The time for monetary policy and QE is over: government spending is needed now. It’s time all sides took note

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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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