Ultra low rates have put us on a new road to serfdom
It is difficult for a Tory leadership candidate to say it, but it is a good thing that interest rates are going up. We would be in a better place today if they had started to rise earlier. They need to rise to help head off inflation and restore financial reality.
When I interviewed Rishi Sunak last week, he showed himself well aware of this. He told me that, when chancellor, he had urged the Bank of England to raise rates to combat inflation.
He did not want to dwell on this subject, however, because his attack on Liz Truss’s tax cut plans, which he sees as premature, centres on the claim that they will drive interest rates too high. His suggestion that the Truss cuts will make your mortgage more expensive is simpler, politically, than discussing the heart of the problem.
This is a pity because the articulate and thoughtful Mr Sunak would be very good at exposing the real issues to the public if he chose to do so. Whoever wins will have to confront them fast.
For many years, I have respected the economic writer, Edward Chancellor, on this and related subjects. As early as 2005, he predicted almost all major aspects of the credit crunch which occurred in 2008-9. I wrote about this at the time.
Now, at just the right moment, Mr Chancellor has brought out a book about the history and theory of interest rates since they were invented in Mesopotamia more than 4,000 years ago. Its apposite title is The Price of Time. Its cover illustration shows the percentage sign with its upper nought rendered as a bomb with a lighted fuse. He quotes the Sage of Omaha, Warren Buffett, as saying: “Interest rates basically are to the value of assets what gravity is to matter.” If interest rates stand at zero or are negative, asset values float aimlessly around in the atmosphere ungrounded by reality. Hence so much “blind capital” chasing dotty schemes.
We are all familiar with the expression about behaving “like there’s no tomorrow”. “Quantitative easing”, extended for 13 years beyond its original, necessary role as a rescue tool for the global banking system after the collapse of Lehman Brothers, has behaved thus. Interest rates set close to zero abolished the financial difference between today and tomorrow. Government debt vastly expanded, partly because it cost very little to service if rates were held so low. So now the swollen finances of governments are dangerously vulnerable to the necessary rise in rates. Higher rates began markedly to increase British government debt costs this June.
The explosion of asset values, says Mr Chancellor, benefits them that hath over them that hath not and the old rather than the young. Real wages have stagnated in this period, whereas things like house prices have shot up. Because people can get mortgages at very low rates, they do so, but the housing “ladder” on to which they wish to climb is more like a treadmill because the unrealistically low rates make the prices insane.
Low interest rates also damage productivity and investment by letting bad companies off the hook. They help such companies survive by enabling them to meet their debt interest costs, but they prevent the shake-outs which capitalism needs. Perhaps a fifth of our businesses are “zombie” companies. Risk-taking, whose mistakes and successes are necessary parts of capitalism, goes haywire if it is socialised.
In such conditions, the vested interests of the financial sector have much too much power and productive industry has far too little. Central bankers and big bankers have shifted from being enablers of a healthy economy to being controllers of an unstable one. Economic growth stalls.
Our fundamental economic arrangements only justify our way of life if, broadly speaking, they bring greater prosperity to most people. That is why so much economic discussion rightly circulates round what will happen to our children and grandchildren. If their general condition will not be better than ours, it must mean that our policies have damaged the future in order to make the present more palatable. There is a price of time and our successors will have to pay what we ducked (and more). As Mr Chancellor says, “It is no surprise that support for democracy among the younger generation has waned in recent years.”
We tend to think of big bankers and central bankers as “Rightwing” – rich people who do not care about the fate of the poor. One of Edward Chancellor’s most arresting thoughts, however, is that we are now witnessing a new version of “the road to serfdom”.
The great free-market economist FA Hayek deployed the phrase when writing towards the end of the Second World War. His vision of serfdom involved state socialism, the central planning of the economy and the consequent tyranny of the bureaucrat.
Mr Chancellor detects a differentlooking manifestation of the same disease today. Instead of nationalisation, prices and incomes controls etc, he writes: “Central planning in the 21st century has involved manipulating the most important price in a market-based economy, the universal price, namely the rate of interest.” He continues, “Interest rates are the traffic signals that guide the market economy … Turn off those signals and pile-ups occur.”
That is what is happening now. It will be the first task of either Liz Truss or Rishi Sunak to get those signals working properly, whichever takes office in a month’s time.