The general wisdom is that when economic conditions are this dire, you need to slash interest rates to get things to pick up again. To make borrowing cheaper, so we might all borrow and spend a bit more, and so that entrepreneurs will find it cheaper to finance new plant and equipment, and so boost production.
But interest rates this low can do more harm than good. Where does all the cash come from that these entrepreneurs and their customers are going to borrow? From savers, of course. But who in their right mind would save right now, when the interest you get is almost non-existent?
Well, say the economists, that will just encourage people to spend rather than save, which is what we want anyway. But they're wrong. Many savers, like pensioners, are actually living off their interest. They don't want to run down their savings, because they depend on the future interest. But they're getting less interest right now. So they are spending less, not more, which is just adding to the economic depression (sorry, slip of the tongue - recession).
Also, low interest rates push down the value of the pound. When interest rates are high, people abroad buy pounds to put into accounts that will capture the high rates. When rates are low, they figure they can get more interest elsewhere, and sell their pounds to buy other things.
Again, the economists say that's just fine, because a low pound makes our exports cheaper and soon we'll be selling a lot more and getting in some much-needed cash. But again, there's a downside. The government aims to pay for its vast bail-outs through borrowing. Well, I don't know about you, but like most of the country, I'm skint. They're not going to borrow it from me. No, they will be borrowing a lot of it from overseas. But who wants to lend to a decrepit country that promises to repay you in a decrepit currency? The government will have to offer much higher interest rates to attract the lenders it needs.
And there will be a lot of people looking at the UK and figuring that interest rates now have nowhere to go. The government's used up every weapon it has – apart from printing money and risking inflation. It's hardly a situation that would give anyone any incentive to back Britain. We should start composing our begging letters to the IMF now.
