The line was delivered with the kind of menace that debaters reserve for a rhetorical knockout punch.
During their heated exchanges about the management of the economy in their televised debate on Monday (July 25), former chancellor Rishi Sunak looked at his opponent to become prime minister, Liz Truss, and demanded to know whether was aware of what types of mortgage they are. the united states
“Whoa, what are they,” he hissed as Truss remained stone-faced. If he admitted that rates had nearly doubled in the past six months, which they have, he clearly believed it would be fatal to his economic plans. The economy could not be trusted to someone so reckless.
But hold on. Is it really true? We have been living in a world of near-zero interest rates for 14 years. We’ve gotten so used to it that we hardly talk about it. However, they now appear to be finally coming to an end as central banks around the world begin to grapple with rising inflation.
In the United States, the Federal Reserve raised rates this week by 0.75 percentage points, its fourth increase in a row, and its benchmark lending rate now stands at 2.5%.
The Bank of England is raising rates steadily and will no doubt do so again in August. Even the European Central Bank (ECB) has finally, if belatedly, joined the party, with a 0.5 percentage point increase, its first increase after a decade of truly negative rates. Perhaps, as Sunak clearly believes, this will be a catastrophe for the global economy, bankrupting households and businesses, and we must do everything we can to keep the cheap money flowing forever.
And yet, it’s also possible that zero rates were always an illusion, and ended up doing more harm than good. Ultra-cheap money created a bitter generational divide as rising house prices made it impossible for younger people to get on the property ladder; created legions of zombie companies that barely stayed alive on easy credit; it encouraged irresponsible spending by governments who thought the bills should never be due; created a debt explosion and fueled asset price bubbles; and destroyed the incentive to save.
It’s true that free money could have helped bail out the economy in the aftermath of the financial crisis of 2008 and 2009. But someday interest rates will have to return to normal, and now is the time.
“By any historical measure, interest rates have been exceptionally low for the past 14 years,” says Nicholas Crafts, emeritus professor at the University of Warwick and an expert on British economic history. “Even in the [worldwide depression of the] In the 1930s they didn’t go below 2pc, and even that was only for a few years. And yet, during that time, growth and productivity and investment have also been very weak.”
The zero rate era has lasted much longer than anyone originally thought possible. Rewind to 2008, with banks around the world collapsing, and the financial system in turmoil, and central banks around the world cut rates to 300-year lows. From 5% before the crisis, in March 2009 the Bank of England had cut rates to 0.5%, the lowest level since it was founded in 1694, in an effort to boost the economy.