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Will The Boe Have To Increase Qe To Counter The Comprehensive Spending Review?

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If the cuts push us back towards or into recession then I think QE is pretty nailed on.

But it really is such a complicated picture and I do think everyone is getting really rather excited about the cuts and that this will die down over time. Until the detail of the cuts is revealed we don't know the exact scale , speed or impact of them.

What we do know roughly is that govt expenditure needs to be cut by about 20% which is about £120BN and will be done in the next five years... what we know won't happen ( but which I suspect there is a lot of hysteria about) is that we won't see cuts delivered over night, we won't see higher forced redundancies than there need to be ( they'll use natural wastage where possible) , in some cases we'll probably see pay and benefits reductions take the place of full redundancies ( as has happened in the private sector)... so the actual impact of the cuts will be slowly slowly.. we won't see unemployment suddenly jump by a million etc.

The key however is that growth in the economy is a must have alongside the cuts , without it we are in a very difficutl place indeed so they will I think keep interest rates as low as they possibly can throughout the parliament while we have slowish growth and an ongoing cuts process and if they think growth is not strong enough then it wouldn't surprise me if they err on the side of caution and throw in some more QE.

It is clear to me that the best outcome for the govt is going to be to try and manage us down slowly rather than things go into freefall, and that's the sensible thing to do as freefall causes more casualties than necessary.

The funny thing is that we suspect ( to a degree ) that low rates and QE and some bank arm twisting are pretty powerful weapons and yet there are still those who seem to think we will see BOE rates rising very rapidly ( in a low growth environment), massive sudden unemployment dragging us into a double dip recession and the knock on effect of both of those to be a triggering of a massive leg down in the property market.... I just can't see it... we won't see high rates becasue we won't see high growth, we will see QE if growth lags due to cuts and they will slow down the cuts to avoid a new recession, as we won't see triggers like rapidly increasing unemployment, rapidly increasing rates or rapidly increasing repossessions there won't be this huge housing crash... there will be a correction but it's going to be long and slow.

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abharrison's ideas of a gradual spending cuts I think is the smart way to do it. Natural wastage and pay freezes over 5 years would do it easily. While erring on the side of extra liquidity for the private economy.

However I do not believe we will see any cuts over the 5 year term of their parliament. In fact by the second budget they bring out I think they will be ramping up spending just the same as before.

Imo the Tory party is just as addicted to and interconnected with the government spending as Labour.

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abharrison's ideas of a gradual spending cuts I think is the smart way to do it. Natural wastage and pay freezes over 5 years would do it easily. While erring on the side of extra liquidity for the private economy.

All well and good, apart from that will probably not be a quick enough reduction in spending to keep the gilts market happy, which may go on a selling spree and force interest rates up.

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I think the BOE probably will print more money, but it will only make matters worse, as it will only lead to further inflation in food and fuel, leaving most people with even less to spend to get the economy recovering.

The problem is when the BoE prints money it pretty much stays in the hands of the financiers when its the average citizenry who are overloaded with debt that they can't pay back. And even if they did print and give the money to the citizenry the debt aspect of that money will still stay with the BoE, meaning that they are even more in debt via proxy.

What the citizenry need is money flowing into their hands in a way that doesnt mean they incur an increase in debt either directly or via government proxy.

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