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Scottish Independence Economic Consequences for England, UK, Ukraine 2014, Britain 2016?

Politics / UK Politics Feb 24, 2014 - 02:58 AM GMT

By: Nadeem_Walayat


Scotland voting for independence albeit by a small margin on the 18th September 2014 referendum would set in motion the painful process of separation that will have huge economic consequences for Scotland and to a lesser degree for the remaining UK that would be further dominated by England as comprising well over 90% of the remaining UK population. Therefore this article primarily concerns itself with the direct economic and social consequences for the remaining UK following Scottish Independence.


The recent political statements from across the UK have made it clear that despite Alex Salmond's smoke and mirrors propaganda statements that seek to effectively hoodwink the Scottish electorate into voting YES, that Scotland would NOT have any say in Bank of England monetary policy and nor would Scotland have the ability to print sterling debt but instead be free to use whatever currency it wished to use for day to day transactions, be it the Euro, Pound Sterling or even U.S. Dollar, though without any say in monetary policy. Scotland could also if it wished to print its own currency, perhaps to be called the Scottish Dollar as many newly independant states tend to latch into the word dollar to engender the aurora of monetary stability i.e. Zimbabwe dollar.

George Osbourne's (Conservative) "I could not as Chancellor recommend that we could share the pound with an Independent Scotland, it wouldn't work, it would cost jobs, and cost money, and it wouldn't provide economic security for Scotland or the rest of the United Kingdom, I don't think any other Chancellor would come to a different view"

Edd Balls (Labour) "Scotland cannot keep the pound and the Bank of England if it chooses independence. It would be bad for Scotland, it would place an unacceptable burden on the UK tax payer, it would repeat the mistakes of the Euro area, in fact worse, you would be trying to negotiate a monetary union as Scotland is pulling away from the UK."

Danny Alexander (Lib Dems) "It is clear to me that a currency union wouldn't work for Scotland if it was Independent, and wouldn't work with the rest of europe".

Make no mistake about it, the UK by saying an unequivocal NO to a currency sharing with an Independant Scotland is a huge confidence boost for the UK currency, as entering into such a currency sharing agreement would effectively have amounted to the SNP parking a trojan horse outside of the Bank of England, allowing an Independant Scotland to effectively steal the purchasing power of the British Pound by means of printing ever greater amounts of sterling debt (deficit spending) the bill for which would be picked up by the UK tax payer, a permanent leech on the back of UK tax payers.

So Britain's currency would be strengthened which would translate into lower bond market interest rates, and even greater monetary stability further bolstering the British Pounds safe haven status. As my earlier analysis (14 Feb 2014 - SNP Independent Scotland Sterling Sharing Trojan Horse to Plunder British Pound ) concluded in strong up-trend forecast for the British pound towards £/$1.80 that followed the ruling out of currency sharing.


The SNP's leader, Alex Salmond has made it clear that if an Independent Scotland could not share the British Pound then Scotland would default on its debts of approx £120 billion, which given the fact that Scotland is about 8% of GDP this would have the effect of inflating Britains debt mountain in terms of % of GDP from the current 77% to 85%

However, as I illustrated by my last analysis of UK debt (30 Dec 2013 - UK House Prices Forecast 2014 to 2018, The Debt Fuelled Election Boom ) that Britain by virtue of having a safe haven currency can and has been busy monetizing its debts which has effectively reduced the debt burden from 77% to 40%. Which implies that all that the Bank of England would need to do would be to just press the QE 'print money button' to bring Britians effective debt burden back inline with its secret target of the debt burden being at 40% of GDP.

Therefore, the REAL UK Debt to GDP Ratio appears to be have been systematically engineered to stay at a constant 41% of GDP (actual 77%), which I expect to remain constant at 41% into March 2015 as opposed to my forecast of actual of 79% on the official measure as a consequence of the effective cancellation of approx £600 billion or 40% of outstanding government debt by 2015.

