Ambrose Evans-Pritchard argues in the Telegraph this morning that:
The damp kindling wood of global economic recovery is poised to catch fire.
For the first time in half a decade of stagnation, government policy has turned expansionary in the US, China and the eurozone at the same time. Fiscal austerity is largely over. The combined money supply is surging.
He acknowledges that he is out of line with most forecasters (me included) in saying so.
His belief that an increase in money supply, mainly in China, heralds recovery seems misplaced to me in an era of QE.
And I do not see a combined round of real investment sweeping China, the US and EU (the UK excepted). But again, I may be wrong.
What I am quite sure of is the UK could not share in such a recovery in any meaningful way. We have a government committed to shrinking GDP over the next four years. That's what cutting government spending from 40% to 36% of GDP means: the cut is not only itself a direct contributor to reduced GDP but the reduced activity does in turn have a multiplier effect that means that the private sector also reduces its activity as people have less money to spend.
The OBR assume such spillover effects are small - which is the inverse way of their saying they think the benefit of government spending is very limited, but it's almost impossible to see how they come to their conclusions. And in that case whatever happens in the rest of the world we're set on a downward strategy by choice, thanks to the Chancellor and his dogmatic belief that we must shrink the state even if it spites us to do so.
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Add in the effect of inequality: whatever benefits there are, they all go to a narrow segment of the population.
If, as you say,there is any recovery at all.
All this, against a background of increasing inequality: we’re not standing still, we’re losing ground as more and more wealth is transferred upwards, and more and more of the economic activity that creates wealth is displaced by rent-seeking.
And note also JCB’s announcement of job cuts today.
Not to mention the 10,000 or more jobs lost due to the steel works closing in Redcar. Wonder what that has done to the falling unemployment figures.
I am not sure what evidence you have for the coming deficit reduction to cause the GDP figure to actually shrink?
After all over the last few years the deficit has continued to fall :-
http://www.ons.gov.uk/ons/resources/psnetborrowinghistory_tcm77-411761.png
While GDP has continued to rise :-
http://www.ons.gov.uk/ons/resources/figure2_tcm77-402574.png
So if the reduction in the Government spending has not caused GDP to shrink over the last few years why will it suddenly do so in the next few years?
You might have meant to say that GDP would be even bigger if Government spending increased or held at the current 40% but that is not the same as shrinking.
If you want people to listen to your comments then they need to be accurate!
I was accurate
You are referring to the past and I was referring to the future
Never let such things worry you
I am suggesting we are heading for problems including potential GDP fall
That we have already suffered is beyond dispute in my opinion
There has been a massive expansion of M2 in China which the FT reports on here :http://www.ft.com/cms/s/3/c85cb7b0-62a1-11e5-9846-de406ccb37f2.html#axzz3qc9IR0Gh and I suppose the nuclear investment is part of the cash expansion. China is set to be a huge rentier wealth extractor in Africa and now this country, not to mention the housing bubble it contributes to in London (not to mention their own).
In the UK no recovery is possible due to the housing fiasco which free market fundamentalism has created.
If global surpluses could be used for social benefit then maybe that would be a good thing but (as with China in Africa) it tends to result in a form of economic suzerainty.
The front page of the FT today reports that there was a power shortage in the UK yesterday such that the price the National grid paid for some of its electricity rose to 50 times its normal level and asked heavy users to moderate their activity. I think it is obvious to all that our infrastructure is creaking. We need to get away from the focus on debt and invest to keep the country going.
Also, on John’s comment, JCB is always a great barometer: because it is family owned they can make decisions quickly, and generally call things well.
“The damp kindling wood of global economic recovery is poised to catch fire.
For the first time in half a decade of stagnation, government policy has turned expansionary in the US, China and the eurozone at the same time. Fiscal austerity is largely over. The combined money supply is surging.”
He neglects to mention that almost all of this QE money bonanza has by-passed the real economy, which is still largely starved of investment.
Also, China is on a downturn. One major reason was the bursting of financial bubbles. However, due to insane fiscal austerity in the EU, and to some extent, the UK, China has been gradually losing ground as the residents of these countries have had less to spend on goods ad services due to enforced austerity.
