2 steps out of the global recession: Step 2

Yesterday I mentioned the use of aiming Quantitative Easing (QE) direct to the people through funding tax cuts or even personal cheques. This in itself will not aid a global recovery. Another necessary step is for the entire world to do this at the same time – globally co-ordinated action.

Effectively the recession is a global crisis and to solve this it requires a global solution. The reasoning is that at the moment most Governments are cutting back on public spending, this is taking demand out of the economy as private investors are not filling the void. Beggar thy neighbour tactics are appearing with more protectionism and greater focus on “national” interests, understandable in the current climate, but economically futile.

Instead the international community must work together and economic policy changes co-ordinated. As Franklin Roosevelt said at the opening of the Bretton Woods summit in 1944

“The economic health of every country is a proper matter of concern to all its neighbours, near and far.”

But what do I mean? Obviously co-ordinated attempts have been attempted before in trying to save financial markets and individual country credit ratings with loan guarantees. These have generally not worked as they are designed purely to appease the lending markets. I personally see three things the international community can do together.

  • If there is to be QE, all countries should do it at the same time, in the same way and the same proportion so that relative to each country, there is impact on currency values, or inflation. The markets will be less likely to threaten one country than another.
  • Common sharing of risk is needed to tackle the markets so a “Euro bond” or even a “World bond” should be introduced. This will mean one interest rate on debt, so the UK will have the same interest rate as Iceland or Germany and Greece on its borrowing. Without the sharing of risk, I struggle to see how countries can stand up to market forces (countries get picked off as we have seen in the Eurozone).
  • Accelerated regulation and approval of new (and green) technology. We all know that the world is changing environmentally, that fossil fuels are harder to find, there is no lack of rhetoric but the lack of action is depressing. There should be international agreement on areas such as air emissions, carbon capture technology, renewable energy targets enforced, environmental standards brought in for construction, focus on sustainable farming; support in all these areas for developing countries. All this backed up with regulation and firm investment commitment. If a world standard is set, enforced and developing countries supported, all countries will be better off in the short run (increased investment, new industries started) and in the long run (environmentally and lower cost of intervention). There will be a need to for more investment, and certainty provided for investors, something that is sorely lacking in the current green technology space globally.

The EU, UN, IMF, World Bank and, more importantly, individual Governments must act decisively and together to get the world economy back to full health. It means taking unorthodox measures, but extraordinary times require an extraordinary response. John Maynard Keynes understood this in the 1930s and 40s and we need today’s policy makers to have the same vision.

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2 steps out of the global recession: Step 1

It has long become clear that the financial crisis has been on a scale deeper and larger than many people have suspected. It has also been exacerbated by muddled policy responses from all Governments and policy makers. Whilst the need to control debt is not in doubt, capital expenditure projects should be pursued and tighter bank regulations need introducing (with much clearer splits between retail and investment banks); all economies are still struggling.

Quantitative Easing (QE) – effectively the printing of money to buy up Government debt, and shore up the banking sector, helping banks’ balance sheets. It has not really got money flowing through the economy. A bolder step, which Australia tried in 2009 (and avoided recession), is to direct QE, not at the banks, but directly at the taxpayer. This can be in the form of temporary tax cuts or even just a cheque from the Government. This BBC article explains the concept in more detail.

Why do I think it could work? Well at the end of the day I see nothing to suggest that additional money from the Bank of England is moving its way into the real economy. Giving the money direct to the people, may or may not work, but it’s no worse than the current method. Some people will use it to pay off debt – in which case the banks still get the money. Some people will spend it, which should help drive demand in the economy and create a multiplier effect. The proposed solution would be monetary policy financing fiscal policy.

There are inflationary risks, and we can’t print our way out of trouble (although by definition you’d be against QE in general then), but in an economic downturn, the inflationary risks are low. There is also the problem that this doesn’t solve the global problem. This is where Step 2 comes into play – to be discussed tomorrow…