Saturday, October 22, 2016

William Hague (UK Telegraph) - Central Banks Must Raise Interest Rates

In this article in the UK Telegraph, William Hague argues that Central Banks are on the verge of losing credibility in regards to their low interest rate policies. The article lists 10 problems with the current policies. The first five are shown below.

"There are at least 10 serious drawbacks to this – all of which can be accepted for a short period but become either politically explosive or economically unwise if continued indefinitely."
  1. 1- Savers find it impossible to earn a worthwhile return, which drives them into riskier assets thus causing the price of houses and shares to be inflated ever higher. 
  2. 2- Higher asset prices make people who own them much richer, while leaving out many others, seriously exacerbating social and political divides and fuelling the anger behind “populist” campaigns. 
  3. 3- Pension funds have poor returns and therefore suffer huge deficits, causing businesses to have to put more money into them rather than use it for expansion. 
  4. 4- Banks find it harder to run a viable business, contributing to the banking crisis now visibly widespread in Italy and Germany in particular. 
  5. 5- Those people who are able to save more do so, because they need a bigger pot of savings to get an equivalent return, so low interest rates cause those people to spend less, not more. 
  6. Click here to read the full article in the UK Telegraph
Added note: The Guardian runs this article in which the BOE argues against the position presented by Willam Hague above.

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