Tuesday, 28 September 2010

Putting Voices To Characters:

I got a call out of the blue the other day from an actor called Paul Panting. He was about to start recording an audio version of Fire Force, and he wanted to have a chat about accents, as well as checking the pronunciation of some of the military hardware.
As anyone who has read either ‘Death Force’ or ‘Fire Force’ will know, there is a big group of character in the stories, and they all come from quite different places. Steve is South London, working class. Ollie is a public schoolboy. Dan is an Australian, Maksim a Russian, Chris a South African, and so on.
We were discussing what kind of voices to give the different men, and how far too push it. In the books, I don’t really give them different accents all the time, in the sense that, Chris, for example doesn’t talk about ‘Seth Eefrica’. That’s partly because I’m not very good at writing accents, but also because it could turn into an accent fest, and get very silly and distracting. I prefer to let their characters comes through by the type of things they say, and how they react to situations, rather than by giving them funny voices.
Paul and I agreed that that was the way to do it in the audio version as well – even if it meant he didn’t get a chance to show off all those accents he learned in acting school.
But it also struck me that just hearing the audio book – which I’m really looking forward to – is going to change my perception of the characters. I already hear Steve and Ollie’s voice in my head when I’m writing them, but of course an actor’s interpretation will be slightly different to mine. It will be fascinating, but also a bit strange to hear a different take on all the guys in the unit. It may even change the way I think about them.

Monday, 27 September 2010

Lay Off Vodafone.

In my Money Week column this week, I've been looking at how the City is constantly attacking Vodafone. Here is a taster...

What’s the most successful British company of the last twenty years? Tesco would be a contender, but it is still a marginal force outside of Britain, and lags Wal-Mart and Carrefour in the global retail market. Royal Bank of Scotland would have been a possibility until Sir Fred Goodwin blew the whole bank up. GlaxoSmithKline has been treading water since its 1980s to early 1990s heyday.
In fact the answer is easy. Vodafone.
The telecoms conglomerate has 347 million subscribers, and runs the largest mobile network in the world, measured by revenues, even if it is slightly behind China Mobile in terms of its total customer base. It operates networks in 31 countries, and has partners in another 44. Not bad for a company which three decades ago was just a small unit of the long-since forgotten Racal.
And yet you would hardly guess that from the way the City treats the business. The share price is beaten up. The chief executive Vittorio Colao is under constant pressure to dispose of assets. There is an endless stream of stories about how he should be selling his businesses in the US, or France, or somewhere else. Demands are tabled for special dividends and share buy-backs.
It is crazy – and an illustration of the City’s short-termism at its most destructive. There are plenty of criticisms that can justifiably be made of Vodafone. And yet the mobile industry is still in its infancy. Its play for global dominance may yet pay off. It may be able to take full control of units it holds minority stakes in. The City should be supporting once of the UK’s few industrial leaders, not trying to tear it apart.
