Interest rates have been falling for 30 years, now the forces that caused those rates to fall during all that time have reversed. It takes a long time to blow up the kind of bond bubble, we have seen, but consistent with the laws of entropy, bubbles take much less time to burst. As the bond bubble bursts, it will cause global interest rates to rise sharply. That poses a severe problem for central bankers like Carney, as well as finance ministers like George Osborne. Their whole policy has been built around the idea that the can actually control interest rates, if not by diktat, i.e. by announcing what official interest rates will be, then by using other means such as Quantitative Easing. But, they can't.
Government's could only get away with printing money without it causing inflation, because vast amounts of cheap goods were being imported from China. The low interest rates were not a reflection of money printing, but a reflection of the fact that huge amounts of profit were being created globally that could not be productively invested. The excess of supply over demand forced down interest rates. Now that is reversing, forcing rates up.
Marx describes exactly this kind of situation in Theories of Surplus Value.
"The same phenomenon (and this usually precedes crises) can appear when additional capital is produced at a very rapid rate and its reconversion into productive capital increases the demand for all the elements of the latter to such an extent that actual production cannot keep pace with it; this brings about a rise in the prices of all commodities, which enter into the formation of capital. In this case the rate of interest falls sharply, however much the profit may rise and this fall in the rate of interest then leads to the most risky speculative ventures. The interruption of the reproduction process leads to the decrease in variable capital, to a fall in wages and in the quantity of labour employed. This in turn reacts anew on prices and leads to their further fall."
Markets know that continued money printing will lead to higher inflation under current conditions. In fact, Britain has suffered from higher than target inflation for the last 5 years or more. A look in any store shows that prices are only being modified by suppliers reducing the size of many products. That is an indication that they know that if they increase prices more, they will face sharply reduced demand, as workers real living standards continue to fall. But, those kinds of methods can only last for so long. The fact that they are resorting to them as an indication that their own cost prices are rising. More money printing means higher inflation, means the real value of bonds falls, means buyers of bonds pay less for them, means yields, i.e. interest rates rise.
Yet, despite the highly paid economics editors and correspondents that the TV channels and newspapers employ, you could be forgiven for believing that just because a state bureaucrat has spoken, that is the end of the matter. News reports throughout the day have featured various people who seem also to have been fooled by the ability of Carney to achieve what Canute could not, to prevent the on coming tide. People who have foolishly over committed themselves to mortgages they can barely afford even at today's unsustainable interest rates, have felt comforted in the belief that their mortgages will not rise for three years. They will. Some on the back of this empty promise of frozen rates said they would take on further debt to become buy to let landlords. They will likely lose their money and their property.
Why don't these economics reporters point out to any of these people that interest rates are rising and will continue to rise whatever Carney says? It could be that actually they don't know any better. They too may believe that Governments can wave a magic wand and make anything happen they desire. More likely, its because to do so would be to step outside the consensus. To include in your report that savers are getting screwed, that it risks blowing up the existing asset price bubbles further is to remain within the consensus, but to point out that, in fact, the state cannot control these things, that the real determinant of interest rates and many more things is the market, would be to expose the lie that bourgeois social democracy rests upon. That lie is that the market acts to efficiently allocate resources, and to increase living standards, and when it doesn't, the state can in any case step in to make it work properly. Within bounds it can, but only within bounds. Those bounds when it comes to money printing have already been surpassed.
But, to point out that interest rates are rising whatever the Bank of England says or does, would also be to warn millions of people not to do what the state wants them to do. The hope of Carney and Osborne is that they can buy their friends in the banks a bit more time, and buy the government a bit more time in the process. They need people to believe that the Bank of England can hold back the sea, so that they go out and buy massively over priced houses, that they go out and buy commodities that most of them don't need. They need that to happen to maintain the level of aggregate demand in the economy. Most importantly they need to postpone the inevitable collapse of house prices.
When house prices collapse, as they will, because people can no longer pay their mortgages, the banks fictitious balance sheets will explode, and the banks will be exposed as bankrupt. My wife was looking at house prices in Ireland over the last couple of days. She saw lovely 6 bedroom house on Valencia Island in Kerry, with a few acres for less than €150,000. Even now after US house prices have risen in the last year, you can still by a 6 bedroom luxury house in Florida for £100,000. That is because the property bubble in these countries burst, and the property market has returned to more sensible levels. Property prices in Britain were even more bubbly, and the fall will be even greater than in Ireland and the US.
Already, as some news reports have pointed out, in most of the country, house prices are continuing to fall, because workers are facing falling real living standards. According to the latest data, retail sales have increased, but the reason for that seems to be partly that people have had to buy things they had put off buying, secondly, that there has been an injection of cash into the economy from people receiving payments from the banks from the PPI mis-selling scandal, and finally that people have gone into even more debt with the savings ratio falling to historically low levels. Given that large numbers of people cannot last to the end of the month on their wages, and they are increasingly reliant on the pay day loan usurers, this is not a good basis on which to build an economic recovery.
The economy undoubtedly has strengthened, as some of the other data indicates. That is not unexpected. I pointed out last year, that the three year cycle that led to a slow down from the end of 2011, would end by the beginning of 2013. In fact, its been slightly delayed, but increased growth can be seen not just in Britain, but in the US and Europe, as well as in Asia. But, in Britain that growth is still very weak as a result of the policies the Liberal-Tories have pursued over the last three years, and the attempt to goose the economy now by cheap credit and scams like Help to Buy, are the last thing the economy needs. In fact, higher interest rates would probably be beneficial at this stage. Not, for the fictitious economy, but for the real economy. Higher interest rates will burst the bubbles, but they will create the basis for healthier economic growth.
As Marx put it,
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