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Eagle Eye
Just where is David Cameron getting his economic advice from?
This is from the Tory leader's speech to the CBI today:
"The idea that the deficit brings the risk of higher interest rates for businesses and families isn’t a theoretical possibility – it is actually happening already. One of the things that is limiting the supply of affordable credit is that banks need to build up their deposit bases and become less reliant on unstable wholesale funding. But amazingly the most attractive – and therefore competitive - one year savings product on the market at the moment is actually being provided by the Government, through National Savings and Investments. So the Government’s need to finance its borrowing is already affecting the supply of credit to families and businesses - and its cost. In other words, government action is already beginning to crowd out the private sector."
So the Treasury-controlled NS&I puts an attractive rate on its bonds and this is crowding out lending to the private sector? Er, bit of a leap here. First, NS&I has a target of raising no new net money this fiscal year. See here, page 83. The size of NS&I liabilities are due to remain constant at some £97bn. How is this crowding other borrowers out?
Second, what makes the Tory leader think that if those funds went into deposit accounts, the banks would lend it out to the private sector? Money has been pouring into the banks thanks to capital raising and quantitative easing, but, as the Bank of England lending trends reports make clear, this hasn't boosted lending to small and medium sized businesses. Why? Because the banks are using these additional funds to repair their damaged balance sheets. They're not interested in new lending.
There's an even bigger economic fallacy in Cameron's thinking. As Paul Krugman and others have made clear, in these special economic circumstances, high public borrowing is, in fact, crowding in private investment, not crowding it out.
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Comments
There is a lot of political tooings and froings going on around NS&I at the moment. what he actually said is untrue as, despite NS&I claiming that such growth bonds would remain (interest rates might fluctuate a bit), the other day the government just pulled this product completely. No warning nothing. And then Cameroon mentions it is a speech a couple of days later - me thinks somebody leaked the speech.
Maybe time our politicians stopped messing savers around for their political games. At the moment saving is a totally worthless thing to do - all it does is allow you to watch your money decline in value. But too much debt has made things a lot worse for the economy (except that Labour like to help out those who are the most irresponsible using money from the responsible).
Banks will be needing money to lend to all these Small Businesses and savers are a major source. But with savers being treated so badly there is no point in them bothering. But the banks also need money to increase their capital reserves so savers are again needed. Low interest rates might help make inflation look low (whereas it is not as low as it looks) and might help those with debts, savers are the ones who are actually in a better position to help spend (responsibly) and drive the economy forward as they are the ones who can actually afford to - but not with interest rates so low.