In the windmills of my mind

Back to the UK for one minute…

by my friend, Amar.

Government cuts are starting to bite in the UK and I’m starting to crystallise my opinions against them. Nobody in power or even within earshot of power has any experience of the crashes of similar magnitude. For a return to growth there must be spending and by cutting public spending the government is putting the burden of spending on the people. This is currently achievable because of near zero nominal interest rates. However, as interest rates rise the incentive to spend will diminish, even with low prices offered by the increasingly desperate retailers. Inflation is already a little too high and will only increase as the price of oil and other manufacturing commodities rises. China is not only exporting inflation to the world but driving the price rises in manufacturing metals. There’s also the impact of the BoE having no room for manoeuvre in the use of monetary policy as a stimulus because the nominal base rate is practically at zero. They’ve been using Quantitative Easing, which is a fancy way of saying they’re printing money. It’s more responsible than the hyperinflation days of Germany and Zimbabwe but it’s essentially the same, inflation inducing technique. So inflation up and interest at almost nothing means we have real interest rates below zero. This is unsustainable and will have to be stopped by increasing interest rates so the incentive to spend will disappear. Monetary and Fiscal policy should be working together and the government is backing the MPC into a corner with the cuts. It seems an incoherent response to the recession. This will mean a deep, cutting recession and slow recovery or a u-turn in government policy. I don’t think one of them is very likely. 

Sensible, structured increases in public spending (or even retaining current levels of spending) will have a strong impact on the economy for the next generation. There are many infrastructure projects that can be undertaken to make the country a better place to live and conduct business. Internet infrastructure is lagging behind the developed world as is mobile network coverage. There are many places that spending would have a constructive long-term impact. 

I feel compelled to point out that I’m strongly anti-Tory so there is a political bias here but this government is leading the country into a prolonged depression. This isn’t a political leaning, simply a massive distrust in the current crowd. Osborne, Cameron, Cable, Clegg et al inspire nothing but dread in me and convey little more than incompetence. My point is not political so back to the economy. The bigger problem will be when the major economies of the world are strengthening we will still be facing stagnation. When we’re all suffering doing badly isn’t all that bad but when the world is flying and we’re still grounded then we’re in serious trouble. 

Personal spending is very limited. There is no such limit on the government and even though bloated spending and a growing deficit is not a good thing it is most certainly the lesser of two evils. The universal solution to this recession is Keynesian. We should be spending our way out of this to try and do otherwise is playing roulette with our economic future. A large deficit is a small price to pay.