This would be set against an Independent Scotland that had just defaulted on its debts and so would only be allowed to borrow against the mortgaging of its assets that the SNP crows so loudly about such as Scotland's £1.5 trillion of North Sea oil reserves whilst conveniently forgetting that it would probably cost near £1 trillion to extract it! So Scotland would forward sell decades of future oil revenues to foreigners in exchange for the financing of current deficits (voter bribes).

Rather than admit to reality, Alex Salmond and the SNP inhabit a fantasy land where post debt default they expect Scottish interest rates to be lower than the UK whilst the example of Ireland which DID take on its fair share of UK debt and which was GUARANTEED by the UK government, nevertheless saw far higher interest rates than the UK right upto the point a decade after Independence Ireland defaulted on its debts owed to to the UK which saw interest rates soar. To which Britain responded by imposing trade tariffs to recoup the monies defaulted upon just as the UK would do today should Scotland default on its debts that resulted in an Irish economic depression, something that Ireland would not fully recover from for over half a century and which contributed towards half its population fleeing the Island. And soon as there was a glimmer of hope for Ireland along came the Euro-zone debt crisis and PIIGS bankruptcy resulting in Ireland effectively being managed from Germany that included a partial bailed from the UK. So Ireland effectively gave up being a significant partner in the UK to become a pin prick in the Euro-zone, all for the sake of religion.

And what of Scottish banks? A financial sector that would be twice the size relative to the Scottish economy than were that of Iceland, Cyprus or Greece! Would anyone keep a single penny in a Scottish bank if they knew that it was impossible for Scotland to ever make good on bank deposit guarantees? That during a financial crisis their bank deposits would be stolen Cyprus style.

Whilst England (UK) economy would be boosted by Britains deficit effectively being cut by at least £8 billion per year (14 Feb 2014 - SNP Independent Scotland Sterling Sharing Trojan Horse to Plunder British Pound ) as a consequence of England no longer having to bribe Scotland to stay in the Union with a net subsidy of £8 billion per year which therefore in terms of the deficit forecast would result in an additional reduction of the deficit by £40 billion over the next 5 years.

This translates into the impact of Scotland's £120billion debt default effectively being cleared within 15 years, so there would be no lasting damage to the UK in terms of taking on the extra debt burden. Not only that but the markets would discount the future, they would be discounting the continuing positive impact if a reduced budget deficit and thus better fiscal outlook for the UK for many decades to come which would translate into lower long-term UK interest rates.


As mentioned earlier the loss of Scotland's 8% of GDP annual economic output would result in the national debt burden rising to 85%. However, as also mentioned that savings of £8 billion of year in subsidy would clear the extra debt within 15 years.

However, actual GDP loss could be recouped far sooner as my forecast is for the UK to grow by over 3% per annum over the coming years., therefore the loss of 8% of GDP could be recouped within 3 years. In economic terms it would be as though Scotland had never been part of the UK.

30 Dec 2013 - UK House Prices Forecast 2014 to 2018, The Debt Fuelled Election Boom

Therefore in terms of my economic growth conclusion, I expect the UK economy to at least attain a growth rate of 3.6% for 2014 and target 3.8% for Q1 2015 with a strong possibility of achieving the holy grail for election victories of announcing during the election campaign of 2015 that the UK economy at that time was growing at 4% per annum. Furthermore post election I expect that an over heating UK economy to slow as it dips back towards 3% over subsequent quarters of 2015.

Therefore in terms of economy and financial stability the UK would actually be far BETTER off without Scotland.


The SNP tend to be quick to state that many Scots have achieved great things, without mentioning the fact that the great achievements tended to have been made OUTSIDE of Scotland. Many commentators suggest that the loss of population of 5 million would greatly diminish the UK in international terms, with suggestions for instance that the UK could lose its seat on the UN Security Council.