UK wages and investment are still stagnant and the government continues to cut public spending at an alarming rate, as does the EU. Unemployment is at record highs in Greece, Spain and Italy. Even Germany are having problems.
Pray tell under these circumstances is this expansion supposed to come from?
This appears to be pure propaganda and wishful thinking.
An interesting read:
http://wolfstreet.com/2015/11/04/corporate-profits-are-the-stock-markets-foundation-what-will-break-them/
And the sequel:
http://wolfstreet.com/2015/10/15/what-will-cause-the-next-recession/
Even more interesting:”the US is “not in the market” to negotiate a bilateral trade deal with “individual nations” like Britain”
http://wolfstreet.com/2015/11/01/us-threatens-uk-over-brexit-vote/
Shrinking government spending…..is what cutting government spending from 40% to 36% of GDP means: the cut is not only itself a direct contributor to reduced GDP but the reduced activity does in turn have a multiplier effect that means that the private sector also reduces its activity as people have less money to spend…
This doesn’t sound right for the simple reason that, in principle, it is equally possible to have a successful economy which has a higher or lower level of government spending.
The mistake being made by those of a right wing disposition, who might prefer a smaller government, is to confuse this with their desire to have a smaller government deficit. Reducing spending without cutting taxes will only send the economy spiralling downwards into recession, thereby increasing the numbers of economically disadvantaged people who will demand a larger government involvement in the economy as a solution to their problems.
So even from their POV, unless perhaps they are part of the ultra wealthy 1%, austerity economics makes little sense.
But it is right that cuts in gov’t spending reduce GDP
And it is right there is a multiplier effect
The OBR assume it is less than the cut i.e. there is replacement private sector activity
I doubt it is of the scale they suggest
But that cuts make GDP growth in the short term (and we can control little else) harder to achieve is, I would think, indisputable
I agree that we shouldn’t make cuts unless and until demand-pull inflation starts to become an issue. But we’re not Tories wanting wanting a smaller state.
However, say we were, and we wanted to use our economic knowledge to achieve that goal. How would we do it? My point was that fretting about the deficit is counterproductive. A sort of Reaganomics approach might not be. Reagan was persuaded by Arthur Laffer that he’d increase his tax revenue by generally reducing taxes. That can only work with individual taxes. For example, if we reduce capital gains tax that could raise CGT revenue but probably at the expense of income tax revenue. There’d be more incentive to switch incomes to capital gains.
But cutting taxes can work in a Keynesian sense too. So I would argue that Reagan’s relative success was because he was an accidental Keynesian! As Dick Cheney said “Reagan proved that deficits don’t matter”.
But Reagan never thought that! How about that for luck?
1) But it is right that cuts in gov’t spending reduce GDP
2) And it is right there is a multiplier effect
3) The OBR assume it is less than the cut i.e. there is replacement private sector activity
1) Highly likely, else why do fiscal stimulus, ever ?
2) Yep.
3) Possibly, the external “wall of money” effect. It might show up in the current account.
Much talk of the “wall of money” prior to 2010. Less so now (strangely)
The counter argument is “public sector crowding out” the private sector.
Seems it is a “common sense” thing, rather than being based on any economic theory/empirical evidence.
So, over to the wingnuts to prove otherwise.
Or not ?
1) “But it is right that cuts in gov’t spending reduce GDP ”
Yes.
2) “And it is right there is a multiplier effect”
Another yes
3) The OBR assume it is less than the cut i.e. there is replacement private sector activity.
Unless there are tax cuts too the effect could well be more than the cut. There are the direct effects of the cuts and the psychological effect of everyone reducing their discretionary spending in anticipation of tough economic times ahead. In addition banks will become wary of lending into what they perceive to be a risky market. You’ll know we are really in the mire when the words credit crunch start to make a reappearance.
The economic theory is largely in the sectoral balances. Anyone understanding what they’ll see in the recent record will have a pretty good idea of what’s to come and it isn’t looking at all good!