Low interest rates have not averted catastrophe – merely delayed it

Only debt is sustaining a post-war, something-fornothing welfarism that is no longer deliverable

It is more than 10 years since the Bank of England last raised interest rates. With almost laughably inept timing, bank rate was increased in July 2007 to what by today’s standards is an almost unimaginable 5.75 per cent. Yet the rate hike was into the teeth of the biggest financial crisis in history. Pretty soon afterwards, rates began to tumble, and within two years they had been cut all the way down to 0.5 per cent.

At the time, few if any imagined that nearly a decade later, they would still be at rock bottom. The policy was also generally thought of as a success, part of a panoply of measures that had saved the West from a repeat of the Great Depression, when unemployment had soared and Europe hit the self-destruct button. Hardly anyone thought it would become a permanent state of affairs. Yet here we are, all these years later, and ultra-low interest rates are just another familiar and natural part of the economic landscape.

As the first rate rise in so long, yesterday’s 0.25 percentage point increase did at least have novelty value but otherwise it was of little significance. All it does is reverse the emergency cut that took place at the time of the referendum. In announcing an increase that two members of the Monetary Policy Committee in any case opposed, the Bank also made it plain that any future increases would be “limited and gradual”. For what it is worth, markets are expecting only another two quarter point rises over the next three years. Barring a Corbyn-led Government, in which case all bets are off, I’d be surprised if it was even that. By the standards of the past, this apparent watershed moment in UK monetary policy therefore barely qualifies at all as a change in the interest rate cycle – more a case of Bank of England bravado, just to show it still can, rather than one of conviction.

It may be true that ultra-low rates helped avoid the economic collapse of the inter-war years, but we now seem to be stuck with them, and it is ever harder to think of any other positives from this now entrenched reality.

Easy money has smoothed the adjustment, but far from dodging the moment of truth, we may only have delayed it. Is the sense of political and economic malaise we feel today really any better than the turmoil we saw back then? With much of the adjustment still left to play out, the question is at least debatable.

Attitudes and perceptions concerning circumstance, prospects and expectations have changed comprehensively during this era of zero interest rates, and nearly all of them in a deeply negative fashion. Opinion surveys by Pew Research Center find alarming levels of scepticism in the US, Europe and Japan over the once widely-accepted benefits of international trade, investment, globalisation and free markets. Those with big mortgages have enjoyed much lower debt servicing costs, but for anyone with cash savings, low rates have acted as a debilitating tax on income. The asset rich have seen values soar, but the asset poor are priced out of the market, undermining the middle-class aspiration which is the bedrock of any well-functioning, free-market economy. Home ownership levels are returning to those of the pre-war age.

Despite record levels of employment, wages have stagnated, making this the longest such hiatus in real wage growth since the 1920s. Policymakers have not been as good as they would like to believe, it would seem, at saving us from similar ravages to those Great Depression years.

To make up the difference, citizens have again been encouraged to rack up record levels of consumer debt, repeating the mistakes that preceded the financial crisis. Rightly or wrongly, voters have begun to believe the next generation will be the first since the industrial revolution to be poorer than their parents. Ruinous debts are being left behind for future generations to shoulder. Job security has plummeted, and with it the productivity growth required to drive future increases in living standards. Meanwhile, the gap between the rich and the poor grows steadily wider, driven in large measure by the monetary incontinence of the world’s major central banks. If turbo-charging asset prices could solve our economic ills, we would be home and dry, but productive growth remains all too predictably elusive.

Small wonder that voters have lost trust in established political and economic elites. Confidence in their solutions – to the extent that they propose any at all – has all but vanished, leaving citizens to seek solace in high risk or delusional political radicalism. There is of course no real comparison between the deprivations of the pre-war years and our own economic discontents, but the parallels are nevertheless there to be seen. Anxiety and foreboding have become the defining sentiments of the age. Optimism and aspiration have given way to pessimism and resignation.

Low interest rates are no more than mere symptoms of the underlying disease; they are not the cause. Yet listening to the technical language and explanations deployed by Mark Carney, Governor of the Bank of England, to justify yesterday’s marginal change in rates, you could not help but think that the technocrats have lost the plot. Slowly but surely, we are being forced to come to terms with an unacceptable truth – that what has been promised politically is no longer economically deliverable. These promises were made not by political populists, but by the welfarism and something-for-nothing of the post-war political consensus. Money creation, debt and low interest rates are the methods by which they are still sustained.

In the US, President Donald Trump hopes to keep the illusion going for at least as long as it takes to get reelected, with the likely appointment of a patsy, Jerome Powell, to be the new chairman of the Federal Reserve.

If there is one person who can be relied on to keep the stock market bubble alive, it is Mr Powell. The eventual comedown will be all the more painful for it.

It may be that the West is going to have to go through an even deeper crisis than the one just seen before it is willing to confront and properly address harsh realities that have been long coming.