09 Jan 2014 - U.K. House Prices vs Supply, Immigration, Population Growth and Demographics Crisis

However, again as my earlier in depth analysis illustrates that the population growth rate for England is such that the loss of population could be recovered within 10 years, so that the total UK population would at least be where it was before Scottish Independence, and likely much earlier as several hundreds of thousands of British citizens (both Scots and English) north of the border would choose to migrate to a far more economically stable UK. Of course most of the people in England do not want further high immigration so the loss of population is less of a domestic issue than it would be North of the border that would experience an accelerated brain drain as its brightest and best migrate to the South of England that would be following the migration of Scotland's financial services industry, as financial sectors are built on only one thing - confidence, something a newly Independent debt defaulting Scotland would be greatly lacking.

Therefore Scottish independence would have very limited negative effect on the UK's economy and global standing, which is suggestive of it being an overall economic non event for the UK.


The real problem of Scottish Independence is as I have highlighted several times in recent articles is that it would open up a pandora's box that would encourage other parts of the UK to start their own separatist movements which would disrupt economic activity right across the UK, and that is the real danger of Scotland leaving the UK, and not its net economic impact on the UK.

Ukraine illustrates what tends to happen when countries start to tear themselves apart as peaceful demonstrations in Ukraine's capital city Kiev of barely a few weeks ago have fast descended into chaos towards outright civil war as several regions in the north-west such as Lviv declare independence, whilst the south-east stands behind its democratically elected President who fled the capital with loyal security forces barely 24 hours ago.

What was unimaginable a few weeks ago has now become a crisis situation of mounting deaths, where with each death Ukraine takes a further step towards leaping over the edge of and into the abyss of where the likes of Syria stands today, as the consequence of what happens when nations rip themselves apart.

Ukraine tearing itself apart has huge implications for european stability as the conflict risks sparking unrest in bordering states most of which have their own separatist movements, especially Russia which therefore looks set to intervene militarily.

Independant Scotland Debt Flash Point

Alex Salmond's debt default threat statements are akin to someone borrowing money from the bank to build a house and then declaring that they did not owe the bank anything, by rights the bank could repossess the property, and similarly the UK could impose tariffs (just as took place following Irish Independence) or seize Scottish assets on paper to the tune of £120 billion, effectively freezing the assets and thus restricting their use and resale.

Of course such an action would be seen as outrageous by the Scottish people and flame the fires of conflict as it would sow much discontent between Scots and the 1/2 million settled English in Scotland, just as does the SNP's statements of not taking on the £120 billion of debt to people south of the border.

This is just one example of how the SNP and Independant Scotland would sow the seeds of conflict between North and South Britain.

The Balkanisation of Britain

Alex Salmond and his merry band of scottish nationalists quest for dominance over a small part of the Island of Britain have failed to calculate that they will no longer have Westminister to blame for this, that, or other latest socialist deficit spending induced crisis. Which implies that the first port of call for disintegration will likely be in Scotland itself, as a vote for Independence at best would only marginally carry more than 50% of the votes. Therefore the Scottish nationalist government would within a couple of years start to hear highly vocal demands from parts of Scotland to rejoin the United Kingdom, the refusal of which could trigger the start of civil conflict, which as we have seen in Ukraine and elsewhere that it does not take much for crisis to spiral out of control.

As for the rest of the UK, unfortunately Scotland attempting to tear itself away from the United Kingdom would set in motion a chain of events that would destabilise the whole Island of Britain as many separatist movements would be emboldened to exaggerate their own sense of injustice mostly based on semi-mythical histories and as remedy seek their own autonomous or even independent states, such as Wales, Cornwall, Mercia and off course heavily subsidised Northern Ireland.

Scottish independence would result in increasingly chaos across the Island, as growing civil unrest would spread as a contagion infecting many other regions of Britain.

The first consequences of the start of UK fragmentation would be in the economic arena as regions would seek to exert greater autonomy and thus increasingly implement differing rules and regulations that would disrupt economic activity that would further accelerate the breakup of the Union as regions would continuously become poorer thus blame others for their circumstances and see further separation as the solution.

The European Union fears this which is why senior EU politicians have been lining up one after another to state that contrary to SNP propaganda, an Independant Scotland would not be fast tracked into the EU, for they understand that just as a disintegrating Ukraine would destabilise the whole eastern european region so would a disintegrating UK destabilise many western EU nations such as Spain, France, Belgium and Italy all of whom have their own separatists movements.