The last week has seen yet another round of pressure on Colao to dismantle the empire that his predecessor Sir Chris Gent so expensively put together at the turn of the last decade. The company’s $6.5 billion stake in China Mobile was sold off, amid pressure for divestments. The 45% that it owns in Verizon Wireless, the largest mobile network in the US, is constantly under review. So to is the 44% stake it owns in the French operator SFR, of which Vivendi owns the other half. The 25% stake in Poland’s biggest mobile operator Polkomtel could be on the block. One shareholder group to lobby for the break-up of the business has been active since 2007. The demand for deals to boost shareholder returns builds all the time.
Some of the criticism is fair. Amid the telecoms bubble of the late 1990s, the company spent almost £200 billion on acquisitions. The $175 billion it paid for Germany’s Mannesmann remains one of the largest hostile takeovers ever attempted in Western Europe. Of the largest fifty deals of all time, Vodafone was a party to three of them. Shareholders didn’t see much of a return for all that frantic, and expensive, activity. Spending £200 billion only produced a company worth £85 billion today: not a great return, even if much of the money was in shares rather than cash. The share price has perked up this year – its dividend is one of the most generous and safest on the London market – but at just over 160p is still a long way short of the 444p it reached in March 2000.
But so what? All that is ancient history. The fact remains that whilst it may have over-paid for its acquisitions, Vodafone is today an industrial giant. No other mobile company comes close to its reach and scale in the mobile market: China Mobile may have more customers, but it doesn’t have anything like the same global reach.
There is still a good chance that its ambitions may pay off one day. No one knows precisely how the mobile industry will develop. It is, in truth, still in its infancy. It may end up destroying fixed line networks. It may merge with the computing and social networking industries. It may develop into something completely different. Whether having a global presence, in the way that Vodafone does, will pay off remains to be seen. It’s a gamble. But it is hardly a foolish one. Being the biggest gives you muscle in a market. It doesn’t guarantee success – there are plenty of big companies that completely mess up – but it’s a good place to be starting from.
Many of its minority stakes are frustrating. It hasn’t received any dividend on its Verizon shares since 2005: the two companies appear locked in a stand-off that makes the War of the Roses seem amicable and straightforward by comparison. Vivendi shows no interest in selling Vodafone majority control of the French operation they share. In some countries, it has already abandoned its ambitions. In Japan, for example, it sold out in 2006 after years of making little headway in one of the world’s most competitive, and technologically advanced, telecoms business.
But is still crazy to pressurize the company to sell out of successful businesses in France, Poland, and most crucially the US. It may be a long struggle to get control of Verizon. But the prize is surely worth having. Likewise, it doesn’t make much sense to sell out of the Polish market, which must surely have some of the best growth prospects in Europe. It may not have complete control of that business. But who is to say it won’t be able to win it one day.
Mobile telecoms is one of the world’s most lucrative and innovative consumer industries. For the UK to have the global leader is a remarkable achievement. It is an indictment of the City that it only wants to rip that apart – and can’t seem to see any virtue in supporting the company. The German stock market doesn’t try and break-up its most successful business, and neither does the Swiss or the Japanese. The London market should be more worried about supporting the country’s few world-class companies – and should spend a lot less time thinking about where the next deal is coming from.

