Dr_Mibbles

There is an excess of liquidity sloshing around the market looking for a productive home. I mean, my goodness, people are even paying money (negative interest rates) on some kinds of short-term government bonds - just to keep their money somewhere they feel it's safe. It would, surely, be much better to take harness this money though introducing something along the lines of infrastructure or investment bonds. The government is the only organisation with the power and ability to do this on a large enough scale. We could introduce government backed investment bonds and build 500,000 social houses over 5 years - this would lift the economy out of depression, and in all likelihood help facilitate something approaching full employment. There is so much money looking for a productive home, the fiscally irresponsible thing to do would just be to let it slosh around, potentially being used for speculation, hoarding, or the creation of other bubbles.

It did. The economy grew in the fiscal year 09/10 at an annualised rate of 2.5%, which reduced the deficit significantly. You can see on your own chart that fiscal austerity didn't kick in until after 2010. And we also know that since then, the deficit has remained at £120bn a year for the past two years. Pain without gain.

That chart shows a shrinking deficit thanks to stimulus! Not austerity! Fiscal austerity kicked in from the financial year 2011/2012. The economy grew thanks to the stimulus, and was growing at an annualised rate of 2.5% in 2010, which reduced the deficit thanks to increased tax revenue. Then austerity kicked in, and you can see what happened next. Then you see the deficit flatlining despite austerity as we pay the price for failure and have literally nothing positive to show for it, other than reduced essential services like libraries and sure start centres. The rest of the figures on that chart are projections based on, guess what? That's right... economic growth! Those projections look extremely optimistic, indeed they look idential to projections made in 2010 about the public finances in 2011/12 and 2012/13. And we all know the deficit has not fallen since then - because of austerity removing demand and growth from the economy. Austerity has failed. Totally and utterly. The deficit fell thanks to stimulus then flatlined. If we had retained the stimulus and economic growth of around 2.5%, we'd see a deficit today of less than 5%.

I'm sorry but you are literally insane if you believe this. There is no evidence at all to support this claim, and if you think there is, prove it. There is however a LOT of evidence to prove the opposite:

Wrong, wrong, wrong, and wrong. Spending was not cut in real terms in any previous recession. That is a simple fact and one you can very easily do a quick google search to confirm.

It's called basic macroeconomics and has a very strong basis in evidence. Unlike the idea that austerity during a depression is a good thing, which is kinda new and has been proved to be completely wrong.

2007-2008 public spending was before the recession hit. The economy is now smaller, so of course spending as a proportion of GDP will be larger. That's how proportionality works. Now combine that with the fact that government spending is supposed to increase during recessions as the automatic stablisers kick-in, and you'd expect to see nothing less than the figures you've quoted above. The problem is that, post 2010, government spending is now being decreased in real terms during a depression, which reduces the ability of the private sector to pay off it's debts (which was the problem to begin with and makes the deficit worse, not better. Why are we even having this debate though? The deficit hasn't shrunk since austerity kicked in, and the economy hasn't grown, and this disaster has been replicated in every country which has tried to cut spending in a recession - so what more proof do you need that austerity isn't working? I'm genuinely curious.

The problem with all of this is that there is absolutely no evidence to support the notion that QE is causing inflation. We have low rates of inflation, probably too low given a bit of inflation would help resolve many economic issues (not least house prices). I understand the mechanism by which QE works, however I disagree that in the current economic climate it will cause inflation. The opposite seems to be happening.

Look, it's really very simple. If you cut government spending during a once-in-a-lifetime private sector de-leveraging shock, you kick away the crutch which supports your economy and your tax base. Cutting government spending during a recession makes the debt problem worse by increasing the deficit as you spend for failure (increased welfare costs, lower tax revenue). This isn't some kind of strange theory - it's what has happened to every single country who cut spending during a recession. The evidence is simply overwhelming. I believe in fiscal responsibility, and it is fiscally irresponsible to cut government spending during a period of temporary private sector weakness. The time for cutting government spending is when the private sector is back on it's feet and tax revenues are rising.

The ECB have stated they will be a lender of last resort, so it's unthinkable that a major euro economy would default. This makes Spain and Italy excellent investments at 4%.

I see no evidence to support this viewpoint at all. What I do see is a period of temporary private sector weakness, during which the government can and should stimulate the economy to prevent total economic collapse. And no, I don't mean QE, which has been largely ineffective, but genuine fiscal stimulus. The private sector (businesses and consumers) do need to pay down debts, but they cannot do this if all sections of the economy de-leverage at the same time, because other peoples spending is your income. If no-one spends, then of course no-one has any income. The government can and must provide temporary stimulus to allow the breathing space necessary for private sector de-leveraging to occur.

You're right, it is different this time, but not for the reasons you mention. The difference this time is that the government has embarked on real-terms spending reductions during a depression which have hampered economic recovery, and collapsed the tax base, resulting in higher deficits. In all other recessions, government did not kick away the crutch while the private sector went through a period of temporary de-leveraging. This really isn't rocket science, it's basic cause and effect.

