forward guidance idea in 2009. Carney slashed interest rates promptly but also pledged to Canadians that this low rate environment would remain in place for a long time to come.
The policy was credited with helping Canada steer its way around the recession and paved the way both for the creation of Carney’s reputation as one of the world’s cleverest central bankers and ultimately him getting the transfer deal from Ottawa to London.
But I suspect that the true value of Mr Carney’s measures have been massively over-hyped. The reality I think was that Canada’s salvation was as much due to the innate conservatism of its banks, high commodity prices and the fact that Canadians carried on happily spending and borrowing, as it was by anything that the central bank said.
To put it another way, are we really sure we are comparing apples with apples here?
So whilst I think this question remains open to debate, I am quite definite that this forward guidance obscures the emergence of a really dangerous situation for most working professionals.
Let’s not forget that 0.5% interest rates are an aberration. They have not been this low for the last 300 years. At some point in the future they MUST rise again. So if you’ve become used to paying your mortgage or business loan or whatever at today's rates, try doubling or trebling that monthly cost and ask yourself how comfortable you’d be in that situation?
If the answer is 'not very', you need to start doing something about it right now.
Next, let’s not forget either that the Bank England does not control the prices that you pay for the financial products and services you buy. UK banks have had a hard time as we all know, and whilst you may smugly argue that they got what they deserved, the fact remains that they will be using every trick they can muster in the coming years to generate profits again. The demise of free banking is already on the horizon and you can fully expect that as central bank base rates rise, customer prices will rise at least as fast and probably faster.
The next point is that as we all know, the UK government is in a state of near cataclysmic debt. It has the biggest deficit of any country in the developed world and simply cannot expect to continue without huge future reductions in spending. And as you’ve probably guessed, this means you can expect to see the costs of pensions, education and healthcare increasingly passed on directly or indirectly to you.
Last but not least, the growth of the last two decades in the UK was based mainly upon debt and house price growth which meant almost everyone felt they were getting richer. We weren’t, it was an illusion and only the ongoing supply shortage and of course the latest government house buying subsidy madness is keeping house prices from collapsing to their true value.
Only one thing really creates real wealth growth and that is rising productivity, and whilst some recent reports point out that this has increased slightly in recent months, it’s a far cry from being any sort of major turnaround. So, without the artificial stimulus of rising debt, real wages are unlikely to rise any time soon and may even continue to fall.
Couple this with the outlook for living costs I’ve outlined above and you can see that if you want to see any sort of improvement in your standard of living, or even just maintaining the one you have now, you’ll need to have a plan to earn a great deal more money over the coming years.
Of course no-one in the government or the Bank of England wants to highlight these points – after all who wants to hear this sort of truth? The reality for most of us is that we will have to work harder, save more and spend less. That’s the sort of forward guidance that Mark Carney ought to be giving us.