Monday, 20 September 2010

How China Will Change Investment....

In my Money Week column this week, I've been looking at how the rise of China as the world's largest stock market will change investment. Here's a taster....

Any serious investor will already be comfortable with the emerging markets. They know the BRICs - Brazil, Russia, India and China - are doing a lot better than the traditional developed economies. They probably have some money in a fund specialising in those stocks. They might even have dipped into what the investment industry calls the frontier markets – places such as Pakistan, Tunisia, or Vietnam.
But over the next twenty years, the amount of attention they will need to pay to them is going to vastly increase. The emerging markets are going to stop emerging. They are going to turn into the establishment.
The mood of the global markets used to be set in London or New York. Over the next two decades, it will increasingly be set in Shanghai, Moscow on San Paulo. That is going to change the way the markets operate, the signals that suggest you should buy and sell, and the way that investors get rewarded. It will make investing a lot more scary, and the markets will be a lot a more volatile. But you need to get on the right side of that trend, or end up getting badly burned.
Last week, Goldman Sachs published a set of long-range forecasts for global stock market capitalisations. It predicted that by 2030, the value of emerging market
stocks would rise more than fivefold to $80 trillion. Their share of world equity capitalization would, the bank forecast, rise to 55% from 31% today. China will be the world’s largest market. Its total value, Goldman predicts, will increase to $41 trillion by 2030 from just $5 trillion today. It projects that the US market will be worth $34 trillion by then, making China easily the worlds biggest.
That will be a big change. Right now, the US stockmarket still accounts for almost 30% of global market capitalisation. China is just 7.2%, only a little ahead of the UK at 6.6%. Brazil accounts for only 2.8% of the world markets, just slightly more than Switzerland (although there are 205 million people in Brazil, compared to 7.6 million in Switzerland).
There is nothing very controversial about that. The emerging market economies are growing at a far healthier rate than either the US or Europe. The International Monetary Fund predicts the emerging economies will grow at 6.4% next year, compared with 2.4% for the developed world. They keep on growing at double or triple our rate every year. Nor is there any reason to expect that to slow down. The demographics of the developing world are in far better shape. So are government finances. And they still have a lot of catching up to do to match living standards in the West. It’s hardly a surprise that their stockmarket will overtake ours. A hundred years ago, New York surpassed London in importance. Fairly soon, Shanghai will overtake New York.
The interesting question is how that will impact on the way the markets work.
We are used to a world where the dominant investment themes and ideas are set mostly in New York, and partly in London. The Dow Jones index might just be thirty companies. Its rather strange composition might well mean that it isn’t even a very accurate reflection of the American economy, never mind what was happening in the rest of the world. As a general rule, however, if you knew what was happening to the Dow, you’d have a pretty good idea where the rest of the world’s markets were heading. Likewise, the FTSE is an oddball mix of companies, largely dominated by oil and mining companies, plus a big bank and drugs company. It doesn’t tell you much about the British economy. But if mining stocks are all the rage in London, you can be certain they will soon be just as popular in the rest of the world as well.
The themes in New York and London dominate the global markets everywhere. If dividends are in fashion in the U, they will be growing in importance globally. If stock buy-backs are a more popular way of rewarding investors in London, that will be replicated around the world.
Expect all that to change in the next twenty years. What will count is the mood in Shanghai, Moscow or San Paulo. The one number you really want to know won’t be the Dow: it will be the change in the Shanghai Composite. It will be the way those markets are developing, the way that money is flowing through them, and the demands that investors are making, which will set the tone for the global markets. European and American markets will take their cue from the emerging market, not the other way around.
That may well turn out to be scary for investors. It’s dated to portray the Shanghai index as an old-fashioned gangster market, with some mysterious Mr Chan sitting in a dark basement dictating whether it rises of falls with a click of his fingers. But it operates to very different rules to the stock markets of the West. It is heavily manipulated by the government. It has no clear and transparent rules governing what firms can be listed, and what they need to disclose to investors. It is not fully open to foreign investors. And the Chinese, who make up the bulk of investors, are inveterate gamblers, who have always thought stock markets should be casinos without the neon lights and cocktail bars rather than places where you try and seriously analyse a company’s likely future earnings. The critics who point out the New York and London market promote a casino culture, treating stocks like gambling chips, haven’t seen anything yet.
The stock market right now is volatile, short-termist and self-interested. But as it comes to be dominated by Shanghai and Moscow it is going to get a lot more so. The market will be dominated by the state, because that is the way that business works in China and Russia. It won’t be very interested in small investors, because they don’t count for very much in any of those markets. Nor are the standards of honesty likely to be the same.
There is no point complaining about that, however. It is where the money will be. The rules of investment are about to change, and investors need to make sure they understand that. Because one thing is always true: if you don’t understand the rules, then you haven’t much chance of winning the game.

Tuesday, 14 September 2010

Thriller Writers Need More Relevance

One of my favourite themes is how thriller writers aren’t keeping up with the times. Britain and the US have been involved in two major and very nasty wars in the last decade, both in Iraq and Afghanistan. But you wouldn’t guess it from reading the thrillers on the shelves at your local WH Smith. The y are all old-style Cold War spy thrillers, stuff about hidden scrolls, serial killers, or lawyers. There is almost nothing about the wars we are fighting now.

There is a fascinating piece related to that in the New York Times. It points out that the most vibrant story-telling about contemporary warfare is in the video game industry, not in the thriller industry. Games like Medal of Honour and Call of Duty are far more relevant to what is happening in the world today than just about any book.

