Interest Rates Change All the Time – Don’t they?

A few hours ago the Bank of England announced an unprecedented cut in interest rates from 4.5% to 3% – our interest payments were 50% higher this morning than they will be when the letter from the Building Society arrives for those with Mortgages pegged to LIBOR. No such joy for those who thought that they knew more about interest rates than the economists employed by the banks & signed up for a fixed rate, they will have to pay the penalty for making their finances unnecessarily complicated.

Unprecedented is a fierce word! Am I justified in using it? I believe so, & point to the event that shocked a generation, sacked a Chancellor, & probably lost a Prime Minister – Black Wednesday. On that day interest rates were raised from 10% via 12% to 15% & then finally back to 12% – so although the day carries political, economic & satirical baggage sufficient to cement it’s place in history, it isn’t as significant as todays change to the arithmetical mind.

It is entertaining to recall that on Black Wednesday the shadow chancellor, Gordon Brown, said colossal errors of judgement by the prime minister and chancellor had betrayed the British people. No doubt he will currently have at the back of his mind that the reputation of the Conservatives for competent handling of the economy was shattered. The 25 year old David Cameron was political advisor to Norman Lamont, the Chancellor of the Exchequer who took the rap for the problems of Black Wednesday, and can be spotted at Lamont’s side in news film of Lamont’s announcement of British withdrawal from the ERM that evening.

Although David doesn’t feature – this is worth a watch by those who didn’t live through it to gather the flavour of Black Wednesday

So I hope that I have convinced you that we have just had the most significant financial change of a generation, you might want to know why it is happening, but the most important question is how is it going to affect you, & what should you do about it?

How is this going to affect me & what should I do about it?

Ronald Reagan once famously explained that “Status Quo is Latin for the mess that we are in”, & that phrase springs to mind when I think about where we are now. The Bank of England has peered over the edge & realised that we are heading for a steep fall that they didn’t know was there. They have panicked. Why? Because it was their job to see this coming, & they fell asleep. Now that they have woken up they realise that they should have seen this coming,  like all guilty parties they have overreacted to try to cover for their foul-up.

So at the last minute they seen the economic crash coming, seen the millions of unemployed, the bankrupcies, the poverty …….. they’ve panicked & they have thrown out the anchor,

The center-back has missed his tackle, panicked & hauled the striker down when he was through on goal. Now we have to take the red card & head for the dressing room.

The Government is printing loads of money to give to the Banks so that they can carry on lending, & it is reducing interest rates to save the economy. There is only one way this is going.

Inflation

Inflation

Inflation

Inflation

Inflation

Inflation

Young people have lived a life where if you can’t afford a computer/games console/video player/TV/Camera/CD you just put the money away,  wait for the price to come down, & you buy it later at a lower price. Old people will remember that it wasn’t always like that. They will remember that once upon a time it was several government’s objective to try to get inflation down to 10% & that they couldn’t manage it.

The nice Mr. Callaghan & the nice Mr. Heath lost their jobs as Prime Minister trying to get inflation down. Mr. Heath tried to do it by making it illegal to work more than 3 days a week, but that was a really silly idea if you think about it, & it didn’t work. Mr. Callaghan was even nicer than Mr. Heath & he tried to do it by getting people to like him so that they volunteered to not have pay rises (which is like taking a pay cut when prices are going up 1% every month). Unfortunately after a short while the people didn’t like having less money – even when Mr. Callaghan gave them beer & sandwiches instead. So when they decided not to volunteer to not have less money any more Mr. Callaghan decided to force them to volunteer, & so they stopped working to show how much they didn’t like having less money. Not working at all was an even sillier way of getting inflation down than only working 3 days a week.

Anyway old people who lived through that history will know that now we should all borrow as much money as we can, & buy things with it because things hold their value, & money is going to be worthless. It’s as simple as that. Borrow & Buy. Buy things that you can’t lose, or have stolen, that won’t wear out, or become obsolete. Suggestions could be gold coins (better than lumps of gold (called bullion) because you don’t have to pay VAT, jewellery (remember that the “valuation” changes by 100% depending upon if you are buying or selling), Gas, Oil, Minerals (buy a “Share” in a company that owns lots).

The best idea is the house that you live in. In 10 years you’ll be grateful that you read this.