Well done Gideon

[BillyStubbsTears]

Glyn

To be fair to Thatcher (Jesus - never thought I'd hear myself say THAT) there was a economic rationale behind what Thatcher was trying to achieve. The problem by the late 70s was inflation and the classic way to throttle inflation out of the system is to raise interest rates and depress demand. That's what she did. (Whether it worked is another issue altogether...)

Conversely, when the problem is depressed demand, the classic solution is to lower interest rates and encourage investment. But when you have a global collapse in demand as spectacular as the one in 07/08, even reducing interest rates to zero doesn't do the trick.

The ONLY thing that Governments can then do is to borrow and spend to make up the shortfall in demand and get the wheels if the economy moving again.

Constricting Govt spending just exacerbates the slowdown and delays the recovery.

UK and Europe constricted Govt spending. We've all experienced a prolonged slump and a delayed recovery. No shit Sherlock? And yet, to the likes of Osborne, the OBR, Olli Rehn etc, this is a surprise. This wasn't supposed to happen according to their calcs. Because their calcs are predicated on the fiscal multiplier being small (ie Govt spending being inefficient). But every week that this crisis goes on makes it more and more obvious that the basis of their calculations are simply incorrect.

[RobTheRover]

...... full of people ludicrously thick or optimistic.

If ever they fall short of members then they could borrow a few from here!

[Glyn_Wigley]

The problem by the late 70s was inflation and the classic way to throttle inflation out of the system is to raise interest rates and depress demand. That's what she did. (Whether it worked is another issue altogether...).

Although Quantity Theory Of Money goes way back, the Monetarist methods that Maggie espeoused were only outlined by Milton Freidman in 1956, so far from being a classic method of controlling inflation it was pretty much untried when she came to power.

This was because the nature of the Money Supply had changed in the 20th century:

The M1 measure was the classic definition of the money supply; basically the total value of the coins and notes in circulation. As such it was relatively easy to use the money supply to control the economy - money could be just collected as taxes and not respent, instead just sitting vaults not circulating.

However, by the late 20th century 'virtual' money not in the hands of the central bank but with just as much purchasing power as real money (ie credit, cheques, other transferable assets) had spread from just the business community to pretty much the whole population. The measure of the Money Supply that included this was M3. It was the attempt to control of this section of the Money Supply that was new and untried.

It's also the lack of the M3 credit that is hampering any recovery because it's shrunk the money supply: hence quantative easing, which is an attempt to expand the money supply though increasing M1 and get money circulating and creating demand instead of banks sitting on money and not lending it.

[BobG]

As one very simple example of exactly the point that Glyn made at the foot of the previous page (the constriction of the money supply) I happen to be in the market for a mortgage with which to buy a property for subsequent renting. I know that's anathema to some, but that's the way it is. Now, I am employed, I have what is considered to be a bloody good salary, my own private mortgage is only 35% of the value of my house and will be paid off in May this year too, I have an absolutely spotless 15 year track record of being a rentier, I own another property in Swindon outright, I have a 50% share in the ownership of another 16 properties in Milton Keynes. I have never been late making a mortgage payment. I have access to upwards of half a million in equity. I am a sodding great bet when it comes to lending money to people. There are very few who will have a better record than me.

And guess what? On any half way sensible basis what I propose to do is profitable - for both the lender and for me. But the banks and co are so shit scared that they all, all, want to impose such restrictive conditions that, even if they'll lend at all, it becomes plain pointless.

So I shan't bother. And bang goes another £10K of spend to the economy - on stuff like paint, wood and all the crap, and people, that would have resulted from a tidy up. Ergo - I am now forced to help the economy contract even further.

This is the economics of the mad house.

BobG

[Sheepskin Stu]

Can you lend me fifty quid to mend the shed?

[Glyn_Wigley]

As one very simple example of exactly the point that Glyn made at the foot of the previous page (the constriction of the money supply) I happen to be in the market for a mortgage with which to buy a property for subsequent renting. I know that's anathema to some, but that's the way it is. Now, I am employed, I have what is considered to be a bloody good salary, my own private mortgage is only 35% of the value of my house and will be paid off in May this year too, I have an absolutely spotless 15 year track record of being a rentier, I own another property in Swindon outright, I have a 50% share in the ownership of another 16 properties in Milton Keynes. I have never been late making a mortgage payment. I have access to upwards of half a million in equity. I am a sodding great bet when it comes to lending money to people. There are very few who will have a better record than me.

