Britain’s government has
tried to increase demand for goods in Britain by having its central bank
participate in Quantitative Easing. QE in this case would allow the Central
Bank to print new money in exchange for mortgage bonds in order to push down
the interest rate of mortgages. The goal of this plan is to bring down the
mortgage interest rates for homeowners which will help free up disposable
income in households. This increase in disposable income will then help increase
the demand of goods and help increase the economic growth rate. The problem
with this plan is that it’s not working because interest rates are still stuck
at high levels. Another problem is Britain’s high savings rate. The current
savings rate is at 7%. The economist article states that if the savings rate
were to drop to 4% a 3% decrease, it would lift GDP growth rate by 2.7%.
Solutions for Britain’s
economic contraction range from increasing the minimal wage, stopping the job
cutting in the public sector, unfreezing the public sector wages, and increasing
spending from the government to the tune of 30 billion pounds. Britain’s
economic solution since the 2008 Financial Crisis has been Austerity. In class
we have discussed Keynes argument for increasing government spending when the
private sector demand falls. In the short run this will help the economy
recover from its recession. Britain has taken austerity route over the increase
in government spending. A Financial Times article titled UK: budget no plan B
outlines that things will get much better by the second half of this year. The
IMF is quoted in the article stating the British economy has been the fastest
EU economy to recover from the 2008 crisis. It also stated that austerity measures
have not negatively impacted the British economic growth rate. It also predicts
a .5% increase in economic growth rate per quarter in the second half of this
year. If austerity measures in the British economy do lead to a healthy
economic recovery in the second half of this year, will other ailing EU
economies take the same prescription the British government has taken to fix
its economy?
I believe the British government is practicing sound economic policy in order to rebound from their economic doldrums. The notion of quantitative easing sounds like a rational practice in which to endeavor, but there can be unforeseen consequences within this practice. By having printing money in exchange for mortgage bonds, the British government may be aiming at hedging inflation shorter than the actual expected inflation rate. Furthermore, QE may cause the British pound to endure a greater inflationary cycle, if the quantity of money produced is greater than necessary. Also the results of another round of British QE may mirror the numerous rounds of quantitative easing, as it existed within the US. Additionally private banks could use this capital to invest into other emerging markets, make personal and business loans, or save into order to weather a future economic recession.
ReplyDeleteIn regards to the elevated savings rate that exists within Britain, the creation of greater disposable income within British mortgage holders may drive the rate of consumer saving above its existing 7%. The possibility of British households not injecting their newly acquired income into the economy may backfire in the face of the BoE. Consumers may witness the lack of market confidence possessed by the British government and choose to save an even greater amount then the existing 7%, furthering the stagnation of the GDP. Only time will tell if the efforts of the British government will further aid their economic towards financial security.
I find it very interesting how the economist article thinks that the savings rate in Great Britain which is at 7% is too high to bring on a GDP growth rate. The article is assuming that a 3% to 4% decrease would bring a GDP growth rate increase of 2.7%. As Ian points out what if more disposable income among mortgage holders only raised the savings rate above 7% causing more stagnation? This would certainly contribute to the current problem of a low growth rate in Great Britain. Is there a more targeted approach than cutting interest rates on mortgages to lift economic growth? I would like to see this conversation develop further because without growth in Great Britain and Germany the EU's future does not look bright.
ReplyDeleteI found the article discussing the 10-point plan to boost the economy in the public interest, in place of the government's failing approach very interesting. Specifically, the notion of nationalizing the banks. The article notes that the banks, still propped up with public money and many with large public shares, must be taken into public ownership. The bloated banking sector was the cause of the crisis, and still represents the largest systemic threat to relapsing into crisis. The incentive of controlling the banks leads the public to have the ability to cap bonuses, clamp down on tax dodging, end the inflated pay deals and direct investment to socially useful and job-creating schemes.
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