Have we Run Out of Ammunition?

As I walked into the coffee shop at Blackwells this morning, I noticed a display of books all about the great depression and depression economics.
It is a sign of the times that economics has become one of the most talked about subjects.
In many ways this current recession / credit crisis is setting new ground as it is different to the recessions which have preceded it.

The first issue is that we have already exhausted most policy measures which usually help us recover from a recession. There is now an element of having to wait and hope that the economy recovers, with the help of what we have tried so far.

Video on – Is there anything more that we can do?

Now we are out of rate ammo – by Hamish McRae at Independent

By on February 9th, 2009

One thought on “Have we Run Out of Ammunition?

  1. Both you and Hamish McRae in The Independent (6th Feb) are wrong to suggest there is little more we can do about the recession.

    The final “piece of ammunition” is simply to have government spend more than it gets
    from tax or borrowing, i.e. print money and dish it out to households
    (who, surprise, surprise, will spend some of it). This is sometimes
    known as the “Bernanke helicopter drop”. The stock
    response to the latter is “Weimar”, “Mugabwe” etc. However, this stock
    response is over-simple.

    While printing lunatic amounts of money, a la Mugabwe, is obviously
    inflationary, there are numerous examples of slightly less lunatic money
    supply increases which have clearly had no effect on inflation. Just one
    example: the US monetary base has doubled in the last quarter. This is unprecedented, yet people have been piling into US Treasuries, i.e. few people expect serious inflation
    in the US in the near future. Indeed, I would guess that despite the above large money printing operation, the US money supply has actually contracted over the last quarter because commercial banks are destroying money at the rate of billions per week as part of their deleveraging.

    There is enough dithering in the US, but compared to the US, the UK’s efforts have been feeble. For example the UK authorities say they will do £50bn worth of quantitative easing, but press reports indicate this will be done with borrowed money, not printed money. The best summary of the UK authorities’ efforts to date is an article by Simon Jenkins in which he says that all the authorities have done is borrow vast sums (which crowds out private spending) and given the money to banks, who in turn have sat on the money. The net effect is deflationary, i.e. (apart from preventing a collapse of the banking system) the authorities have arguably made matters worse, just as they did in the 1930s. (see http://www.guardian.co.uk/commentisfree/2009/jan/21/treasury-banking-keynes-demand )

Comments are closed.