And guess what? On any half way sensible basis what I propose to do is profitable - for both the lender and for me. But the banks and co are so shit scared that they all, all, want to impose such restrictive conditions that, even if they'll lend at all, it becomes plain pointless.

So I shan't bother. And bang goes another £10K of spend to the economy - on stuff like paint, wood and all the crap, and people, that would have resulted from a tidy up. Ergo - I am now forced to help the economy contract even further.

This is the economics of the mad house.

BobG

And the best solution is for the government to step in do what the banks aren't doing - lend to businesses. And you'll notice I said lend, not give. And only to someone who can show that the exact same thing has been turned down by a high street bank already. The banks can't complain about competition if they're not not willing to operate in that market.

[BillyStubbsTears]

Glyn.

Or actually GIVE the money out to businesses and individuals. One point that both Friedman and Keynes would have agreed on when you are at the zero lower bound on interest rates is that Govt should expand the monetary base AND GET IT INTO HANDS THAT WILL SPEND IT. Friedman coined the term Helicopter Money, suggesting that in such a scenario, the Governor of the Fed should sprinkle dollar bills from a helicopter.

The debate on this concept is (finally) starting to be taken seriously among policy makers. If we have another year of flatlining throughout the developed world, it'll get taken more seriously still.

[Glyn_Wigley]

Glyn.

Or actually GIVE the money out to businesses and individuals. One point that both Friedman and Keynes would have agreed on when you are at the zero lower bound on interest rates is that Govt should expand the monetary base AND GET IT INTO HANDS THAT WILL SPEND IT. Friedman coined the term Helicopter Money, suggesting that in such a scenario, the Governor of the Fed should sprinkle dollar bills from a helicopter.

The debate on this concept is (finally) starting to be taken seriously among policy makers. If we have another year of flatlining throughout the developed world, it'll get taken more seriously still.

The right-wingers will decry anything that smacks of giving money away. However, there's nothing to stop any lenders having very easy terms.

[The Red Baron]

Glyn.

Or actually GIVE the money out to businesses and individuals. One point that both Friedman and Keynes would have agreed on when you are at the zero lower bound on interest rates is that Govt should expand the monetary base AND GET IT INTO HANDS THAT WILL SPEND IT. Friedman coined the term Helicopter Money, suggesting that in such a scenario, the Governor of the Fed should sprinkle dollar bills from a helicopter.

The debate on this concept is (finally) starting to be taken seriously among policy makers. If we have another year of flatlining throughout the developed world, it'll get taken more seriously still.

One way to do that would be to cut taxes, both for individuals and businesses.

[Glyn_Wigley]

One way to do that would be to cut taxes, both for individuals and businesses.

A sledgehammer to crack a walnut. You wouldn't be directing it at where it does most good and not getting the most effective stimulus for the cost of it.

[BillyStubbsTears]

Glyn.

Or actually GIVE the money out to businesseso and individuals. One point that both Friedman and Keynes would have agreed on when you are at the zero lower bound on interest rates is that Govt should expand the monetary base AND GET IT INTO HANDS THAT WILL SPEND IT. Friedman coined the term Helicopter Money, suggesting that in such a scenario, the Governor of the Fed should sprinkle dollar bills from a helicopter.

The debate on this concept is (finally) starting to be taken seriously among policy makers. If we have another year of flatlining throughout the developed world, it'll get taken more seriously still.

One way to do that would be to cut taxes, both for individuals and businesses.

TRB

As Glynn says, that ain't going to be the best way to do it. The key was in the bit in capital letters. If you want to stimulate the economy, you have to get money circulating. There's no point directing money into people's pockets if it just stays there. That is why the cries for Corporation Tax to be cut are particularly stupid. Companies are already sitting on hundreds of billions of pounds that they are too scared to invest. Why give them more money to sit on?

What we need to do is put money into places where it will be spent. Do you know the easiest way to do that? Increase welfare benefits. That's trick No1. No2 is to spend money on projects that employ poorly paid staff who will spend most of their new income. Stuff like construction.

Now. This lot in power. They cut capital investment on Day One. So that was construction f**ked. And they make a big play on cutting benefits.

And I thought Cameron had a First in PPE from Oxford? I assume the PP saw him through because he seems to know f**k all about the E

[Filo]

Glyn.

