No Further Interest

So, the US Fed has cut official interest rates to zero. The BoE has been cutting like there's no tomorrow (they may be right about that).

I am not an economist, but as far as I can imagine this will not work.

They are obviously all following the mantra "desparate times call for desparation".

Or perhaps they just want to be seen to be doing something. Now, of course, they have left themselves with nothing more that they can do.

I can empathise with their collective desire to do this, but I'm still a bit surprised.

Firstly, it obviously hurts savers and pensions considerably and that's not a good thing.

Secondly, it is far from obvious that it helps anyone that much when it is the availability of credit, not the price of it, that is the problem.

Insofar as the price of credit is a concern, lowering the official rate does not directly help anyway. The actual rate at which individuals and companies borrow is far divorced from the base rate and to a great extent, cutting the base rate just de facto increases that gap.

Inasmuch as the cut is designed to help/encourage people to borrow money, it's not entirely obvious that it's a valid aim as all economies need to reduce borrowing dramatically.

Meanwhile, the cut doesn't necessarily help the banks that much if the real objective is to make them lend money at extremely low rates. It may help them carry their assets at a less punitive rate, I suppose but only if credit is more available (not likely to be a direct result) or if they can borrow from the Government at the new lower official rates (more likely).

The US market jumped on the rate cut yesterday, which is the usual first reaction to a rate cut. I would be surprised if that rally lasts a single day.

About the only way this cut actually works directly is that it does lower the outgoings of most mortgage borrowers, so it operates as a Government subsidy to all those households and that will have some impact, just like the VAT cut makes some impact. Like that cut, however, it leaves a big headache for later.

Overall, this move seems to me to indicate a state of denial. The assumption is that the credit problem can be fixed by dramatic steps whereas in fact it's mainly going to take time. About the best that can be said for this approach is that it might possibly shorten the time it takes, although I have a feeling it might do the opposite !