Money is rotting

Punters and pundits alike reacted to rising mortgage rates in the wake of Truss’s mini-Budget with indignant horror. Leaving aside a market overreaction to fairly modest policy proposals, I wanted to tell aghast homeowners: ‘Well, what did you think was going to happen, people?’ In 2008, the plunging of central bank rates to nearly zero was super-weird. (EU rates eventually going negative, meaning you paid banks to keep your money, was even weirder.) Flatlined interest rates were a response to an emergency. Yet when emergency measures continue long enough, they start to seem totally normal, in this case inducing the bizarre expectation that borrowing money will be basically free, for ever.

Sorry, virtually free borrowing is intrinsically dysfunctional. It (surprise!) encourages more borrowing, so that central banks essentially solved a debt crisis with more debt. Combined with rampant money-printing, zero interest rates were a short-term expedient that made the big picture still worse.