I’m trying to address that with my ‘Death Force’ series, which are bang up to date. But not enough writers are taking up that challenge. I suspect that is partly the fault of the publishers, who should be looking for more contemporary material. But it also because writers have lost the desire to be relevant.
The video game already poses a big challenge for writers. In many ways it is a more interesting narrative form. But surely it is silly to leave the field completely top gaming, rather than the novel

Monday, 13 September 2010

Questioning Bank of England Independence....

Given the poor track record of the UK economy since 1997, I'm surprised more people have't been questioning whether an independent Bank of England was a great idea. I've been addressing that in my Money Week column this week. Here's a taster....

All of sudden, everyone seems to want to claim credit for giving the Bank of England its independence in 1997. In his memoirs, Tony Blair rather surprisingly said it was his idea all along. Until then, Gordon Brown had always insisted he thought of it. In response to Blair, the Labour leadership candidate Ed Balls popped up to say that he had the idea before anyone else.
The debate is fairly infantile. The idea of an independent central bank had been around for decades, so there was never anything very original about it. The interesting point is how they all assume it was a triumph, a move of such brilliance that the only real debate is about is authorship, not about its effectiveness. But that isn’t nearly as clear as they seem to think.
In reality, thirteen years on, the record is, to put it mildly, mixed. The independent Bank has presided over catastrophic period of British economic management. Growth was disappointing. A debt bubble built up. The housing market went crazy. The banking system collapsed. The inflation target has barely ever been met. It has hardly been an unqualified success.
That hasn’t stopped the Labour tribe squabbling over it. “When I suggested it, he readily agreed,” Blair writes his memoir “A Journey,” published last week, of the decision to give the Bank sole control over interest rates. “I allowed Gordon to make the statement and indeed gave him every paean of praise and status in becoming the major economic figure of the government. In truth, too, as with the Bank of England independence, the broad framework of the economy, never mind anything else, was set by me.”
Gordon Brown has on countless occasions claimed credit for Bank independence as one of the triumphs of his ten years as Chancellor. And Ed Balls has been just as keen to claim it was all his idea right from the start. He points to a pamphlet he wrote in 1992 advocating independence for the Bank. "When I presented detailed proposals to Gordon and Tony in 1995, they both agreed in principle it was the right thing to do," he said in an interview with the Sunday Times last weekend.
In reality, there was never anything particularly original about the idea. Independent central banks had worked very well for a long time in the US, Germany and elsewhere. You could argue the UK already had one in the late 1980s when the then Chancellor Nigel Lawson was shadowing the deutschemark – it just happened to be the Bundesbank rather than Bank of England. Ken Clarke as Chancellor under John Major had increased its powers over interest rates. The decision was part of an evolving policy, rather than a sudden and brilliant innovation.
And yet the fact that suddenly in 2010 Blair was to take credit for the Bank’s independence is, in truth, confirmation that the man knows nothing about economics. After all, looking back at the last thirteen years, it is hard to conclude that Bank independence has been a great success.
Growth has been fairly modest. Over the years 1997 to 2009, the British economy grew at an average annual rate of 2%, according to calculations by the National Institute of Economic and Social Research. Under the previous period of Conservative rule, from 1979 to 1997, it grew by 2.2%. Between 1960 and 1973 it grew by an average of 2.9%. So it’s only compared to the chaotic years of the mid-1970s that the growth figures for the years of Bank independence look good. Judged by the whole of the post-war period, 2% is a slightly disappointing rate.
An enormous debt bubble built up. According to McKinsey data, over the last decade the UK saw the largest increase in the ratio of debt to GDP of any developed economy. Total public and private debts rose from 350% of GDP at the start of the decade to 449% at its end.
The hosing market went crazy. Admittedly, the UK has always had a fairly bonkers property market. But the problem got worse under an independent Bank. Between 1979 and 1997, house prices grew by 146%, according to Nationwide figures. Between 1997 and 2009, they grew by 230%. Housing was already very expensive. On the Bank’s watch, it turned into a bubble.
The Bank didn’t have control of the financial system – that was hived off to the Financial Services Authority. Even so, the fact that the UK saw the most catastrophic series of banking collapse in more than a century since it was granted its independence is hardly a great advert for its role.
Nor has the Bank even been particularly successful at meeting its inflation target. It is mandated to maintain inflation at 2%, with no more than a 1% deviation in either direction. But it has consistently failed to deliver that. This year, for example, inflation has been above 3% for more than seven months in a row, and shows little sign of coming down. Few ordinary people looking at their household bills would conclude the record on rising prices had been great over the last thirteen years.
Naturally, it is unfair to blame the whole of that record on the Bank. The growth rate has more to do with the overall thrust of government policy than just interest rates. Against steadily rising taxes, and more and more regulation, the UK was always going to struggle to grow. The credit bubble was part of a global trend, even if the UK took part in it with even more enthusiasm than any other country. It is hard to disentangle where responsibility lies for the economic mismanagement of the last thirteen years between the government and the Bank.
But it is certainly possible that the Bank could have done better. Interest rates look to have been held too low for too long for the health of the economy. It fretted publicly about house prices, but shied away from doing anything about them. True, it’s hard to prick asset bubbles: but lots of things in life are hard, and that’s not really an adequate excuse for not trying.
Indeed, given the generally disappointing record of the British economy since the Bank was given its independence, it’s surprising that more people haven’t started to question whether it was really a good idea.
And it is even more surprising that so many politicians are so keen to claim credit for it.

