The effect of low interest rates

Taxes

Taxes (Photo credit: Tax Credits)

What are the benefits of low interest rates?

As far as I can tell, it allows governments to raise money and pay a lower rate of interest to investors. In my opinion this is pretty meaningless, as at the moment governments are only paying back their debts by issuing more bonds. So in essence, does it really matter what the rates are?

One beneficiary of lower interest rates in the UK, is the home owner who has a mortgage.

As the banks are not lending to businesses, it really doesn’t matter what level interest rates are and indeed, those companies who are desperate for finance are having to pay over the odds to raise money from the private sector anyway.

What does matter, is where the money is coming from, to drive growth in the economy and stimulate jobs, pay taxes to governments to repair budgets and end austerity measures.

So where does this money come from?

It comes from the tax payer, consumer, corporation tax payer amongst others. Simplistically, if I have £100K on deposit at the bank returning what amounts to 1 or 2% net, I earn about £2K and the taxman earns circa £1400

I’m not really jumping about with joy, or thinking about whether I should fit a new kitchen at my home, buy a new BMW or go on holiday.

What does concern me, is that my income taxes are the same, my children’s school fees are going up, my fuel fills are rising, my indirect taxation costs are rising (VAT) and my health costs are rising. If I haven’t got a mortgage then I don’t see the benefit of lower rates either.

So what does this mean? Well, I have to budget. Budgeting is something that governments worldwide are being educated about, even as I write.

Budgeting means I spend less in the shops, on the beleaguered UK high street, I go out less (restaurants, entertainment leisure), I trim my food bill down at the supermarket, I tell my wife to highlight her own hair and I start growing long hair and a beard.

Apart from looking like a cave man, what does this now mean? Less money flowing into the economy, resulting in less job creation. Less taxation revenue for the government, resulting in even more austerity measures. Less money for corporate UK, slowing sales growth, less for directors, employees, pension funds, the taxman.Resultant falling share prices contribute to the ever increasing downward spiral.

Interest Rates

Interest Rates (Photo credit: 401K)

What if interest rates are higher and my returns are nearer 6 or 7%? net. Common sense tells me I’ve got more money to spend, about £6K, thus stimulating growth. I pay all my bills, the government gets a bigger tax take also (about £4K) and UK corporate benefits etc etc.

More importantly, every pensioner in the UK is suffering with low interest rates, having to rebuild their capital base, as health costs are spiralling upwards and pensions are reducing. This is making it harder for pensioners to support or financially aid their offspring.

 

 

 

So are low interest rate benefitting the economy?

Common Sense, don’t set UK Bank of England base rates at 0.50% without it.

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  1. October 30, 2012 at 11:15 am

    A rather simple, incomplete analysis simon. Given the UK’s addiction to property, rates at 6% reduce disposable income for the majority of home owner’s and given current levels of personal debt/Income, would most likely trigger an increase in foreclosures in the UK which would not be great for a much weakened financial sector. That in itself would have a negative impact on consumer spending and sentiment resulting in cost savings and increased unemployment. It would increase the debt service payments of a country that is already highly indebted and limit financial flexibility leaving less income for services. Higher rates may also result in a stronger currency that would hurt exporters.There is no easy solution to the current environment. No, the BoE rate should not be a 0.5%…but not 6% either.

  2. December 4, 2012 at 2:13 pm

    Interest rates *used* to be a tool to take money out of the economy, ie, to slow it down.
    Imagine a shoebox is the economy – the lower interest rates the more the box fills up, which used to lead to higher inflation as more people were spending.
    Higher interest rates would take money out of the box, slowing spending and reducing inflation.
    In today’s financial climate, half the bottom of the shoebox is missing.
    The interest rate is low, so in theory the box (economy) should be filling up with money, people should be spending this extra cash, but as half the base is missing, the box fills up much slower, interest rates have less of an effect as a tool to slow down/speed up the amount of money in the box.

    I know my example is rubbish, but until governments of any colour fix the base of our shoebox, (ie, finding out why half the base now has a hole and sorting it out) then the UK will never have the same level of control over what’s going on in the economy/shoebox.
    Successive governments of different colours have failed to protect our shoebox and act/have acted as if the base of our shoebox is all there.
    Which is why the people are getting walked over, each government applies it’s own rule of thumb/policies, which are based upon the shoebox being in good repair.

    Unless we get a real conviction political leader, say someone of Thatcher’s ilk, with a huge majority, or a new political party, I can’t see a way out of it for the people.
    As it stands, there are many similarities with the UK in the early 1970s, all that’s needed is to change “unions” for “corporate businesses”

  1. May 31, 2012 at 12:59 pm
  2. August 24, 2012 at 11:22 am
  3. March 18, 2013 at 10:24 am
  4. September 9, 2013 at 12:32 pm

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