At last, there is some positive news coming out of the Euro area. France and Germany are no longer in recession. Both economies recorded modest growth rates during the second quarter.
It won't be long before the UK economy will produce a similar story. It is a fair bet that the economy has now stopped contracting and that it will record a small increase in GDP during this quarter. No doubt, it will be followed up with a further quarter of growth during the closing months of this year.
However, what about the long run cost of generating this paltry spurt of pre-election growth? After all, it was achieved through an unprecedented expansion of the fiscal deficit and a dangerous experiment in monetary policy, which saw interest rates cut to an all time low and an unprecedented expansion in the monetary base.
These policy innovations are unsustainable. The government debt stock is exploding. At some point, it will need to drastically curtailed. Likewise, even the most optimistic exponent of quantitative easing recognizes that the printing presses will have to stop and interest rates will necessarily rise.
Unwinding these policies will be desperately painful. We will see growth again contract as government expenditure is slashed, taxes are hiked and interest rates return to more reasonable levels.
The sad reality is that the jokers running the UK economy have a time horizon of less than 12 months. No one is thinking about what the UK economy will look like in 2011, when the great policy unwinding is in full swing.
So when everyone begins to rejoice at the positive GDP numbers, which will be reported in October, think for a moment about the true cost of that short spurt in economic activity. Make no mistake, it was purchased by creating massive monetary and fiscal problems that we will have to face in the future.
indeed.
ReplyDeleteStick to your guns, Alice.
ReplyDeleteYou were right before, you're right now and you'll be right then.
Enjoy your coffee.
Interesting post :)
ReplyDeleteAlice can I ask an O/T question?
Why does the BOE / government set a target inflation rate of 2%? Why not 0%?
2% would mean any savings will halve in 20 years or so in real terms. So why is 2% better than 0%?
Many thanks
"Why does the BOE / government set a target inflation rate of 2%? Why not 0%?"
ReplyDeleteOne theory is that a 2% inflation rate acts as a tax on inactivity e.g. if I could store my wealth in cash buried in the garden for the long term and be confident that my money wouldn't lose value then the overall economy would be less productive than if I risked employing my capital in a business venture. In reality, that 2% inflation nibbles away at the money and encourages me to participate in the real economy.
At least, that's the theory.
2% - Mmm, maybe it's just a tax full stop - even on savers. maybe a saver cab get 1% on their savings after inflation - it's smewhere between 1% and maybe just protecting your savings against inflation.
ReplyDeleteBad country, really: Gordon is eager to rifle the pockets of the prudent and hard-working, the utiliies overcharge, local government gives poor value for money (what does the council tax really pay for?), most bureaucrats get on any bandwagon offering a fake justification for more tax, massive waste on quangoes, and numerous public service CEO's seem to focus on printing as much self-vaunting publicity at pubic expense, etc, etc.
There must be a word-for it. Post-imperial reversion to cronie gvernment?
B. in C.
End P-I Re ...
ReplyDeleteEndpire
Yep we're going to pay a huge price for inflating the economy in this manner, the central players are using the money supply as their plaything and it will result in disaster (again).
ReplyDeleteTo jump start the economy in a constructive way they should really be looking at getting house prices down and taxation off of productive enterprise. Once the right incebtives are in place, i.e non taxed wages and interest from savings then the economy will sort itself out as demand naturally increases.
Unfortunately that requires grown up debate and long term thinking which are qualities that pretty much bar you from entering the politics.
Chefdave.
We always knew they would hyperinflate their way out of this sucker. Gordon Brown, a paedosmiling liar of gargantuan proportions, knows he is pulling a fast one. He knows he has created the conditions to put a giant 1 million Scofields chili pepper up our bums to get us working for him again.
ReplyDeleteWhat cost inaction? Alice fails to consider the alternatives again.
ReplyDelete