The Suicidal Intent To Raise Rates Quickly
Bank of England Monetary Policy Committee member Martin Weale warns that interest rate rises may be coming in 2015, and Conservative politicians — assuming that this will occur — are already hankering for tax cuts to offset the contractionary effect of rate rises, worrying that rate rises will cost them the election.
Although I’d love to see tax cuts — because that would reverse some of the current austerity measures — why stop now? After four years of contractionary austerity foisted upon the country by deficit scaremongering that has grown into an epic misunderstanding of the dynamics of debt, and a total rejection of Keynesian ideas on deficits in the slump, the UK is already in a worse slump than the Great Depression. Possible rate rises in 2015 won’t change the mistakes of the past. We’re already in a depression, and the government’s complacency on this — and delusional belief that contraction can be expansionary — has already severely damaged their prospects at the next election.
So, it’s frankly baffling that any monetary policymakers are talking about the possibility now, even Weale whose views are broadly austerian like Cameron and Osborne. Unemployment is still above 7%, and nine months of relatively okayish growth hasn’t dug us out of the slump yet. The desire for interest rate renormalisation may be driven by a number of things — fear of bubbles, assumptions of general equilibrium and swift returns to full employment, concern for the plight of savers (and rentiers) in the low interest rate environment. It might even be sensible to consider rate rises — or at least an end to quantitative easing — after another year’s strong growth if unemployment fell to closer to 5 percent. That’s probably the framework of assumptions Weale is working under.
But really, that’s pie in the sky thinking. The UK is in a depression. There are no guarantees of another year’s decent growth, or a fall in unemployment, especially with the Tory government committed to cutting the deficit at any cost, with the potential for a financial blowup in China, with the ongoing unemployment disaster in the Eurozone, and with geopolitical turmoil ongoing in the Ukraine and Venezuela.
The last nine months of decent growth are likely to have just have been a perspicacious upward bump within the context of a wider depression. I hope not, of course. I always hope for recovery. But I am not the market, and I do not control other people’s animal spirits.
Of course, irrespective of what Weale thinks (or wants?), I somewhat doubt the Monetary Policy Committee will entrap itself into raising rates without significantly lower unemployment and sustained growth, irrespective of rentiers’ continued desire (and loud shouting) for such a thing.