It would be difficult, if not impossible, for Scotland to join the European Union - European commission president José Manuel Barroso

The bottom line is that Scottish Independence would open a Pandora's box that would result in a state of Britain that is far removed from the rose tinted glasses picture that the likes of the SNP are painting today, because the UK has always been MORE than the SUM of its parts. Therefore a fragmented UK will be far LESS in EVERY respects than that which the UK is today.

Gangsters and Paramilitaries

Gangsters that would eventually become paramilitaries are waiting in the wings to capitalise upon the many opportunities they will be presented by the breakup of the UK, as separation will result in a boom time for criminal enterprises such as smuggling, gambling, drugs and extortion protection rackets amongst many others at huge cost to civil society in terms of the day to day lives of ordinary citizens becoming subject to the whims of flag flying criminal gangs.

A situation that the people of the Scotland or bordering regions of England could never imagine today much as the peoples of Northern Ireland could not imagine what lay in store for them following the breakup of Ireland. Where today, even over 15 years on from the Good Friday peace agreement the people of Northern Ireland still have to contend with the consequences of more than 180 well organised armed gangs, most of whom use the cloak of republicanism and loyalism to engage in high level of criminal activities that are beyond the experience of the peoples of mainland Britain. To imagine that this would not be replicated in a disintegrating UK and that on a far greater scale is ignoring what has taken place following the breakup of virtually every nation state in history. Weakened states act as magnates for organised crime, just as today Ukrainian, Russian, Polish gangsters are busy capitalizing on the chaos that is taking place in Ukraine.

So whilst it is unimaginable today for the SNP to have a paramilitary wing, however that does not mean it will be so a decade on from Independence as a consequence of the chaos that would follow the break up of the United Kingdom as we could see Scottish Nationalist paramilitaries battling against Loyalist paramilitaries as they attempt to carve up areas between themselves to profit from criminal activities as a consequence of weakened states that apart from terrorising the general population will have a huge impact on legitimate business activities.

The bottom line is should the UK start to breakup starting with Scottish Independence then several decades from now people will look back at today's UK as being a golden era of political, social and economic stability.

In terms of investment decisions, if Scotland votes Yes, then it should be taken as a cue to start to disinvest from the UK, and to seek to formulate an escape plan from the UK before the penny drops.

Bitcoin Craptocurrency MTGox Price Crash to Under $100

Magic the Gathering! Holders of bitcoins in the worlds largest bitcoin exchange MTGox continue to experience stomach churning days as the price of the so called currency can change by more than 50% from day to day Zimbabwe style, as the price tumbled below $100 this week far removed from its $1250 high of just over 2 months ago!

The MTGox site paints a picture of price stability as do all of the other smaller bitcoin exchanges located in the financial wild west nations of Slovenia, Bulgaria, Romania and worse!

Trade with confidence on the world's largest Bitcoin exchange!

MtGox is the world's most established Bitcoin exchange. You can quickly and securely trade bitcoins with other people around the world with your local currency!

The truth is that holders of bitcoins remain locked into holdings of ever depreciating value as the price appears determined to grind its way towards zero.

When I last looked at MTGox, bitcoins were trading at at USD 112, many bitcoin pumper's point to other exchanges that have bitcoins priced at $550 as reflecting the true price of bitcoins and in reflection of its apparent stability whilst ignoring the blatant in your face fact of how can something that calls itself a currency have a more than four fold price differential between exchanges? When arbitrage in a REAL currency would ensure that there would be little difference between exchanges.

This reeks of something that is backed by nothing that in reality has no value, much as I have repeatedly written from right just before the peak of the bitcoin bubble that bitcoins are a SCAM. This and the fact that volume has all but dried up across all exchanges which means that the price being quoted is worthless if one cannot actually trade at it.

