The FT's reported this afternoon:
Central banks must head for the exit and stop trying to spur a global economic recovery, the organisation representing the world's monetary authorities has warned following a week of market turbulence sparked by the US Federal Reserve's signal that it would soon cut the pace of its bond buying.
The Basel-based Bank for International Settlements used its influential annual report to call on members to re-emphasise their focus on inflation and press governments to do more to spearhead a return to growth.
I do not always agree with BIS, let alone central bankers, who I think have been given far too much power, not least in the UK. But on this occasion BIS is right: the time for monetary intervention is over and direct action is needed instead.
QE has helped, but holding off the impact of debt and by providing some liquidity, but far too much of it has simply been used by banks and not been passed on. Low interest rates could last for a long time; indeed, anything else would be madness. And inflation at 3% or 4% should not worry anyone - especially if wage led. But none of this will get us out of recession. Only government spending will do that. And that spending has to be paid for with borrowing in the short term - and maybe quite a lot of it.
Candidly, this should be obvious to anyone. Austerity has not worked. Despite it - and maybe precisely because of it and its impact on unemployment and benefits - borrowing went up last year (even if only slightly) to over £118 billion. To supposedly address this Osborne is demanding £11.5 billion of cuts - which will, in the scheme of things, have no impact on debt but will enormously harm services and the functions of government, and society in turn. As apolicy it, like QE, is now very obviously failing to deliver because any positive desired impact has long past and the current consequences are almost entirely negative.
So now the time has come for the only alternative that economics can show will work - which is borrowing led spending on investment. This has to be matched by an end to absurd fiscal rules, and instead a serious programme of public education has to start to make people aware that the only way to end the deficit now is to borrow and invest.
That, of course, could be done. That should be done because every other will deliver stagnation, maybe deflation, depression and worse. But will it be done? The appetite does not appear to exist. I despair of Labour's rhetoric on this issue, which has basically conceded that it will fight the next election on right wing economic territory. That's no way for it to serve the people of this country. There is just one viable solution left now the BIS is saying to the problems we face. It is for governments to take action. In 2009 they were all Keynesians, briefly. We need them to be so, very badly, again now.
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Agree with the article. Austerity and cuts are the wrong way to get out of depression. On the contrary, government should kick start the economy by more spending- but on the right endeavours and projects.
Having said that, spending borrowed money should be the first, not continued, step towards recovery. This should be followed by a rigorous plan to enhance productivity in the country- something that has disappeared for many years. For productivity the sky is limit while cuts are absolutely limited by depth of the well.
My local Conservative MP keeps repeating the mantra that we cannot follow your advice because increased borrowing will inevitably mean increased interest rates including of course increased mortgage rates. I am sure, Richard, that you have written about this but I cannot find where – can you point me (and probably others) in the right direction please.
I have not very much
But then Paul Krugman has done it extensively so I refer you to him
Or Martin Wolf on the FT
“The Basel-based Bank for International Settlements used its influential annual report to call on members to re-emphasise their focus on inflation”
I might be missing something but that looks to me like the BIS are trying to tell central banks that ‘inflation’ is the worry going forward and that to increase growth a tighter monetary policy is required. That’s how it reads to me anyhow?
But they’re wrong: deflation is the likely problem
Time to revisit Kalecki’s Political aspects of full employment? anyone for negative interest rates? 😉
On further reading it appears that not only are they looking for higher short term interest rates and an end to QE [two sides of the coin] but also tighter fiscal policy.Action to spur growth means cutting deficits and instituting labour market reforms [means make it easier to sack people].
They may be
I am not
We agree that it’s not the duty of central bankers to stimulate the economy but not on whether stimulus is needed
Central bankes have always been happy for people to suffer
If the QE is solely used to pump the world’s speculative activity, then I agree it should stop. It is a great shame it wasn’t used to create infrastructure (like carbon-free energy) and work; the world’s economy wouldn’t be in the doldrums it’s in. In a perfect world (not ruled by the financial elite and plutocrats), we could see the nations of the Eurozone for example, nominate infrastructure projects and social needs (housing, education, etc), issue bonds against these and the ECB purchasing them and liquidating the debt.
“Low interest rates could last for a long time; indeed, anything else would be madness. And inflation at 3% or 4% should not worry anyone — especially if wage led”
Unless you are a pensioner who has prudently saved for retirement. In which case your income drops to nothing, your expenses rise and you have no way of alleviating your poverty. No worries!
I’m sorry – but pensioners have done extraordinarily well – from property
The time to give the young a chance has arrived
But I somehow suspect that this won’t be an argument that any major political party will be making in the near future. Of course you are largely correct.
Some pensioners may have done well from property. However, we still have to live somewhere, so it’s actually our offspring that do well from property, providing we have enough money to keep it in good repair.
I agree
But then pensions are paid by people in work – not out of savings
So pensioners definitely need people in work
So my logic still holds
QE is yet another reliance on the fabled ‘trickle down’ method and I seriously doubt if it was ever meant to work in the way it was sold to the general public. If you desperately needed to get water to trees/plants you’d concentrate on the roots and maybe give the odd squirt to the canopy.
Whether you agree with Richards Green aspects of his New Deal, and I do, doesn’t really matter. The idea of creating growth by seeding/feeding the base isn’t a tough one to grasp. The Green aspect is just akin to pruning to encourage growth in the right direction or to curtail areas of bad growth.
Don’t worry I’m sure the financial sector will step up to the plate to ensure a strong worldwide economic recovery!
http://www.theonion.com/articles/financial-sector-thinks-its-about-ready-to-ruin-wo,32865/
Perhaps not;-)