So another rate cut by the Bank of England to the lowest ever in its 315 year history; quite something!

The next couple of years will tell us whether these cuts will work or not, but it does seem in the short-term to be counter productive.  Retail banks are not lowering their mortgage rates because the LIBOR rate is too high, and the lowering of interest rates greatly affects savers at the very time when the government is asking us to save more!  Therefore it is questionable as to who it helps in the short term.  VAT has been reduced, but on the typical item of clothing, say at £30, this is hardly putting money back in people’s pockets.

There are even suggestions that the government will have to “expand the money supply”, which to you and me is printing more money and potential inflation.  If this happens, the question that follows is who gets this new printed money?  It’s our old friends the banks of course.  The government will buy assets in the banks in exchange for newly printed money.  However, I am pretty sure that was what happened in the recent bank bailout, no?

Ultimately, there may well be a shift in consciousness here.  We have been living in a false economy for some time built on credit that doesn’t seem to exist.  “Where has all the money gone” seems an apt question right now.  With debt levels so high, the money supply may have naturally contracted with the increasing payments people need to make.  The only action that may be logically left for the government is to increase the money supply to make up for the shortfall.  However, we are walking into an inflation minefield, the one the current Prime Minster said would never happen again.

I believe we need a mentality shift away from credit, and until drastic action is taken, such as cancelling large percentages of debt, the current problems may well persist.