A bitcoin is worthless because it is backed by nothing, for a virtual currency to have value it must be backed by something, anything physical be it land, property, precious metals, or even the quantity of water in a fresh water reservoir, it MUST be backed by SOMETHING REAL! Else it is WORTHLESS! At least fiat currency is backed by tax payers.

You Were WARNED! - A recap of my Bitcoin Warnings of the past 3 months:

29 Nov 2013 - Bank of England UK Housing Market Bubble Panic is Mark Carney Playing Game of Thrones

As was the case for the original Tulip Mania, following the bursting of the bubble Bitcoins will soon be forgotten and so will the craze for all peer to peer i-currencies, as the bottom line is that bitcoins never matched the hype for transactions are NOT anonymous and it IS heavily manipulated by a handful of mining pools so is not decentralised as today ordinary people cannot muster the processing power required to mine for bitcoins.

The bottom line is that bitcoins are a pyramid ponzi scheme where those who got in early win, whilst everyone else loses. If you own bitcoins then you should get out IMMEDIATELY!

05 Dec 2013 - Bitcoin Mania Bubble Bursts, China Triggers Price Crash Start, Technical Forecast

What's Next for Bitcoins

A quick technical review of the charts implies that a double top pattern is being formed which is a warning that the bounce from the neckline is not something that bitcoin holders should put much hope into for the price is likely to reverse within days to break the neckline and retrace all the way down to at least 500 (current 1074), which is more than a 50% drop of the last price and a 60% drop from the high.

07 Dec 2013 - Bitcoin Price Crash Towards Zero? The Ponzi Scheme Bubble Plays Out as Designed

The bitcoin stepped crash with much volatility continues to play out not just towards my technical target of 500 but eventually towards virtually zero as represented by my longer-term objective of just 15, that is 1/99th of its trading high. So understand this that the nightmare for those who continue to hold onto bitcoins is only just beginning, yes the price has crashed by 37%, but it is still stands 37% above its technical target of 500 and has the potential for a 96% loss of its current value should the target of 15 be realised, so this is NOT the time to hold on hopes of recovering back towards the highs as the loss of value sustained could literally be TOTAL! A lesson that all market traders have to learn else they will go bankrupt holding on for price recoveries that always become more distant with each stomach churning lurch to the downside.

16 Feb 2014 - Bitcoin Craptocurrency Ponzi Crash Grinds Towards ZERO, Where's Max Keiser Hiding?

Bitcoin Craptocurrency has plunged to USD $230, down 81.6% from its USD $1250 high - Unfortunately for bitcoin holders the ponzi scam crash continues to play out as holders of bitcoins find out that as is the case with all scams that when they want to sell their holdings they CAN'T. Instead they are locked into holdings that continue collapse in value all the way towards a pittance of the price that hooked them into buying of just a few months ago.

Slovenia, Bulgaria, Romania, and such like places where the now effectively frozen bitcoin exchanges operate from should have been a big signal for SCAM ALERT! Even the big exchange at Tokyo remains frozen as hackers, crackers, and cyber attackers dictate the real value (if any) of the craptocurrency.

The current 'price' of Bitcoins is USD $230, though off course the price is absolutely meaningless if one cannot actually trade at it ! Which is the case for many bitcoins holders today, as they will only be released form their bitcoin torture when the value of their holdings has been effectively wiped out, stolen by those that constructed and maintained the ponzi scam that hooked many unsuspecting naive investors into its vortex amidst an avalanche of sales propaganda that was liberally regurgitated at length by worthless mainstream media that painted a picture of Bitcoins having come of age when the truth was of the scammers final price spike.

Stock Market Correction Over?

The stock market (Dow) has once more confounded the heights of another new bear market mantra by bouncing back above 16k to last close at 16,103, this despite a series of bad economic data such as a surprise fall in industrial production of 0.3% against expectations for a 0.2% increase (polar vortex bad weather effect). Off course for the perma-bear crowd the current rally just represents a bear market correction to further short into.

