Leading article

Do you think the age of boom and bust is over? All our party leaders are betting that it is

All the parties seem to be gambling on the era of cheap debt lasting indefinitely

9 May 2015

9:00 AM

9 May 2015

9:00 AM

After working for Bill Clinton, the political strategist James Carville said he had changed his mind about where power really lies. ‘I used to think that if there was reincarnation, I wanted to come back as the President or the Pope,’ he said. ‘But now I would like to come back as the bond market. You can intimidate everybody.’

By this he meant that every political leader, no matter how powerful or radical, lived in fear of going too far into debt, lest the market hiked up interest rates, tipping the government into collapse.

Alas, that’s no longer the case. This magazine ridiculed Gordon Brown for claiming to have ‘put an end to boom and bust’. The idea that you can buck the trade cycle or business cycle is as hubristic as it is economically illiterate. But during the election campaign, each party has assumed that the recovery will never end. The Conservatives plan to run deficits for another three years, and Labour plans to run them for ever. For the SNP and the Greens, forever isn’t enough.

Nowadays, no one is intimidated by the bond market. Everyone is banking on an uninterrupted orgy of cheap debt. Five years ago, when George Osborne passed his first Budget, his message was simple: the bond market has a gun to our head. Look at Greece, he said, crucified on its huge borrowing rates, forced into sado-austerity. Britain needed to balance the books or we’d be next.


Now, Osborne talks about cheap debt as if it has replaced North Sea oil as our biggest natural resource. He plans to increase debt by £150 billion over the next five years. And that’s if all goes well. His latest budget envisages household debt rising even higher than it was before the crash.

The bond market has been letting indebted governments off the hook. Like all markets, it can be manipulated by clever devices such as quantitative easing, as the EU is now demonstrating. Add to this the sheer weight of the Asian savings glut and you have the extraordinary situation of cash being lent at below the rate of inflation. In effect, governments are paid to borrow. Consumers too.

Even bailed-out Spain can borrow at just 1.5 per cent on its loans, better terms than Britain (we’re paying 1.7 per cent). Italy’s industrial base has collapsed, yet the country is still paying only 1.8 per cent. George Osborne has missed his deficit targets again and again, and suffered the ignominy of losing Britain’s AAA credit rating. But the bond markets haven’t cared, and are lending at ever cheaper rates. No one mentioned this during the election campaign, yet the effects of the debt binge can be seen everywhere.

Why are house prices so high? Yes, supply of new houses is a problem. But so is the basic mortgage rate: if you can borrow at the astonishingly low two-year fixed rate of 1.09 per cent (the latest offer from the Co-op Bank), then you can afford to splurge more on a house. That pushes prices up. Cheap loans mean high prices — for houses and other assets. Those who can’t afford to buy, or to move somewhere with more space, have the bond market (and QE) to blame. All of this has fuelled another asset boom, which exacerbates inequality.

How long will this madness last? Andrew Haldane, the chief economist of the Bank of England, recently produced a chart suggesting that the era of negative real interest rates will be with us for 40 years. If so, this will upend everything we have come to know about saving and borrowing. With interest rates nonexistent, there is no incentive to save. Inherited property will start to matter more and the old practice of marrying into money will find new life in the 21st century.

Britain has become so deeply addicted to debt that low rates are treated as an unequivocally good thing. But rock-bottom rates punish savers, subsidise the profligate, make property even more unaffordable and inflate an asset bubble which has allowed the richest 3,000 people in Britain to double their wealth by doing very little. This distorts markets, crushes hope and fuels justifiable anger about inequality.

There is an unwritten rule in politics: if you can’t fix it, it ain’t broke. No party wants to admit to the problems thrown up by the era of cheap debt. No one wants the Bank of England to raise rates; everyone wants to keep living in this bizarre era of rock-bottom interest rates, dangerously cheap loans and surging asset prices. The next five years in British politics will be full of uncertainties. But we can be sure of one thing: every political party is now betting that the era of boom and bust is over. As we have seen before, that is a dangerous gamble.

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  • Derek

    This article nails the key issue no one has mentioned in the election campaign. You can placate your creditors if you have a credible plan to reduce your debts, or at least the pace of their accrual.

    If the market loses faith in your plans, mortgage rates loans to corporates and governments which has been baked in to all budgets (household, corporate and government) will increase, meaning less economic activity, less scope for pay increases and no more magic unicorns for the government to hand out. At least a lot of our debts are long term and have been refinanced, but imagine the national debt at 1.7trn on an average interest rate of just 4%, that blows a hole so wide in every parties spending plans to lead to some genuine austerity, the kind that in the early nineties led to health spending falling in nominal terms, imagine selling that to your over-entitled constituents.

    The bond market will become restive as the amount of outstanding gilts owned by the BoE diminishes (in percentage not nominal terms – QE will never be unwound) and actual real buyers have to buy these promises.

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