From subprime to subzero: now you’ll pay the bank to take your money

In an attempt to pull the economy out of the doldrums, the Bank of England is planning to cut its base rate to below zero. In parallel, it’ll shift its printing press into a higher gear and add to the £375 billion of worthless currency it has already run off in the last few months.

I’m sure that savers and pensioners, whose livelihood will be destroyed, are finding solace in knowing that the country’s economy is in safe hands. Managers of building societies must be ecstatic too: they’ll no longer have to get up early to go to work. The rest of us wonder what other weapons of mass fiscal destruction our rulers will deploy against us.

It’s axiomatic that the state’s fiscal policies affect people’s economic behaviour. The lending crisis of 2008, or rather the ongoing crisis that started in 2008, was caused by many factors. But by far the most pernicious of them all was the fiscal policy of the US administration and other Western governments. Collectively they encouraged banks and individuals to behave foolishly and irresponsibly.

By keeping the base rate artificially low and providing incentives for banks to lend, the US government created the subprime mortgage crisis that delivered to the world economy a blow from which it has never recovered.

In the subsequent panicky attempts to get their economies up from the floor, governments started pumping funny money in, trillions’ worth. The money was indeed funny because it didn’t reflect any underlying value. Ostensibly it came from the printing presses activated by the levers held in the hands of quasi-independent central banks. But the real culprits were Western governments exerting pressure on the banks.

‘Quantitative easing’ is by its nature inflationary – it increases the money supply without increasing the amount of goods and services available. Sure enough, for several years now the interest on savings and government bonds has been lower than the inflation rate, roughly by half.

The new bright idea will hit the economy with a double whammy: it’ll increase the inflation and further punish responsible individuals by plundering their savings. Add to this the surreptitious but progressively sharper pinpricks of higher taxes, and we find ourselves bleeding white.

Saving will now be even more of a losing proposition than before. The pot will simply grow smaller every month until it’s empty. Borrowing, on the other hand, seems to make every sense in the world – why not take on a second, third or fourth mortgage if there’s practically no interest to pay? The value of your properties will grow at no cost to you; it’s like getting rich by investing somebody else’s money.

This is the kind of mentality that has proved ruinous already. Derisory interest rates to the state are what a piece of cheese is to a mousetrap. Encouraged to take gambling risks with their money, millions of human mice reach for the cheese, only to see the trap slam shut behind them.

For at some point in the near future the lending rates will go up, as they did in America a few years ago. As thousands of overextended people got caught in negative equity and impossible repayments, a spate of defaults hit America, along with all those dominoes leaning against it in our globalised world.

So, if saving is silly and overextending ourselves in the property markets fraught with danger, what else are we to do with our money, what’s left of it after the state has taken its growing cut? We could either spend it or take gambling risks. But what about those of us who are by nature neither gamblers nor wastrels? Historically, there used to be viable options, but this has changed.

The up side of low interest rates was that they encouraged active, rather than passive, investment. For example, rather than letting money sit in a savings account, in the past we could invest it in the shares of our manufacturing concerns and then grow with them.

In those days, the price of shares and the amounts of dividends reflected the real value of the firm. That’s why shares were held for years, often for generations. Rather than putting money into a building society, people would buy shares in solid firms and live off dividends. If the company was doing well, the dividends were high. If not, they were low. But by and large the marginally greater risk of such investments was offset by returns higher than those available at a bank.

This situation has changed. Hardly anyone buys shares for the dividends any longer. People gamble on a rapid increase in the shares’ face value, and with the advent of High-Frequency Trading (HFT) fluctuations are very rapid indeed. Share ownership first began to be measured in months, then in days and now – courtesy of HFT – often in seconds.

Most HFT traders sell their whole portfolio in one day, and in America about 70 percent of all trading is done that way. This means that share values no longer reflect a company’s long-term performance – more and more they depend on imperceptible, and often unaccountable, factors  changing by the second.

Under such circumstances buying shares has become sheer gambling. The choice is no longer between putting money in a bank or investing in the stock market – it’s between buying shares or roulette chips.

Hence the government’s strategy is just what we’ve come to expect from this lot. They’re counting on a short-term upsurge in growth that’ll last until the next election. If they win it, they’ll handle the inevitable fallout then. If they lose, this becomes somebody else’s problem.

Don’t you just love these chaps? Alas, even as we no longer have reasonable choices of investment, neither do we have any reasonable choice of government. The lads waiting in the wings are even worse.

The Nobel economist Milton Friedman, the great champion of modern economies, titled his bestseller Free to Choose. I wish.

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