Interest Rate & Government Policies Fail Badly

Low interest rates have solved nothing, they have just made things appear better for a few more years. They were sold to the general public as a solution to the financial crisis 2008, but that was almost 12 years ago. Since then almost nothing has been done to solve the main banking and debt problems in Greece, France, Spain and Italy. 

Germany does not have a debt problem but they have three other major problems – their banks stink, their emphasis on austerity is killing the Eurozone, and their foreign policy has been without a backbone now that Ms. Merkel is on her way out.

Near to zero interest rates have not revived investments in any EuroZone country and the same is true in most other developing countries. Investments in public infrastructure, in industry and in commerce has remained at low levels meaning that productivity has not improved. 

Big companies lay off people and small companies and start-ups are starved of funds and resources. Banking has become so regulated that banks prefer to use their money for selected house mortgage lending and safe big companies. They have stopped lending to risky small companies. 

Did you know that the new capital regulations will triple and double the amount of capital that banks need for lending to SME’s and big companies respectively? 

This is exactly the opposite to what is needed – some parts of government are trying to get banks to lend more to the real economy, while the regulators are doing the exact opposite! It is a fools’ paradise…

Now in the UK, “Freed from the Shackles of the Europe”, the “new improved government” (think of soap advertisements) has said that that they will strike down austerity and borrow huge amounts of long term bonds in the markets. 

Interest rates will rise and the unlucky Brits will see that their credit rating will slowly fall and their borrowing costs increase. Leaving the EU will cause a big dip in economic activity, unemployment will grow, tax revenues will fall, and it will take years to recover…

… and Trump is also on his way to ruin a healthy economy that has become overheated. Obviously the virus only made things much worse. He has been cutting tax revenues and increasing spending on walls and defence, both of which have no returns, except dead and wounded bodies. 

He has been backing fossil fuels and cutting back on healthcare. He has surrounded himself with fools and incompetents now that the few remaining adults in the White House have left. His trade policies are suicidal for the economy as his order to close air traffic with Europe. The Republicans can think themselves lucky that they have such a saviour, they could have had somebody like Kim…

In conclusion the fact is that the USA must start to borrow big time, and this means that interest rates will rise there too. They will be needing a lot of cash to repair the damage that Trump is inflicting.

In Europe, we will see that Greece will default on their loans, and Italian banks will face huge problems accessing markets. France will also see turbulence because Macron is not the most popular leader even though he has tried hard to make sensible reforms. Spain and will also be force to solve structural problems, while the Germans will start to understand that their hesitation to maintain austerity was a big mistake. They will introduce higher spending limits and that too, like the rest of Europe, will cause interest rates to rise in a period when credit risks will be higher.

Governments are caught with their trousers down. Few have proper resources to deal with the virus and the economic costs will be horrible. The taxpayers will be asked to pay up for their incompetence.

For the time being cash is king but soon the stock market will be a much better buy… just be patient and enjoy the spring sunshine while it lasts…

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