Living on Plastic

Living on Plastic

So the UK economy is still strong. What is the secret? Sadly, the weak pound hasn't made much of a difference to export sales - it is down to you and me and the fact that we keep on spending. In fact we are spending more despite household incomes dropping. To do this we are squandering our savings and building up debt.

Why are we doing this? The Bank of England acted very quickly when Leave won:

• It cut interest rates to 0.25% to make borrowing cheaper, and make saving worse than pointless - if you put £5000 in the bank today (with inflation at 2% - and rising fast) then next year it will be worth only £4900. So spend it now (and keep us afloat)!
• It gave out government money (i.e. your taxes) to the banks so they could lend it back to you at the new rate. That made it easier to borrow - the banks only got it if they managed to lend it out - and why borrow except to spend!
• It printed more money (aka quantitative easing). This is essentially printing more inflation. With more pieces of paper saying '£5' but the same amount of real things to buy then you need to give more of the pieces of paper to buy the exact same stuff.
  Essentially it is the same as adding a zero to every bank note we have. Sadly, that wouldn't mean that suddenly you could buy ten times as much - you would find that all the shopkeepers have simply written an extra zero on the end of their prices - hey presto, inflation.
  So far so pointless?
  Not at all. Lenders can't simply say, "Well, with this QE we need to add a chunk onto the amount you owe." People would go nuts (and the government would jump on the lenders). So people's debts shrink magically and they can afford to borrow (and spend!) more.
  How come the banks put up with this? Well, of course, it isn't their money they lend, it is ours (i.e. savers' money or government money), So the banks don't lose - it is the savers who suffer because we get back less than we saved.

Of course, there must come a point when we can't keep the economy going because we haven't any money left to spend and no one will lend us any more.