My last look at the stock market of 3 weeks ago concluded in the following trend expectation:

03 Feb 2014 - Stocks Bull Market Over? Are the Bears About to Break...even?

The current stock market correction looks set to attempt to revisit 15,000. How close it gets to 15,000 I can't tell, perhaps half way, just that the correction is not done to the downside. Following which the price chart implies that the Dow will enter an upwardly sloping trading range that would target a NEW all time high. However given the nature of trading ranges it is difficult to say how many swings it would take for such an outcome to occur, i.e. the last such trading range comprised 7 swings before breaking higher. This one could be quite brief and just comprise 2 swings as indicated by the chart, which could imply a New Dow high by early April, though that does not mean that the Dow would be able to hold the high as it could remain in the upward sloping range for some time which implies Sell in May and Go away as probable.

So to answer the question - Is the stocks bull market over ?

NO ! No sign whatsoever that this (what people decades from now will look back on as being the greatest bull market in history) bull market is anywhere near being over!

The subsequent price action closely matched my trend expectations for the Dow to bottom around 15,250, and therefore implies that the correction of just 8% should be over. Can you imagine all that doom and gloom that surrounded what amounted to just a minor 8% correction!

In reality, I would have liked the Dow to spend a little more time to the downside by extending a little further lower to perhaps down 10%, i.e. to give the bears a longer noose to hang themselves with. This translates into expectations for a slightly more volatile up-trend going forward towards a new stock market all time high by early April, at which time I will compose my next in-depth analysis and concluding trend forecast. Ensure you remain subscribed to my ALWAYS FREE Newsletter to get this analysis in your email in box.

The bottom line is that this was a relatively minor and healthy stock market correction to help dissipate the froth that had built up during the preceding rally to new all time highs and which now sows the seeds for the next new all time high by early April.

Your analyst increasingly doubting that the majority of rationale Scots will fall for SNP delusions and thus 'should' vote NO.

Source and Comments:

Nadeem Walayat

Copyright © 2005-2014 (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 25 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis focuses on UK inflation, economy, interest rates and housing market. He is the author of five ebook's in the The Inflation Mega-Trend and Stocks Stealth Bull Market series.that can be downloaded for Free.

The Stocks Stealth Bull Market 2013 and Beyond EbookThe Stocks Stealth Bull Market Update 2011 EbookThe Interest Rate Mega-Trend EbookThe Inflation Mega-trend Ebook

Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication that presents in-depth analysis from over 600 experienced analysts on a range of views of the probable direction of the financial markets, thus enabling our readers to arrive at an informed opinion on future market direction.

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

Nadeem Walayat Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


24 Feb 14, 06:44
Scotland After September 18th?

There is little doubt that Scotland *could* secure EU membership, but no country has ever carried out the application-to-accession process in less than eight years.

To say Scotland already qualifies is patently nonsense. It has, for example no independent financial services regulatory regime which would be a basic requirement: it uses the UK system. There is no incentive for "London" to continue to provide this service to an independent Scotland (other than perhaps a very large fee?): the London regime costs £1 billion a year, and London financial institutions would leap at the chance to reduce this cost by *not* regulating Scotland. And there are doubtless many more such examples. Which is why the process takes years.

I doubt if Spain (with an eye on Catalunya) would ever veto a Scottish application. But it would be even-handed and offer no concessions not available to any other new applicant. So using the Euro is a given, as is the loss of Thatcher's rebate. There would be no opt-out from the EU justice system such as the UK now enjoys. And so on.

Scotland would be an EU member without the main concessions which (barely) keep the rest of the UK onboard.

And the Yes campaign have offered no road map for what the hell Scotland does for say the decade commencing September 2014, until EU membership is in place.

24 Feb 14, 10:53
delusional and wee.

Last week after a very wee shift in a very wee poll, all we heard was the sultan of smirks feeble line that posh boy osbornes alleged bluff would drive scots in their hordes into the yes camp .

Errr no.

We heard Nicola borgeon asking us to believe thst inequality would be reduced under independence . The polls says ..... Err no.

It is as though the NATSY leadership have become prisoners of their own wee ness, incapable of dealing with reality .