Wednesday, 8 September 2010

Fact vs Fiction....

Fact vs Fiction:

I haven’t been writing very much on this blog, largely because I’ve been rattling out a quick book on the Greek crisis for Wiley. The book was written at huge speed – a couple of months – and will be out in November. That was exhilarating in itself. As most of us know, the process of writing can be pretty leisurely. It takes a long time to write a book, and just as long for the publisher to bring it out. This one will be about five months total from Wiley getting in touch about the idea to the book hitting the shelves.

For me, it was also a chance to reflect on the difference between writing fact and fiction. I wrote a couple of business books much earlier in my career, but this was the first one I had done since I took up writing fiction.

It is a very different process. Obviously, the non-fiction book involves a lot more research. On the other hand, the story is just there. You collect the facts, marshal them into a coherent argument, then tell the story.

In fiction, you have to create every detail of the story yourself. You have to create the characters, and make them real. You need twists and denouements. It’s far harder work.

The funny thing is, most people looking at ‘Bust’ would assume it was a far more serious book than, say, ‘Fire Force’. But a book like ‘Fire Force’ is far more difficult to write.

Monday, 6 September 2010

Why Humans Are Better At Investment Than Computers....

In my Money Week column this week, I've been looking at why humans are better at investment than humans. Here's a taster.

