Wednesday, May 12, 2010

First steps on the death spiral

David Blanchflower punctures the excruciating media enthusiasm for the new government.
"Anybody who is going to start cutting in that position is basically going to push us in that death spiral. That's what we've avoided until this date.

We need to stimulating growth, not withdrawing multiple billions out of the system."

"This is a scary day for the unemployed."
(I have just spotted that the video subtitle mistakenly calls him Danny Blanchflower. Those of us of a certain age will know that Danny wasn't an economist.)
Oops. It's his nickname. See comments by John.


John said...

Yup, but that's his nickname. Those of us who've made that mistake before have had to correct ourselves twice! :-(

John said...

DorsetDipper said...

in the city Danny Blanchflower is regarded as a maverick. A trader colleague of mine said "he wants to reduce interest rates to zero and allow inflation to inflate the debt away. Getting rid of inflation will prove probably more painful than sorting out the debt now, so better to tackle the debt now." He's a Lib-Dem by the way.

Any government - British or Greek - that prints money to bail out debts in the economy and causing devaluation is in effect taking money off people who have prudently saved and giving it to people who have recklessly borrowed. No government - left or right - should do that unless it has absolutely no alternative. Also, this is a trick you can only do fully once. After that, no-one, at home or abroad, will hold any amount of the currency. Which is why the majority of US dollar bills are held outside the US.

Finally, just thought I'd let all your readers know that the return of spring has brought the return of Clive James to his usual morning perch at the local coffee shop on the South Bank. You can all relax now you know the great man has survived the winter.

The Plump said...

Hmm ... City orthodoxy didn't prove to be a howling success in the recent past. And what is the policy of the Bank of England at the moment - er, interest rates at half a percent, quantitative easing and an effective devaluation of the pound.

Actually, if you listen to what he said, he wants to begin to pay off the deficit once growth is established so that deficit reduction takes place in an economy which is capable of sustaining it. There is a risk that cutting to pay off debt now, whilst recovery is fragile and relying on the external stimulus, would lead to recession, thus making it impossible to get the deficit down, and probably increasing debt, as earnings decrease.

He is not advocating inflating our way out of the deficit, rather he sees the big danger at the moment remaining as deflation. So he is arguing for a counter-cyclical policy rather than a pro-cyclical policy. Not very radical nor particularly maverick.

As for Clive James ...

mikeovswinton said...

As for Clive james.... What number does he bat at these days? Is he still playing for the 2nd or 3rd XI?

DorsetDipper said...

Martin Wolf in the FT said something along the lines of "Cut back spending too much and you sink into deflation. Spend too much and you risk inflation which will require a recession to bring under control. The best option is to grow our way out of the debt, but this is extraordinarily difficult to do, which is why the best thing is not to get your way into this situation in the first place."

Blaming the city for the current state is easy, but IMHO misplaced. The primary beneficiary of the credit boom was Gordon Brown. Brown’s reputation was based on two big lies; that government policy could, by itself, create wealth, and that he alone was possessed of a unique genius that could deliver this growth. In retrospect, we can see that he encouraged an artificial credit boom, spent the proceeds, and has left us in a parlous state.