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28 Aug, 2014 15:02

​Black arts of banking: The higher rate dilemma

​Black arts of banking: The higher rate dilemma

Transatlantic central bankers in the UK and US are arguing about higher interest rates.

For those paralyzed by insomnia, reading Central bank meeting minutes are a splendid source of relief. However for those practicing the black arts of economics, they promise wondrous and highly enlightening tidbits. The interactions of governing boards can make for often fascinating reading – if you can glean the bits which pertain to the primary job at hand: maintaining a solid grasp on the economy then considerable insights may eventuate. Meanwhile, there is also the ability to get many, many solid nights’ sleep by combing through the dull bits in these predominantly humdrum meetings.

For devotees of fiscal pornography seeking inflection points in economic history, recent minutes have, by the (admittedly low) standards of the national money stewards, turned pretty steamy. Readers of these Op-Edge articles who recall my myriad stories on economic voodoo such as Quantitative Easing will be aware that I am not entirely enthralled by the deployment of crackpot theories endeavoring to rescue the economy from what a blatant case of excessive debt. Meanwhile, dear reader, let us not get tied up in that “all bankers must die” gibberish. I concur, the bankers got away with remarkable excess in recent years but it takes two to tango and bankers waltzed through the boom with governments of multiple persuasions who simply couldn’t say no to rectitude, like a child facing an endless jelly and ice cream buffet.

That said, the world’s economy was a much more adult party and hence the issue has often been described not in relation to sweet treats but rather highly intoxicating liquors. The punch bowl has long been pivotal to contemporary central banker metaphors, as the Federal Reserve and multiple satellites have overseen one mother, father, brother, uncle, and let’s include the in-laws here, of an excessive party which began somewhere post-9/11. Governments refused to adhere to fiscal rectitude so the debt party expanded and politicians loved the idea of affordable housing et al. Until, of course, housing became not very affordable at all. At this juncture the sluice gates of mortgage funding were widened so everyone could own a home, even if they just couldn’t afford it. Hence the collapse of 2007-08 exploded when concern circulated briefly that the punch bowl had run dry.

Faced with their banker friends going bust, the political-central banker nexus foolishly bailed out all and sundry, leaving everybody suffering a vast debt hangover. This remarkably induced central banks to double down with a whole new party. The punch bowl was replaced with Quantitative Easing – the economic equivalent of crack cocaine.

Now we have reached an impasse. Debt addiction has left an economy which looks a bit like 2008 with vast property and other asset bubbles (e.g. I love classic cars, but frankly these values are absurd and will readjust soon, violently). QE “funny money” has inflated all manner of assets but the real economic boost has been patchy. QE has boosted the rich, while doing little or nothing for the average worker – whether blue or white collar. Therein lies a fiasco, which demonstrates the core conceit of the central bankers themselves.

There has at least been one steady point throughout this whole crisis. Unfortunately, this “fixture” has been the utterly dismal Eurozone economy. Thus Europe may yet unleash its own QE program but this may prove tricky as the continent is already swamped with debt.

However, amongst the governors of the US Federal Reserve and their equivalent at the court of the Bank of England, a realization is dawning and fractious debates are being minuted. Theirs are economies with growth being achieved that tangibly reduces unemployment. Admittedly nobody is quite sure how much this is due to the ongoing infusion of QE, but the methadone drip is being reduced and the stimulus will soon fade to zero. Nevertheless, the growth factor spurs debate: we are reaching the cusp where US and UK interest rates will rise, a factor almost unseen for the current generation of western borrowers. Increasing borrowing costs bring multiple ramifications – higher mortgage repayments will squeeze already pressurized families and will likely puncture various crazed property bubbles from Tel Aviv to Toronto, and particularly London.

Interest rates increasing will be welcomed by the world’s few remaining prudent savers. Whether or not the economic rebound can survive the rate shock will depend on how already beleaguered continents such as Europe react to a world reacquainting itself with interest rate flux.

The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of RT.

The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of RT.