Two years on from the start of the credit crunch, it is easy to observe that not a great deal has really changed. The banks have gone back to paying big bonuses, the traders and dealers are as speculative as ever, and the hedge funds are still raking in fortunes.
Still, one corner of the capital markets has been hammered hard – the so-called-called ‘quant funds’.
A few years back, the intellectually super-charged hedge funds that used mind-bogglingly complex formulas to trade assets and make huge profits for their owners were the hottest sector on both the City and Wall Street.
But now the combined assets of the quant funds are down from around $1.2 trillion at the industry’s peak to around $470 billion now, a drop of more than 60%, according to data from the research firm eVestment Alliance. Around a quarter of the quant funds have closed in the last two years, according to figures from Lipper Tass.
In part that tells us that investing styles go in and out of fashion. Sometimes people want gurus, sometimes charts, other times they want geo-political trends, and so on.
But it also tells us something more interesting.
Despite the best efforts of thousands of incredibly bright people, and despite the billions of dollars at stake, no one has ever really managed to mechanize the markets. They remain stubbornly human.
The quants, as they became known in the markets, were obsessed with taking the human element out of their trading strategists. The scoured university campuses, taking astro-physicists and mathematicians blinking out of the library, and paying them hundreds of thousands to have a shave, put on a suit (or at least some Boss chinos) and sit all day in an office on Mayfair’s hedge fund alley.
Once installed, they came up with programmes that could trade on minute price discrepancies between different markets, and make a fortune on the results. Or the scoured the record books for past price relationships, and when they found them, built trading computers that could exploit them.
Sometimes they came up with interesting results. The price of oil, for example, expressed in gold has remained virtually static for generations: as soon as it deviated from that norm, there was a trading opportunity.
But, although they had some big successes in the bull market, the quants were undone by the crash. None of the complex mathematical models they built predicted the credit crunch. All the expensive computer programmes were about as useful as a bucket and spade in Birmingham. The quants reputation was largely destroyed. The reason the value of the funds fell so fast was because they preformed so poorly, and because disillusioned investors withdrew their money.
In fact, the markets remain impossible to mechanize. If you could build a programme that predicted the markets, you would make, quite literally, billions. Yet no one ever manages it. Indeed, the harder they try, the worse the results usually are. In the 1990s, another hedge fund, Longer Term Capital Management, which had more Nobel prize winners on board than Man City have expensive footballers, collapsed with vast losses and bought down the markets with it.
There are three reasons why the market remains so defiantly human – and so resistant to smart mathematical models.
First, the markets are chaotic. Computers are very good at capturing fairly straight-forward relationships. They are very bad at modeling complex ones. Chaos theory is one explanation for that. For example, a butterfly flaps its wings in China, and it causes a thunderstorm in Britain. There are so many complex inputs making up the way weather works, you can’t hope to capture them all. It’s the same with the markets. A mortgage defaults in Florida, and a month later The Royal Bank of Scotland is bust. They are inherently chaotic, and so incredibly hard to predict.
Secondly, computer programmes are very bad at capturing human reactions and emotions – and the more people are involved the worse they get. That’s why they are good at chess, but not very good at bridge or poker: both card games are essentially about judging what your opponent will do, whilst chess is mainly about crunching a lot of numbers. The markets are much more like a card game than a board game. Investment decisions, and hence the direction of the markets, are driven as much by emotion as anything else. Sentiment is strong some months, and weak in others, even if not very much really seems to have changed in the meantime. It is tough for any computer programme to understand that, let alone model it, and start building it into its predictions.
Finally, behavior changes. The way that investors behave and the markets respond, evolves all the time. It isn’t static, or predictable, like the way the moon revolves around the earth. It will be different today from yesterday, and different again tomorrow. The quant funds were building predictive models based on the way market behaved in the past. But, whilst interesting, they didn’t really discover anything very useful. Just because a price has moved in a certain way historically does not mean it will move the same way in the future.
The lesson is a simple one. The markets will remain an arena for great traders, with an instinctive feel for where assets prices are going. They can’t be predicted with any kind of precision by computer programmes, no matter how much brain-power has gone into creating them.
And all those astro-physicists who for a few years could drive around in Porsches as they got paid million by a hedge fund can go back to the dusty poverty of the university library.
Still, there is one comforting thought. You might find it fiendishly difficult to predict what any market will do in the next years. But the smartest brains from the best universities couldn’t do it either – the markets caught them out, the same way they usually do the rest of us.

Wednesday, 1 September 2010

Zero Rates Have Lasted Too Long....

In my Money Week column this week, I've been discussing how almost zero interest rates have lasted too long. Here's a taster....

