Saturday, October 15, 2011

Fiscal failure

Time for some intelligent policy making

This is a Financial Times article by Martin Wolf behind a paywall which is why I've used a Canadian newspaper copy instead. Wolf briefly explores the difference between private debt and national debt, the effectiveness of QE and why we are heading towards a deflationary depression if we don't start thinking about new fiscal policy. More QE will not help much. Getting money to consumers and liquidating excessive private debts would be more effective at getting our economy growing. Also, here's a brief commentary from Tax Reasearch UK: Can Martin Wolf get much more unsubtle and still be polite about the Prime Minister?

Posted by quiet guy @ 10:43 AM (1656 views)
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8 thoughts on “Fiscal failure

  • Quite bizarrely Martin suggests; ‘Is there another way out? Again, yes. One could work directly on the balance sheets. Highly indebted households could sell their houses to people who want them, but would not need to borrow. Maybe, one could sell the houses to frugal immigrants. But where would the British people then live?’. So who wants houses yet has enough cash they don’t need to borrow?

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  • @enuii

    Yep, that bit wasn’t too clever but I think Wolf is asking the right questions; just not coming up with the right answers. Personally, I think households that have too much mortgage debt on their primary residence should be allowed to go through bankruptcy in a year or two so that they can start again but that would require a significant change in UK law. Making mortgages non-recourse might cool the bank’s enthusiasm for lending at ever higher salary multiples as well.

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  • @1,
    Wolf is correct that we could (in theory) solve the debt problem by increasing the population, thereby diluting the debt. Total debt remains the same but debt per capita falls, so everything works out. In practice the numbers of immigrants required would be far too great, and there is little or no willingness in the population for further immigration.

    Persuading people without debts to spend more will be tricky, because those without debts are (generally) those who are saving for retirement. As the population ages, people will save more.

    Bankruptcy is the logical solution. Foolish lenders are punished, foolish borrowers lose their homes. House prices fall to reasonable levels. This is largely what has already happened in America, and the world hasn’t ended.

    Print more money will work too. We all know that’s what the government is doing.

    I’d be wary of lending much credence to Richard Murphy of Tax Research UK. His logic is often sloppy and much of his writing is just Tory-bashing in disguise.

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  • Martin Wolf is a classic example of a chap who holds communist views (“communism for the rich”, that is). I wish papers like the FT and The Economist got back to their free markets liberal roots. At the moment they are peddling totalitarian and communist (communism for the rich that is) ideas that brought the free market capitalist system into disrepute and collapse (through the financial crisis caused by pathological and criminal behaviour of the financial and political elite of the western world).

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  • Ant,

    You might enjoy Peter Oborne’s recent column in the Telegraph, in which he comprehensively slates the FT.

    Telegraph: The Great Euro Swindle
    […]
    Let’s examine the case of the Financial Times, which claims to be Britain’s premier economic publication. About 25 years ago something went wrong with the FT. It ceased to be the dry, rigorous journal of economic record so respected under its great postwar editor Sir Gordon Newton.

    Turning its back on its readers, it was captured by a clique of left-wing journalists. An early sign that something was going wrong came when the FT came out against the Falklands invasion. Naturally it supported Britain’s entry to the Exchange Rate Mechanism in 1990. In 1992, it endorsed Neil Kinnock as prime minister. It has been wrong on every single major economic judgment over the past quarter century.

    The central historical error of the modern Financial Times concerns the euro. The FT flung itself headlong into the pro-euro camp, embracing the cause with an almost religious passion.

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  • financial planner says:

    Wary of Richard Murphy? Not half. He’s a very dangerous man peddling his QE 3,4,5,6,7,8,9 etc until everyone is in the hands of bankers and we’re a communist state. See the parody of him at @murphyjrichard on Twitter

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  • Drewster @ 5 so the FT “lefties” (almost all of whom were better qualifed to opine on such matters at the time than Professor Hindsight- Osbourne) were right on two out of three anyway, then!
    As for the third issue, the ERM, it might not have been such a disaster if the exchange rate had been set lower. In any event, I, along with 99% of the “priced out” generation, would be more than happy if a similar currency peg existed right now to prevent the Tory inflation plan to bail out the profligate speculators and pop the UK housing bubble once and for all. If only, I can hear my peer group cry!
    The Thatcherites are to blame for everything that came thereafter, particularly city deregulation,”Nu” Labour sans clause four and Blair.

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  • “If debt destruction were desired, the least damaging policy would be inflation”….well,thats all right then.!!!!!!
    Why are people allowed to get away with asserting that somehow inflation does not destroy economies!

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