The MPC meeting shows a clear lack of joined up thinking from the experts.  First of all, we see a cut in interest rates.  The idea of which is to generate cheaper debt.

Now step off your “debt got us in this mess” soapbox a moment, right though it may be, because we have to come to grips with the notion that this isn’t just personal debt we have to deal with here, it’s corporate.  If companies have been encouraged, through poor legislation and a complete lack of control from government over the last 10 years (but don’t worry, Mr Brown is genuine in his belief it’s not his fault, so we can trust him to get us out of it), to borrow up to the hilt, then any reduction in income is going to affect their ability to pay back the mountain of debts they have taken out.  So, they either need to cut costs (i.e. lay off staff, reduce purchasing and/or investments), increase income, or they need to cut the cost of their debt.

Unfortunately, the banks aren’t, as seems to be the thinking by the MPC, a bunch of brain dead, central bank following morons.  They are fully aware that companies and people have over borrowed for around a decade, and now times aren’t so rosy it’s getting tricky to pay back all the costs that have been accumulated over all this time.  That means they are fully aware of the fact that the money they think they are owed is only worth what people can pay back.  Which is why all of a sudden there are massive write-downs of the stock and balance sheets of banks.

To counteract this, they are going to charge for the risk of losing all their money in the event that people/companies won’t pay it back.  The worse the economic situation gets, the more they are going to want to charge, protecting their own backs. 

In addition to this you’ve got to remember that there are savers who invest their money into the banks, which the banks then loan out to people (and they also invest some of it, or loan to other banks) to make their money.  Savings accounts therefore will always have lower interest rates than a mortgage; otherwise the bank pays out of its own pocket.

Given a savings account with 0% will attract no customers whatsoever, the rates paid to savers need to be around about in line with inflation, at the minimum.  Otherwise by keeping your money in a bank, it’s worth less the next year than it was when you paid it in.  Better to buy anything that’s likely to keep its value, artwork, antique furniture, and even vintage Turkish Zildjian cymbals than stuff it in a bank.

So inflation hovers around 2.5-3.0%.  So interest rates, where you can find them, are about the same amount.  Therefore there is no point in further reducing interest rates because it won’t cut inflation, so savers rates can’t go down, so lending rates can’t go down.  In fact, cutting inflation causes investors in Stirling to pull out knowing the yield (return) will be lower, so Stirling drops in value against other currencies (like the Euro and the dollar) and because we import practically everything, costs get driven up, and so inflation goes up.

Add to that the problem of personal debt, where people are mortgaged, credit card-ed, and loaned to the hilt to pay for things they couldn’t afford, which means they can’t take out any more money, and the little cash they do have should be frantically going towards paying off any excess debt, so that when (I mean if, right?) they lose their jobs, they don’t get the repo men and the banks taking everything they own and still being in debt.  If there is no spending, the companies aren’t making any more money, so they have to lay off people, so they have less money, and the cycle of recession completes another turn.

Quantitative easing, the genius second string to the bow of the MPC, is not technically printing money, because the money is added to the electronic bank sheet and never exists in the physical world.  But to you and me, it is making money exist where it didn’t before, and if the people who write duck tales (see video on my facebook profile) can understand what that causes then why the hell can’t the MPC.

The fiat money (that is, money created without a gold reserve to back up the wealth) will almost certainly be used to buy the government bonds, because, err; no-one else is (see the ft website for the downturn in bonds sales).  Which is great, because then the government can use the money to fritter away on retarded bailouts or even more retarded expenses claims for their own MPs.  At least they’ll have a pension to draw on.

But the problem is when you create money from nothing, all the rest of the money becomes worth less.  And that means higher prices, higher inflation, and the last time it got really bad with hyperinflation coming out of a depression we needed a world war to right the economy.  The other problem is it tells the world “the UK are up to their necks in a bad way” and so everyone bails out as fast as possible, leaving the problem much worse, and the delightfully short-sighted nature of economics means we’ll probably keep printing money until the only thing that will fix our problems is invading Poland.

So, if we’re not careful, the pound will plummet, hyper inflation will spiral, and we’ll have our life savings incinerated by the lack of interest accumulated.  Of course, it could be that the QE doesn’t achieve anything, in which case we just have a regular depression on our hands and we can look forward to rioting and soup kitchens.

Yes, I know they are two extremes, but we have to remember that there is no quick fix now, not when you’ve spend a decade binging on cheap credit thinking there would be no end to it.  Tie in the global population explosion, lower crop yields and people are going to have to get back to a time where food shopping and bill paying probably is the biggest expense from your pay check.  The only sensible thing the government can do is trim its own outgoings, cut jobs, get rid of retarded waste of money schemes (trident, ID cards, tax credits), and pay off as much of its own debt as possible. 

It’s a hard storm, and we aren’t even halfway through yet.  You can’t set up a tea party on deck to convince the cruise passengers that there isn’t a hurricane over the starboard bow.