It's worth unpacking what the IMF is really saying to George Osborne in the blog I've just posted from them, here and here.
Their first suggestion is:
First, monetary stimulus can be provided with further quantitative easing, which evidence suggests can continue to support demand by lowering long-term interest rates and improving banks' liquidity. In line with recommendations made in our report, the Bank of England's Monetary Policy Committee voted on July 5, 2012 to expand further its quantitative easing program. The committee should also keep under review the merits of cutting the policy rate. The recent sharp flattening of the yield curve may have increased the stimulative effect of this instrument, possibly outweighing potential negative effects on money markets and financial stability.
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If QE is simply replacing government debt (gilts) with cash, then by definition outstanding government debt is being reduced….
Also, the banks can create loans independently of any such cash reserves. If no loans are happening it’s either because there is no demand for loans (caused by lack of confidence by companies in extra demand for new products, so expansion is risky, this is in turn caused by lack of demand from debt-laden cash-strapped customers) or the banks themselves don’t think such companies (or entrepeneurs) have a low-risk convincing business plan in these debt-laden cash-strapped times.
In short, supply-side policies are pointless and aren’t working. Demand-side govenrnment intervention (read spending) is necessary – anathema to all existing political parties, as mindless defecit paranoia prevails.
They all need a good dose of MMT with no sugar. Idiots.
The IMF is I think saying demand side action is needed – read the rest of my blogs
You seem confused. The BoE has been using QE as a mechanism to stimulate the general economy, however, due to the banks fear of collapse they are not lending to each other or business. The new BoE’s policy of providing loans to banks provided they pass it on to business is in recognition that their previous QE stimulus wasn’t doing the job.
No, I’m not confused at all
I get all that
So does the IMF
So far as I can see they are saying that we should do more of what is not working: we bailed out the banks and it is not working: and now we are to bail out the rest of the private sector too. It is only if that doesn’t work that they even consider cutting the pace of austerity.
I do not disagree that they are realising what everybody else has known forever: but they haven’t the grace to admit they were wrong nor the conscience to recognise the damage they have done.
Charlatans should all be sacked: they have no idea what they are talking about. We could put their jobs in a prize draw open only to the long term unemployed
No they’re saying pay the private sector to build public infrastructure, I think
And go round the banks to help them get the finance they need is necessary
Why should we take on more debt so the private sector can build infrastructure? The banks have money they can lend if they choose: and there is no reason they should not lend to large companies capable of building infrastructure. If we want to do that (and I think we should) then we should do it directly.
Because it will be state owned infrastructure?
Well we will have to disagree Richard. It is probably the only game in town, so maybe it is progress: but it seems to me that it confirms austerity for the foreseeable future (they say consider slowing it down IF QE and credit easing don’t work) and it incurs more sovereign debt to pass directly to private business by buying “assets” on the secondary market: if they are for sale and the private sector won’t buy them, when they are cash rich, why not? I think it is a bail out of the private sector pure and simple. PFI was an obvious disaster and they do not seem to want to repeat it: but it was done that way because of the EU limits on PSBR so far as I remember and those have not changed. Are there no other ways to give money to the private sector without ending up with the resultant asset: if there are then why will that not happen again? There is no poltical will to support a mixed economy so far as I can tell. What we need is public money for public service and directly for the poor in the form of increased wages and benefits: they will spend it and that is what demand is all about. Infrastructure is a good way to do that: not minimum wage jobs in the private sector.
I don;t think we’re disagreeing about much
All I’m saying is that if the IMF is now saying it’s time to slow down austerity and spend more that’s welcome
But if you’re asking mne whether I think that’s the new economic architecture I desire the answer’s no – and they’ll never be the author of it either!
As you said in another blog post, private companies are also sitting on a lot of cash: the lack of demand is not to do with a lack of liquidity. That is an assumption founded on “it must be so or our economic theory is wrong” At least that is how I see it.
Mervyn King, please note and get to work…