Or actually GIVE the money out to businesseso and individuals. One point that both Friedman and Keynes would have agreed on when you are at the zero lower bound on interest rates is that Govt should expand the monetary base AND GET IT INTO HANDS THAT WILL SPEND IT. Friedman coined the term Helicopter Money, suggesting that in such a scenario, the Governor of the Fed should sprinkle dollar bills from a helicopter.

The debate on this concept is (finally) starting to be taken seriously among policy makers. If we have another year of flatlining throughout the developed world, it'll get taken more seriously still.

One way to do that would be to cut taxes, both for individuals and businesses.

TRB

As Glynn says, that ain't going to be the best way to do it. The key was in the bit in capital letters. If you want to stimulate the economy, you have to get money circulating. There's no point directing money into people's pockets if it just stays there. That is why the cries for Corporation Tax to be cut are particularly stupid. Companies are already sitting on hundreds of billions of pounds that they are too scared to invest. Why give them more money to sit on?

What we need to do is put money into places where it will be spent. Do you know the easiest way to do that? Increase welfare benefits. That's trick No1. No2 is to spend money on projects that employ poorly paid staff who will spend most of their new income. Stuff like construction.

Now. This lot in power. They cut capital investment on Day One. So that was construction f**ked. And they make a big play on cutting benefits.

And I thought Cameron had a First in PPE from Oxford? I assume the PP saw him through because he seems to know f**k all about the E

PPE? Has the Health and Safety Executive got onto the PM`s back now?

[The Red Baron]

One way to do that would be to cut taxes, both for individuals and businesses.

A sledgehammer to crack a walnut. You wouldn't be directing it at where it does most good and not getting the most effective stimulus for the cost of it.

You seem to be working on the assumption that politicians and central bankers are wiser at spending money than individuals and businesses. I'd have thought if the last few years have taught us nothing else it is that the assumption is flawed.

[The Red Baron]

Glyn.

Or actually GIVE the money out to businesseso and individuals. One point that both Friedman and Keynes would have agreed on when you are at the zero lower bound on interest rates is that Govt should expand the monetary base AND GET IT INTO HANDS THAT WILL SPEND IT. Friedman coined the term Helicopter Money, suggesting that in such a scenario, the Governor of the Fed should sprinkle dollar bills from a helicopter.

The debate on this concept is (finally) starting to be taken seriously among policy makers. If we have another year of flatlining throughout the developed world, it'll get taken more seriously still.

One way to do that would be to cut taxes, both for individuals and businesses.

TRB

As Glynn says, that ain't going to be the best way to do it. The key was in the bit in capital letters. If you want to stimulate the economy, you have to get money circulating. There's no point directing money into people's pockets if it just stays there. That is why the cries for Corporation Tax to be cut are particularly stupid. Companies are already sitting on hundreds of billions of pounds that they are too scared to invest. Why give them more money to sit on?

What we need to do is put money into places where it will be spent. Do you know the easiest way to do that? Increase welfare benefits. That's trick No1. No2 is to spend money on projects that employ poorly paid staff who will spend most of their new income. Stuff like construction.

Now. This lot in power. They cut capital investment on Day One. So that was construction f***ed. And they make a big play on cutting benefits.

And I thought Cameron had a First in PPE from Oxford? I assume the PP saw him through because he seems to know f*** all about the E

I'll agree with you on capital spending. Trouble is, it is an easy thing to cut because by and large it doesn't provoke squeals of protest. If you were a politician of any party and you had to choose between cutting, say, a house-building project and something like EMA, you'd probably choose the former- even though overall it would give you greater long-term benefits.

I can't agree with you on welfare payments, though. I take your point that benefit claimants will spend that money, hence stimulating demand (I'll avoid the obvious jokes that it will go on fags, booze and plasma TVs.) However, it will perpetuate the problem of an underclass that can "earn" more money for doing nothing than for doing a basic job.

Why not give people who make the effort to go out to work or set up a business a break? OK, they may use the extra money they get from tax reductions to pay off their debts- but once they've done that they will start to spend again.

And no, I don't mean extra money for "the rich" (which when you look closely usually means people who earn a few grand more than average salaries) but for the hard-working majority- via raising tax thresholds, maybe a cut in fuel duty, maybe the removal of ENIC (which is simply a payroll tax).

Trouble is, Osborne has painted himself into such a corner that he now lacks the imagination or courage to do even that. 