On March 5th last year the Bank of England cut interest rates to just 0.5%. It was the lowest rate in the Bank’s 315-year history. Accompanied by a package of asset purchases, it was part of an emergency package designed to shore up and economy which, at that point, appeared to be teetering on the edge of an abyss.
In the last few months, however, something very interesting has happened. Near-zero rates have started to become the ‘new normal’. Rates have stayed at that all-time low for 17 straight months now. No one thinks that they are about to rise any time soon.
And yet, the evidence is starting to emerge that the market is beginning to be seriously distorted by money that is virtually free. An M&A boom is bubbling up, created by cheap money. The housing market is kept buoyant by bargain-basement mortgages. Savers are abandoning deposits accounts for corporate bonds.
If rates stay at these levels much longer, behaviour will have changed so much that the shock once they start to get back to realistic levels again is going to be huge.
In the three centuries that it has been in existence the Bank has never pushed rates as low as this before. As a temporary, emergency measure, it was perfectly understandable. The credit crunch had tipped the global economy into a deep recession. There was plenty of talk of the threat of deflation (even if there was not much actually evidence of it). Something had to be done. And pushing rates down to almost zero was about the only weapon the Bank had available.
But now that low rates have been maintained for nearly a year and half, they are starting to be accepted as completely normal. For the first few months, people realised they were exception. Now they just think that is what money costs.
There is little sign of rates rising soon. At the last meeting of the Monetary Policy Committee, only one member, Andrew Sentence, voted for a rate rise, and that was only by a quarter of one percent. The rest of the MPC seems happy enough to keep rates on hold for the foreseeable future.
And yet at these levels, money is not just cheap: it is, in real terms, effectively free. Inflation remains stuck stubbornly above 3%. The real interest rate is negative, and has been for more than a year now.
A basic rule of economics is that once you change the price of something, you change behaviour as well. With money now virtually free, three things are happening.
First, there is a big upsurge in M&A. BHP Billiton’s $43 billion bid for Potash is only one example. This August has seen more takeover deals than any August since 1999, at the height of the dotcom boom. No doubt the autumn will be even busier.
It makes sense. If a company can borrow money at less than 1% and go out and buy a business yielding 6% or 7% a year, then it isn’t very hard to make a deal stack up financially. When chief executive’s thought 0.5% rates were temporary, they held their fire. Now they are looking permanent, they are starting to do deals based on very cheap money.
Likewise, the housing market remains suspiciously buoyant despite the slump in the economy. Again, it is being propped up by ultra-cheap money. There aren’t any mortgages available at 0.5%, but there are plenty of trackers available at less than 3%. Initially, record low rates were a windfall for home-owners. Their monthly mortgage payments came down dramatically. By now, however, we should assume that many people have bough properties on the assumption they will be paying about 3% a year interest on their mortgage forever.
Savers, too, have started to change their behaviour. There isn’t much point in putting your money into an account paying 0.25% a year or less. It’s hardly worth the trouble of filling in the form. There are plenty of anecdotal reports that savers are switching to corporate bond finds, or high-yielding equities, in record numbers. It is hard to blame them. There isn’t any point in collecting practically nothing on a deposit account when you could be making 5% or more on a bond fund.
The trouble is, as near zero rates come to be accepted as completely normal, behaviour is changing in all sorts of ways. People are starting to act as if those rates will remain indefinitely.
But, of course, they won’t.
The one thing you can say for certain is that if a price is at a three century low, there is nothing normal about it. It’s clearly exceptional. The think tank Policy Exchange predicted last weekend that interest rates could be back up to 8% in two years, as the impact of the huge expansion of the money supply fed through into prices. That may or may not be accurate. Whether it is or not, however, a return to a more normal rate of around 5% is guaranteed at some point in the next two or three years.
When it happens, it is going to be a huge shock to the system. Companies will have made huge takeover deals based on free money. People will have bought houses thinking they would only have to pay 3% on their debts. Savers will be invested in bond funds that may well fall sharply in value once rates start to rise again. The economy will have adjusted to near zero rates – and it will be extremely painful to have to start paying for borrowing again.
The Bank of England probably made the right decision in slashing rates close to zero. The economy did need rescuing. But by allowing that rate to remain in place so long, it is taking a big risk – that companies and individuals get so used to free money, they won’t be able to cope once rates do finally start to go up again.