Email of the day (2)
Comment of the Day

August 24 2012

Commentary by David Fuller

Email of the day (2)

On Keynes:
"In today's edition you wrote:

"Consumers are still deleveraging and fewer of them trust the stock market than in earlier decades. Job insecurity and the cost of living, which is much higher than CPI as everyone knows, leave consumers in a cautious mood.

Business leaders are concerned about the slowdown in global GDP, in addition to their domestic economy which is certainly not firing on all cylinders. In the US, uncertainty about post election policies, not least taxation, is sufficient reason for continued caution."

"This is the classical description of what Keynes called the "Liquidity Trap". Please, please use this term over and over again to explain why monetary policy is useless in the current situation. QE will pump more and more money into world markets in which consumers and businesses do not want more debt. This credit will not get the "real" economy moving again. It will just go round and round in the financial sector pumping up the value of financial assets and driving interest rates down even further.

"Only fiscal policy can solve the current problems."

David Fuller's view These are good points but might you have overstated your case somwhat?

Monetary policy will appear to be 'pushing against a piece of string' at a time of deleveraging but the economic slump would arguably have been much deeper without it and the stock market considerably weaker. Also, some businesses have used exceptionally low rates as an opportunity to secure future financing by issuing debt very cheaply.

I agree on fiscal policy and for the UK and USA, I think this should be spent on improving infrastructure, as this would help to make their economies more competitive and be of benefit to most people.

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