Saturday, August 27, 2016

Money For Nothing




Dire Straits: Money for Nothing

With the Uk Bank of England (BOE) reducing Interest Rates and the US Federal Reserve (FED) publically postulating an increase for the Nth time it is time to listen to the rather appropriate Dire Straits song.  Even the Artist name seems to be appropriate.


In the News

https://www.theguardian.com/business/2016/aug/26/janet-yellen-speech-jackson-hole-federal-reserve-interest-rate

http://uk.businessinsider.com/janet-yellens-speech-at-jackson-hole-august-26-2016-8?r=US&IR=T



Reality

The reality is:


 The FED who cried Wolf

Talking up Interest Rates is popular in financial circles, because today money is cheap, lending is cheap. It is cheaper now than in Sept 2008, when Lehmans famously declared bankruptcy and the neighbouring Subprime crisis It absolutely defies year 1 Economics 101.  In practise whenever the FED /talks/ about rising rates the market jumps up, even when, as is always the case, they do sweet nothing.  It is literally /money for nothing/.

But actually raising Interest Rates is too brave for most

Indeed as noted, BOE actually reduced Interest rates, because this /Market Stimulus/ which was once temporary,  once started, is difficult to rewind Why?  Because the idea is reduce rates until the Economy recovers.  But it does not recover.  So?  Yep, double down and reduce some more.


Whatever
This short article does not attempt to reference some of the reasons why Central Banksters are using lowered Interest Rates.  But what does it mean for private holders of debt?

In particular for the housing market?

- Lower interest rates allow those who qualify to borrow even bigger
- A 2% rate would for example allow you to borrow 1Million GBP at for less than 2000 GBP per month.
- What does it mean?
- It means that private individuals in the UK  (and other low interest countries such as USA and Europe) can now borrow large, pushing up house prices further
- Also meaning that first time buyers have even less chance to buy

The Future
Both US and UK Governments continue to intervene and distort markets to allow banks, institutions and even individuals to borrow more and more and at insanely low costs.  The Subprime collapse and UK bank collapse in the 2008-2009 period, which if you recall was due to irresponsible lending, has now been not fixed, by guess what irresponsible Government lending.