It is almost universally accepted that the first duty of government is the protection of its citizens. But there are other threats that I believe we have a right to be protected from — the debasement of our currency, the erosion of our earnings and the devaluation of our savings. I believe it is fundamentally wrong for governments to engage in structural profligacy, spending excessively across the economic cycle and passing ever-larger amounts of debt onto future generations.
The policies of fiscal restraint imposed have seen our annual budget deficit fall from the terrifying heights of the 11.4% of GDP that we inherited from Labour, but at 5.7% of GDP it remains the third-highest in the EU. As the UK’s national debt has grown from about £960bn to more than £1,600bn, so our debt interest has risen dramatically to around £50bn per year, much more than we spend on our national defence and security. The financial crash of 2008 was one of the greatest warnings we have had about how quickly contagion in one part of the global economy will spread to the rest. It is worth asking: has enough thought been given to the causes of the crisis?
Specifically, have we changed the patterns of behaviour that were such a key contributory factor to the crash? Perhaps a little, but not to the extent that we should. What we have had on both sides of the Atlantic is more and more supposed stimulus, the use of taxpayers’ money to featherbed the banks and a failure to address the remuneration system where the temptation of short-term personal gain produced irresponsible risk-taking with other people’s money. On top of this, a persistent low interest rate environment has boosted the stock market and created cheap capital that can all too easily find its way into adventurous overseas investments.
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Back in 2011 Kevin Dowd, Martin Hutchinson and Gordon Kerr made a presentation to the Cato Institute’s annual monetary conference entitled The Coming Fiat Money Cataclysm — and After. Beautifully understated! They argued that the US authorities had massively increased government intervention in the economy in response to the crisis, and by doing so had diminished the ability of the financial system and the broader economy to correct themselves.
They wrote: “They aggravated underlying moral hazards that were a major proximate cause of the crisis. They undermined accountability and generated massive transfers to those responsible for the crisis (who had already greatly enriched themselves in treating it) at the expense of everyone else. Even worse was the response of the political establishment, repeatedly bailing them out with taxpayer cash, with further bailouts likely to follow. This goes beyond mere cronyism and amounts to a takeover by the ‘banksters’ of the political system itself.”
These critics argue, as many others do, that lower interest rates were responsible for one boom-and-bust cycle after another since the late 1990s. Yet the response of the Federal Reserve, in particular, was to lower interest rates again and create an even bigger bubble next time round.
In the spring of 2009 the Bank of England introduced an emergency interest rate of 0.5%. Six years later it remains exactly the same. Is this the longest economic emergency in our history, deserving of such prolonged divergence from financial orthodoxy, or has it proved to be an ineffective cure for our economic ills that we now find, at a practical and political level, too difficult to unwind?
I am not an economist, but I am a stakeholder — a taxpayer, a mortgage holder and a saver.The government is making a valiant attempt to reduce our deficit. Yet what if the fear of rising rates and the impact on short-term political fortunes are holding us back from decisions that might actually improve our chances of economic success and with it the revenues that will help close the deficit gap without the need for future tax rises or even deeper spending cuts? What if, in terms of interest rates, we have got ourselves in the “pusher and addict” relationship? And this is without even considering the lunatic ideas of a Labour party that would create a whole new wave of excessive monetary expansionism. Its so-called “people’s QE” would be better termed an economic RIP.
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In short, I believe we need a rise in interest rates as soon as possible. I would personally like to see the base rate rise by half a percentage point — and for rates to remain at levels more appropriate to a properly functioning capitalist economy. Only in this way can we rebalance the economy between borrowers and savers.
If we continue on our trajectory of ultra-cheap credit and maxing out QE then, should an economic slowdown arrive, as it surely will, policy-makers would be no better than rollercoaster riders holding their hands in the air.
Dr Liam Fox is the Conservative MP for North Somerset. He will deliver a speech, The Road to Honest Money, at the Institute of Economic Affairs tomorrow