[Glyn_Wigley]

One way to do that would be to cut taxes, both for individuals and businesses.

A sledgehammer to crack a walnut. You wouldn't be directing it at where it does most good and not getting the most effective stimulus for the cost of it.

You seem to be working on the assumption that politicians and central bankers are wiser at spending money than individuals and businesses. I'd have thought if the last few years have taught us nothing else it is that the assumption is flawed.

I don't need to think it, it's already happened with the tax cuts Gideon's made - they've just gone straight under the corporate mattresses and not been spent in investment.

[BillyStubbsTears]

TRB

The danger with any cuts on tax on income is that this will go straight into paying off personal debts. It's the same with ENIC. Neither of those does anything to stimulate demand. Getting demand going requires injections if money that will circulate round the economy, not be used to pay off debts. Paying off of debts can come when we've got the economy going, not before. Otherwise it is entirely self-defeating.

That is why cutting VAT was a classic approach to demand stimulation. It made it cheaper to spend and so helped keep up demand in the economy. Osborne's first act was not just to rescind that cut, but to increase VAT still further. Economic stupidity done for ideological reasons (because Tories ideologically prefer to tax consumption rather than income.)

As I say, it really isn't rocket science. But as YOU say, Osborne has painted himself into a corner by insisting that the debt has to be tackled first. He now cannot admit what pretty much the whole world is screaming at him - that we're f**ked if Govt doesn't do something to get demand going.

[The Red Baron]

I fail to see why cutting ENIC (I'd abolish it personally but I doubt that can be done in one hit) would not stimulate demand. It is a tax on jobs- remove that and you can employ more people. I take your point on Corporation Tax- why give businesses a benefit there when many big ones are sitting on piles of cash. Although don't forget a Corporation Tax cut would be about attracting more inward investment.

Anyway, QE was supposed to get money circulating around the system and that didn't achieve its objectives. As you hinted in one of your previous comments on this thread, economists and central bankers have much in common with military strategists- they tend to fight the last war. Just as the British High Command in 1914 thought that wars were won by cavalry charges, so current economic thinking asserts that if we keep monetary policy loose for long enough then eventually the dam will break and demand will increase.

My view is that we are now coming round to the fundamentals of all this- debt is the problem. If you add up personal and Government debt in the UK it doesn't make a pretty picture. That's why the pound is falling through the floor, and that is why (rather than Osborne's mismanagement) we've lost our AAA rating. I suspect we are looking at years of low growth - a lost decade (a generation maybe) - not just in the UK but also in the US and the eurozone.

[BillyStubbsTears]

TRB

When your debt problem is as big as ours, there is only one way to get out of it. You HAVE to grow, combined with mild inflation. There is no sensible alternative other than the Armageddon of default. THAT was Osborne's stupidity. He assumed that growth would follow from some fabled "confidence" coming into the economy if he cut spending.

This is unforgivable because we've known the technical solution strategy for this problem for 80 years. But in the UK and EZ, policy makers have quite deliberately ignored this solution for entirely ideological reasons.

As for ENIC, cutting that does nothing for demand. It is a supply-side cost reduction. It reduces the cost of employing people and therefore, potentially reduces the cost if supplying goods and processes. But companies will only take new staff on if there is DEMAND. There is no evidence whatsoever that the economy is being throttled by companies being stopped from taking on new staff. On the contrary, the collapse in productivity strongly suggests that companies have retained more staff than they really need in the hope that they can spring back when demand finally rises.

We MUST get demand up in the economy. This is by far and away our most pressing and dangerous problem.

[BillyStubbsTears]

PS. The issue with QE is that policy makers have grown to their positions of influence in an era in which monetary policy was dominant. So they naturally look to monetary solutions to problems. That usually means reducing interest rates to spur economic growth. But we're already effectively at zero interest rates. So they have to go to unorthodox monetary approaches like QE.

QE has possibly helped mitigate the worst of the crisis but it is demonstrably not enough. We COULD try still more unorthodox monetary approaches, like Helicopter Money. But no-one seems to have the balls to go that far off the cliff.

What has been totally off the table for three years is the idea if fiscal stimulus, even though it has a well-established theoretical basis and even though it clearly and demonstrably helped a very quick rebound from the depths of the crisis in UK and USA when it was applied in a panic in 08-09.

It is entirely an ideological choice to eschew fiscal stimulus now.