Alex mcleods latest piece of statesmanship is to tell the world that England should learn from us on dealing with extreme weather conditions. This from a man who was in charge when his government couldn't clear the snow from the m8 , the major arterial route between Scotland's two main cities , for two days .

These people are truly delusional .And wee.

25 Feb 14, 12:19

Bitcoin, bad idea, getting even worse...

Just another get rich quick scheme for the top of the pyramid IMO...

25 Feb 14, 15:20

I just created something called "bozo coins" These NEW COINS are ultra ubber double extra maximum secure coins. They are worth $1000 each, who wants to buy some from me? They will be worth $10,000 in the future.

25 Feb 14, 22:13
Deliberate ongoing near zero rates

Nadeem, I have a theory that central banks and governments have been deliberately targeting low and decreasing rates for decades. The world is full of internet opinions beginning with the phrase "When interest rates rise.." My question is - Why MUST interest rates rise? Why can't they continue to drop as they have done for decades, then stay near zero forever??

People justify rising rates by looking to the past, but we are in uncharted economic territory now, so why must things in future behave like the past?

The behaviour of central banks and governments suggests that low rates are what they want. Let me give some examples. 1) There is no action by banks or governments to stop asset price inflation, as this would require a rate rise. 2) The inflation indices (CPI, RPI) ignore house prices, as to include them would require raising rates in response to rising house prices. Yes, mortgage interest payments are included in the indices, but this reflects interest rates as much as prices and tends to rise slowly. 3) Wage increases are kept suppressed, as a wage-price spiral could take off, requiring rising interest rates. 4) Policies in the UK such as QE, Funding For Lending and Help To Buy all succeed in lowering interest raes. 5) Mark Carney (BoE Governor) gives an unemployment criteria for raising rates, which he thinks won't be met for years. When it is met quickly, he changes the criteria. 6) Total lack of concern by central banks or governments that low rates will create an even larger bubble, prompting the thought that they are either stupid, evil or it's a deliberate and misunderstood economic policy.

Example such as the above have been in existence for decades now and the evidence is that rates have been in a falling trend since the 1980s, when the inflation beast was tamed.

The ultimate outcome of this trend would be zero rates and high asset prices, but the economy would just climb to a new equilibrium. Why isn't this workable? If QE becomes a permanent part of monetary policy, as expected, then new money can always enter the system when needed. Bond yields can be kept low by QE. People can still borrow and invest, inflation will hover around zero and real-terms returns will be more obvious, rather than cloaked in inflation.

I would welcome any commments. Why isn't this a realistic policy target, the evidence seems to support it? Why do we absolutely have to have a world with positive rates? This is a system invented by mankind after all, we can shape it.



26 Feb 14, 01:16
Rate Rises

Hi Peter

Because inflation will be a lot higher in the future because of QE



26 Feb 14, 11:46
Rate Rises

Hi Nadeem,

Ok, but that seems to be a convenient one-line answer.

What about the massive expansion of bank credit during the late 90s and 00s coupled with low inflation and falling interest rates? Surely all of that extra bank credit should have created inflation, just as QE should create inflation?

What did happen was that house prices and asset prices were inflated, but not counted in the inflation index. To be clear, when I say inflation, I mean CPI/RPI. If they continue to be low, as they have been during the late 90s and 00s credit expansion, why can't they remain low in future? And therefore interest rates can remain low.

Surely the extra printed money will inflate various assets? Where is the wage/price spiral going to come from to give high general inflation?

All the best,


26 Feb 14, 19:38
Interest Rates

90's 00's - china exported deflation.

Non productive monetary expansion (government borrowing) sows the seeds for future high inflation. There never is a free lunch.

It is very easy to get suckered into believing that interest rates will remain low, most of whom have been piling on debt will be crushed when rates rise.

Interest rates are already rising, UK 10 year bonds are now 2.7% up from about 1.5% of just over a year ago.

But I understand why today many people are unable to realise that they are in a low interest rate bubble that WILL POP sooner than most expect.



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