UPDATE June 28th – Now Mark Carney agrees with me!
Britain today is addicted – addicted to cheap credit
Britain’s zero percent APR addiction entails endless adverts for cars, vans, furniture, white goods etc where you are charged zero percent interest and they even contribute towards your deposit! At the same time nobody is really interested in you paying up front for anything and savers are lucky to get over 1% on their savings. No wonder so many older people almost feel forced to enter the buy-to-let market and many young people have given up on saving.
It’s now almost pointless to hold large sums of money on deposit. It’s true that we are warned by Mark Carney and others on a regular basis about what might happen ‘when interest rates rise’. But maybe they never will – at least not in the medium term, because our whole economy is hopelessly addicted to cheap credit – that goes for the car industry, manufacturing and indeed the property market.
How did we get here?
The main source of our current addiction leads back to the financial crash of 2008, when the banks – mainly American, nearly trashed the world economy. Following that crash it was necessary for government and banks to progressively lower the rate of interest just to keep the economy turning over. This has been true the world over but it is particularly critical in Britain where a disproportionate amount of the nation’s cash is locked up in property. Thus the very roofs over British people’s heads depend upon the perpetuation of cheap credit – not to mention the existence of the likes of B&Q and Homebase.
However the other main reason is the massive suppression of ordinary people’s wages over the past 20 years or so, due largely to mass immigration, the increased power of directors and the decline of trades unions. Employers can literally pick and choose employees, whilst offering them absolutely paltry wages. Thus the only way employees’ purchasing power can be maintained is with cheap and widely available credit. Enter the enticing Zero Percent APR.
The Property Market
The fall in interest rates is indeed worldwide, but because we in Britain have such a love affair with property ownership it has drastic effects on the housing market here. Many older people who would have once tucked their savings away in their local building society now feel almost forced to jump into buy-to-let, where yields of 6% are fairly easily attained. This in turn drives up demand for property, putting it even further out of the reach of the majority of younger people. When I was young it was fairly normal to buy your first property in your late 20s but now many are having to wait until their late 30s or even 40s before they can ‘get on the property ladder’.
You would assume that because mortgages are so cheap that younger people would be able to afford them but because of the traumatic experience of easily available mortgages before 2008, banks and building societies tend to look for relatively high deposit to loan ratios.
So will interest rates ever rise?
Obviously no one has a crystal ball, but as I have said, I certainly believe they will not rise in either the short or the medium term – maybe 10 years. Chronically low interest rates and quantitative easing mean that money itself is losing its value and that is a very dangerous thing. Perhaps if there is a change in the employment market where people are actually paid more realistic wages then this could eventually begin to turn the tide in the opposite direction. Maybe in many years time interest rates may at least climb to 3 or 4% and people might start saving again – who knows?