Friday, 9 January 2009

What is needed...

From today's Financial Times:

"It means a return to growth, despite lower levels of private borrowing, higher savings rates and a move to fiscal balance. If the government knows how to achieve this combination, it has not said so.

So what are the required elements?

First, the economy will have to grow out of its over-indebtedness during many years. It is important to sustain the financial system, but crazy to expect a return to buoyant lending.

Second, the current account will have to go into surplus, to generate activity without extra borrowing.

Third, higher savings will also be needed. That is partly because output of tradeable goods is more capital intensive than that of services.

Fourth, it makes sense to use a substantial portion of today’s massive government borrowing for investment, particularly in infrastructure. Such investment must make sense when the government can borrow cheaply.

Fifth, the transition to an economy with higher exports is going to take years. The fall of sterling should help. But the economy will depend on large net inflows of capital for some years.

Finally, the government must indeed maintain fiscal and monetary credibility. If a return to inflation is widely feared, the game will be up for the UK. The danger is not only deflation, but also a sterling collapse, a jump in inflation expectations and a spike in long-term government bond rates. The Bank of England was right to cut interest rates modestly this time."

Comments are here

Useful revision for Unit 2....

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Methods there are many, principles but few, methods often change, principles never do