It's absolutely true that QE has depressed UK bond rates, however there is nothing to stop you investing in other bonds. Italy and Spain both look like excellent investments at c.4%, with the eurozone now much stablised .

Ireland has 14% unemployment, rising to over 40% for under 25's, so that is highly doubtful. Canada and New Zealand both use a points system, and someone with a standard bachelors degree and no 'skills shortage' work experience in a few specific areas wouldn't get enough points to qualify.

a progressive graduate tax would have been vastly preferable, provided the projected tax take was genuinely ring-fenced and invested in education

yes, it had all the signs of a bubble, although I don't think it was per se (i.e. I don't think people were piling their money in with the deluded belief that it could only go on rising exponentially) - it was more a rational reaction to the low returns and perceived instability of the global financial system nonetheless, there will no doubt be a reduction in the value of gold now other options such as equities and bonds are offering good rates of return for little perceived risk

I'm not sure how that relates to what we were talking about... my point was that it is better for economic growth and our prosperity in general if a larger share of corporate profits is paid out through increased wages, rather than simply hoarded and not being put to productive use.

Yes, energy is a good example of a completely dysfunctional market. The energy sector really should be re-nationalised and run as a not-for-profit essential service for both businesses and households. It currently operates like a cartel, benefiting no-one but energy companies themselves.

Nothing you have said is incompatible with what I've stated - i,e, that debt doesn't create or destroy money, it just moves it around. This can be a really beneficial thing - if you have a lot of money just sloshing around being unproductive, far better to lend it to a growing business who can invest it, putting the money to good use. The points you are making seem to be more related to irresponsible lending and the consequences of that. And I agree with you, reckless borrowing caused the financial crisis, and I certainly don't want to see a return of it. But remember that private debt and public debt are very different beasts - the government which borrows in it's own currency will never, ever need to default, and creditors know this, leading to extremely low interest rates. The private sector is weak, and recovering, so let us give it that chance by not engaging in reckless fiscal austerity during a depression.

To be honest, I don't see what is muddled about stating a simple fact: debt neither creates nor destroys money, it merely moves it from one party to another. Your point about the creditors legal action is a complete irrelevancy in the context of our discussion.

We did it to start with, yes. And it worked. The economy was growing at an annualised rate of 2.5% when the Coalition took power and the deficit fell as a result, by about 25%. But then the Coaltion immediately started reducing real-term government spending (i.e. fiscal austerity), and made a set of predictions about how this would be expansionary and reduce the deficit further. Well, three years later, the facts and figures are in, and they were spectacularly wrong, as anyone who understands basic macroeconomics predicted. Our deficit has remained high because austerity killed growth, and expected tax revenues have collapsed as a result. I'm not anti-austerity forever, I'm anti-austerity during a depression. This is just basic economic common sense - .if the private sector is weak and paying off past debts, it needs breathing space to do that. Fiscal austerity during a depression kicks away the crutch, and causes a death-spiral. No country in the world has had any success with fiscal austerity during a recession, so it shouldn't be surprising that we haven't either.

In the context of this particular discussion, that doesn't matter. The money is still in the economy. My debt is someone elses asset, and if I default I still have the money. Debt neither removes nor creates money. That's not to say that debt doesn't matter. It certainly does, and I've not said otherwise - however, it depends on the type of debt, the status of the debtor, and the terms of the creditor. Private debt caused the financial crisis, but not debt in general, it was a specific kind of debt (sub-prime mortgages) and the way that debt was absorbed into the financial system. It was reckless. It is equally reckless for a government to engage in fiscal austerity during a period of temporary private sector weakness. That causes permanent economic damage and makes it much more difficult for the private sector to de-leverage.

It wasn't caused by the amount of private sector debt per se, it was caused by the amount and quality of that debt, and, importantly, the way the debt was distributed in the financial system. Debt is a necessary part of successful capitalism, moving money from places where it isn't productive, to where it can be invested. For an accurate overview of how the financial crisis happened, watch the film 'Inside Job'. It's one of those rare documentaries that is not only entertaining, but entirely accurate as anyone who has worked in banking will attest.

You would only do this if you thought the economy was permanently damaged and would never recover. Otherwise, if you take the view that the private sector is going through a period of temporary weakness, government can and should step in and pick up the slack, while businesses and individuals pay down their debts. This prevents serious damage to the economy. If everyone cuts spending at the same time, you enter a recessionary death-spiral of the kind Greece is experiencing, with literally nothing positive to show for it. Government spending is private businesses income - either through direct contracts, or salaries being spent in the private sector. If you cut that lifeline while businesses are trying to de-leverage, you have an economic disaster on your hand.

Except all evidence points to the opposite occuring for the last 5 years, in spite of constant warnings and predictions to the contrary. Will there be a problem in the future? I don't know. I don't think so, but my hunch is as useful as yours (i.e. not very). However, if we take an evidence-based approach then we can say quite categorically that inflation hasn't been the problem that some predicted. They've been wrong consistently for 5 years now, so I really think it's time to stop listening to them.