Keynes, QE and the need to be positive in the face of some pretty grim alternatives

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My old friend and Green New Deal colleague Larry Elliott is in speculative mood in the Guardian today. He muses on what Keynes would think if he were to come back to life today. The piece is worth reading in full. This extract comes from the conclusion:

Before you go, [Keynes] is asked, what advice do you have for policymakers in 2016. Keynes outlines three alternatives to the status quo. The tax-cutting and infrastructure spending plan proposed by Trump will lead to stronger growth in the short term, but Keynes says he is not especially impressed. He fears that there will be little extra investment in the public infrastructure that the US actually needs and that the stimulus will be poorly focused.

The second option would be to exploit exceptionally low interest rates by borrowing for long-term investment projects. Governments could do this without alarming the markets, Keynes says, if they followed his teachings and borrowed solely to invest.

Option number three would involve being more creative with quantitative easing, Keynes says. Instead of the newly created money being used for speculative plays, why shouldn’t governments use it to finance infrastructure? Building homes with QE makes sense; inflating house prices with QE does not.

There is, he adds, another escape route. We were building up to it in 1936 and it arrived three years later. Not recommended.

Larry's concerns about Trump are well placed. He is spot on with options two and three. And like so many he is worried about the alternatives, all of which are worse by a long way than taking action of the types that I agree that Keynes would recommend now.

When will governments act with sense?