Comments: Dear Tony, I'm afraid we've run out of steam

Cutting interest rates would encourage more consumer borrowing by some as well as the desired less saving by others. The more a substantial segment of the population is in debt, the greater the threat to the economy. I believe the Bank of England is walking an increasingly narrow tightrope when it comes to interest rate flexilibility.

Posted by David Goldfinch at January 8, 2006 09:51 PM

As Victor Meldrew would say 'I do not believe it!'

The 1990s after the boom went bust, and the currency collapsed, taxes were raised, was a period of great technological growth in the operations of business - especially english speaking businesses.

This English speaking world led, series of IT innovations is what I believe gave the UK, as well as many other countries who share the same culture, such a huge leading edge in productivity and innovation, a rapid rising service sector, RISING REAL WAGES, thanks to non unionised flexible IT workers, and lead to great investment, as real returns on capital rose strongly, and exports rose as we beat on price non english speaking inefficent competitors who caught on slowly to the technological breakthroughs.

Yes, we are weighted down with insane red tape, Just tommorow I have to fill in pages of forms which have changed yet again this year, and have grow more complex. It will probably cost me 3-4 days to sort out again.

Reams of confusiong regulation and complience, big business allowed to crush smaller cheaper businesses, massive tax burdens ;

Why have such perversions not had a nasty effect on profits,and a nasty effect on employment by now?

Through it all there is still growth keeping the bad ship Brown afloat.

Where is it coming from?

This economy relies on massivly high levels of immigration, which I see barely meantioned in economics columns - this acts to lower real wages, but also raise productivity, (The sad state of UK productivity would have been much worse without these very cheap workers).

As the bank prints money, the returns on capital, instead of through technology, seem to be at the expense of workers as thier wages can never catch up, and are falling in terms of houseprices and other real resources.

We are at a totally opposite extreme to the period when low interest rates and rising taxes, a collapsed undervalued currency encoraged RISING WAGES, capital inflows and investment in risk and profit and jobs, with no printing of money the BOE.

Property now represents 60% of UK wealth, from under 20% in the 1990s. In the 1990s most wealth was in savings and businesses.

If the bank lowers interest rates now, houseprices will storm, but peoples real incomes will carry on falling under taxes. Each job in the public sector is already looked on enviously by a weighted down private sector. There is little to spur rising wages, without inflation or more labour force competiton and displacement from more immigration.

Can you see serious capital ready to invest in UK companies, developing real returns and innovation, not connected to the credit industry, property or real resources like oil? Under the fumbleing mountain of regulations, taxes, public sector jobs and stuper inducing property boom, our innovation and competitve edge so prevelent in the 1990s has gone!!

Cutting interest rates and raising taxes further, expecting a investment boom, may result in the opposite - capital flight.

Posted by Mr M Micaber at January 8, 2006 11:28 PM

From a personal standpoint, I find Smallwood's suggestions alarming.

Higher taxes would leave me with even less in my pocket at the end of the month, after steep recent rises in council tax and other taxes.

Lower interest rates would not only reduce the return on my savings, but the inflation they would cause would erode their value too. House prices would zoom out of view again, and the weakness in sterling that lower interest rates would cause would inevitably cause prices of goods like petrol to rise. Yet it is unlikely that wage inflation would follow suit, given the dampening effect of new EU immigration and the lack of labour organisation to push for pay rises. So personally I would be a lot worse off.

The recipe for any economic planner - be it in a capitalist system or in another system like communism - should be to reward hard work and frugality. Yet Smallwood's suggestions would see myself and many other worker/savers in a far worse position. While debtors would see their interest burden eased and the value of the principal diminished by inflation. Those who live within their means are punished, those who live beyond them are rewarded. In these circumstances I would leave the country, and I am sure I would not be the only one. Why stay here and work if work is not rewarded?

What really needs to be done is for interest rates to be RAISED and for government spending to be CUT. This would for a period bring about a recession as the economy is rebalanced. But it is the only remedy for the imbalances in our economy - consumer debt mountain, bloated public sector, trade deficit, the parlous state of government finances. The longer the cure is put off, the worse the medicine will taste.

Posted by El_Pirata at January 9, 2006 12:26 AM

Rates & Productivity
The UK has had a very good period of growth in prosperity. the tail of that period has however created a lot of slack.Instead of doing little to obtain a lot, a long period of doing a lot to obtain little might be just starting.( Its productivity.....STUPID !)

p.s We could of course make it much more complicated in making things unintelligble... cound't we ?

Posted by Arik Schickendantz at January 9, 2006 08:10 AM

Cut rates and raise taxes? Well OK, but won't that just mean that consumers, faced with lower real incomes, will borrow this still cheaper money to facilitate spending, thus making the debt imbalance in the economy worse? Our problem is that our economic growth has been substantially funded by government and consumer borrowing, and whatever the way to correct that, it surely can't be done by making the consumer part of it worse. The relatively modest growth achieved in the last decade was achieved by living beyond our means as a nation. We have to start living within our means, and that is going to mean pain.

Incidentally, I thought businesses invested at times when they thought prospects were going to get better. We already have massive service and retail capacity in the UK (and of course manufacturing is a busted flush); why would any business want to invest now, when it looks as if harder times lie ahead?

Posted by bears all at January 9, 2006 10:31 AM