The Governor of the Bank of England is taking no chances, digging trenches, erecting barbed wire fencing, tank traps and cannon to keep out the great financial calamity he sees on the U.K.'s horizon. Funny thing is that apart from surveys, pundits and his own forecasts, there is no sign yet of the great Brexit recession.
Still, he thinks, better to be safe than sorry. So Mark Carney cut the U.K.'s official interest rate by a quarter point to 0.25 per cent. Not content with a single warning shot, he has fired a complete broadside: another £70-billion ($120-billion) of money printing in the form of sterling bond purchases including £10-billion in corporate bond purchases. (The latter will be bonds issued by "firms materially contributing to the U.K. economy." Who are they?) To top it all, the Bank of England has a new idea, the Term Funding Scheme, a special program that will lend money to banks at especially low interest rates, close to the official bank rate, on condition the money is used to expand net lending in the real economy.
It sounds impressive but it may be unnecessary – there is no evidence yet of the economy contracting, just surveys of nervous exporters and a slump in the market for vulgar high-end London homes. The recession could happen – the Brexit vote was a political shot in the foot, a single finger uplifted to the political establishment by the poor, the ignorant, the male, middle-aged and disgruntled, all inspired by the daydreams of libertarian fantasists. It will take years to work out what it means in the real dollars and cents world of commercial trading relationships and Theresa May, the new prime minister seems to understand that as far as Brexit is concerned delay and pretend is her best friend.
We don't yet know whether British employers and investors have been dealt a severe blow or are just a bit stunned by the stupid behaviour of the electorate. Taking interest rates down almost to zero will only hurt the mainstream banking system – their margins were already crunched by the low rates and some have already warned business customers that they may be forced to charge for commercial deposits. This will only increase the rising demand for bank notes among small businesses who may find it financially as well as fiscally convenient to partially opt out of the banking system. Manufacturers of safes will do well. Meanwhile, a further decline in bond rates will wreck the solvency of defined benefit pension schemes that rely on income yielding investments to meet their liabilities. One of the props that held up the retirement security of a very large segment of the working middle classes is being trashed by the drive toward negative interest rates. Employers will rush to close such schemes in order to avoid ruinous demands for cash injections.
So why is Mr. Carney rolling out his big guns? He is doing this for two reasons – because of hubris and phobos. He fears that the decision to leave the EU will affect Britain's attraction as a location for investment and job creation, thus crimping its long-term competitiveness. He is probably right, so his "phobos" is rational and sensible. The question is whether his tools, cutting the cost of money to almost nil and using artificial techniques to force money to circulate faster are an effective antidote to Brexit or even a good painkiller.
This is where Mr. Carney shows the hubris of a typical banker. He believes the financial system is the bulwark of the economy, rather than just a piece of infrastructure that enables people to do commercial transactions and invest, more or less efficiently.
The billions invested by monetary authorities in OECD countries in money creation since the financial crash have had little impact on underlying demand from consumers. The latter remain cautious but the British consumer is certainly not obviously underborrowed. According to The Money Charity, which monitors household finances in the U.K., almost half of British households have less than £1,500 in savings while personal debt rose 3 per cent last year with credit card loans up 6 per cent. The average adult's personal debt in the U.K. stands at 113 per cent of average annual earnings.
Whatever Mr. Carney does, people will feel less well off next year; the collapse in sterling will make food, clothing and energy more expensive, well outpacing any saving in interest costs from lower rates. What will make the difference, if a Brexit recession is to be avoided, is investment by businesses in new productive capacity and new markets. That requires a degree of confidence in the future that no manipulation of financial markets can ever achieve.
What Britain and, arguably, the world needs is stable governments determined to pursue policies that create the conditions for economic expansion – lower taxes, infrastructure investment and investment in training, research and education. These are the things that make people's lives better, not doing funny stuff with money.
Carl Mortished is a Canadian financial journalist based in London.