Posted by
beppe on Monday, November 27, 2006 3:31:51 PM
In Great Britain the political elite and mainstream media don't miss an opportunity to stress the positive impact of mass immigration.
Last month Merving King,the governor of the Bank of England,declared that without the the influx of east-european(at least 600,000 since the EU enlargement)interest rates would be at least 0.5% higher.
The link between mass immigration and interest rates is not new,many studies in the past underlined it.
Lower interest rates seem a huge blessing for ordinary folk:houseowners save on the interests they pay for their mortgage,companies can borrow cheaper and invest more,consumers can get credit very easily.
More immigration,less cost,more wealth:it's sounds very good.Too good to be true.
In fact a careful look shows how this statement(like many others in relation to immigration) is misleading.
A great economist passed a few days ago said there is not a such thing such a free lunch.
And low interest rates are not "free".
Leaving away the wisdom of keeping salaries low in order to contain inflation,this is not the topic of this post,
the so called advantages of low interest rates actually are flimsy.
A look at the broader picture reveals a lot of distortions affecting British economy in the form of house price bubble,huge level of personal debt and unprecedented riskness in financial investments.
HOUSE PRICE BUBBLE
Here in the UK the price of houses increased at unprecedented levels.
If 10 years ago the average price for a house was £60,000,now you need at least £180,000.
What is shocking is that this is not happening exclusively in posh areas so much loved by wealthy professionals,but in low income suburbs in London and Outside London.
There are a lot of reasons for that but mass immigration is one of the most important.
Huge number of people boosted the demand for accommodation and affected selling and rent.
However,lower interest rates played a role given that investors,looking for higher returns,increasingly invested in the real estate sector.
How happens in those situations,once the price increase more people flood in so that investors drive the increase and not the opposite.
Apart the risk of a crash,this situation has cut off the market a lot of first time buyers,who cannot afford to buy.
Many key workers struggle to find a place to live and government,rather that trying to reduce immigration,is only able to propose the construction of afffordable house(thus imposing a tax on developers) and planning to build more in the countryside(thus destroying the few remaining green space and by imposing those developments to the local population who cannot oppose it).
HUGE LEVEL OF PERSONAL DEBT
Lower interest rates usually offer consumers the incentive to borrow more money and spend more.
Here in the UK this process went too far so much that now it poses a risk to the stability of british economy.
Bankers love it because they can gain fat commission,so much that this has been the most lucrative area in the financial sector.
The problem is that too many people are too much in the red and the number of them declaring bankrupt is rising.
This spending bonanza comes with a catch:a suddent increase in interest rates makes the economy more vulnerable to external shock because it forces consumers to halt spending abruptly and makes downturns more severe.
Those concerns are shared by many in the financial sector,so much that recently many suggested to sell banking shares because of a possible fall in profits.
UNPRECEDENTED RISKNESS IN FINANCIAL INVESTMENTS
An unintentioned effect of lower interest rates has been an increase in the risk of financial investments.
Lower interests rates mean investors need to find a way to boost returns.
It's not a coincidence if in the last few years there was an increase in the use of derivative instruments.
Traders use high leverage(the ratio between th value of the derivative and the value of the underlining asset at which the derivative is linked) to make more gains,banks are issuing more bonds linked to their loans,private equity firms are borrowing a lot of money to buy listed companies,increase their return and sell them.
This increased use of debt and its spread to other investors is making financial markets more prone to financial crisis.
It's true that actually devivatives can reduce the likeliness and the consequences of a financial crisis but the problem is that no financial crisis occurred in the last few years so no one is able to predict how an external shock can affect the stability of the financial sector and how it wil affect the economy.
The above point should be kept in mind every time anyone stress how mass immigration is reducing interest rates and how the lower interest rates are,the better is it.
Because there is not such a thing as a free lunch.