I see John Redwood was up bright and early this morning, blogging away. At 6:34am he posted that:
“…the [cuts] strategy has worked, bringing interest rates on government borrowing down and seeing off a possible Greek or Irish style borrowing crisis.”
Well, maybe. But there’s an alternative explanation which would chill the former Minister’s blue blood. I would have thought traders would pay a lot of attention to the interest rate desired by a central bank able to use QE to drive down yields to whatever level it desires. FT Alphaville suggests that the Fed, at least, might decide to simply target long-term interest rates rather than apply a specific amount of QE. Not a market to short just now, I would have thought. Much safer to bully the Portuguese.
For the record, I can’t help a nasty feeling about all this QE. The danger is letting inflation catch up with us. A bit of inflation right now would be a jolly good way to get rid of all that negative equity. But if inflation expectations sneak up on us the Old Lady would be compelled to sell off her QE bonds at a loss to soak up excess cash. And it would suddenly make new government debt rather expensive.
Still, there don’t seem to be any better ideas out there. And the clear and present danger, as pointed out by Posen, does seem to be a Japanese style “lost decade”.
But it was what the Vulcan did next that really amused me. He was on the Today programme this morning absolutely fulminating that the Deputy Governor of the Bank of England, Charlie Bean, had suggested that if savers spent some of their money it might benefit the economy. Redwood apparently believes that: “We are all collectively embarked on cutting the mortgage and putting some more money into savings and pensions.” Yes, “all”. How does that work, John? Where does this money come from? The same magical mystery place as bank interest apparently, since the former stalking horse also lectures us that: “Consumers might spend more if they got a better return on their savings and had more savings income” and that: “As house prices fall, people become more alarmed by the level of the mortgage.”
Um, doesn’t one person’s savings income come from another person’s mortgage interest payment? And won’t house prices fall even further and people become even more alarmed if their monthly mortgage payments rise?
What on Earth does the Member for Wokingham think the economy is? Maybe on Vulcan there are some different principles, but in this part of the Milky Way it’s generally considered that the more money circulates in return for goods and services, the healthier the economy is. Yes, John, money has to circulate. We can’t all stuff our mattresses with it.
Another getting their knickers in a twist over all this is our old friend Martin Wolf over at the FT. If he feels the Coalition’s cuts agenda is dangerous I suggest we listen. And this morning Wolf’s teeth were dripping the blood of the IMF, who (much to the delight of Grant “Anyone for Rugger?” Schapps on Question Time yesterday evening) have dared to endorse the new government’s spending plans.
Personally I think there’s a good chance the whole cuts debate is redundant as – just like in a household – it’s not always that easy to cut back on your spending.
But what really surprised me this week was a rare slip by Wolf. He wrote that:
“The [policy strategy] of slashing the fiscal deficit while the private sector tries to slash its debt suffers from a fallacy of composition: it is impossible for all sectors of the economy [i.e. the public and private sectors] to spend less than income at the same time.”
This is simply incorrect. There is no “fallacy of composition”. The creditors are all private sector, so it is entirely possible for both public and private sector debts to be paid down simultaneously. It’s not the balance between the sectors that matters; it’s what happens within the private sector that’s important. Simply put, to decrease total debt, there needs to be an increase in financial equality (though not necessarily in living standards, since public spending reductions affect the rich financially and the poor non-financially).
Strangely, whilst my first contribution to the debate appeared immediately, my second comment which began by succinctly pointing out Wolf’s error failed to appear on the FT for a couple of days (then appeared twice). I have little tolerance for this sort of thing. It seems to me that the mainstream media who have coopted much of the blogosphere debate have a responsibility to allow debate to actually proceed and make sure their technology works reliably. I was going to have a good whinge. Now I suppose I’ll have to give the FT the benefit of the doubt. Must have been a glitch.
There’s a really big issue here, though.
It’s becoming more and more apparent that the big picture is that inequality is more than just bad for us Spirit(Level)ually – it’s also bad for the economy. Robert Reich has apparently explained this in Aftershock which I was just about to order when I realised I had his Supercapitalism on my shelf. Unread. Not any more though, so I’m off to see who can rush me Aftershock (2-3 weeks say Amazon, tsk).