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Longest Recession Since Great Depression
Economic statistics in the US still look very grim. GDP figures in the first quarter of 2009 show an annual rate of decline equal to - 6.1%. This follows on from a fall of -6.3% at the end of 2008. It also means the longest period of declining output since the Great Depression. The US entered recession before the UK. It does not bode well if the UK is to follow the US path (which has occured up until now.) At least the US experienced a promising rise in consumer spending. Also inventory lists have fallen dramatically meaning that firms may be forced to start increasing stock. This would lead to rising output. In the UK, consumer confidence improved to the best levels since August 2007 and problems of Northern Rock. A study by GfK NOP found consumers’ economic expectations for the next year is still in negative territory at -15, but this reflects an improvement of 16 points from -31 in March. This increase in confidence has occured despite rises in unemployment and falling average wage growth. (maybe the survey was taken on a sunny day?) Related

Implications of 2009 Budget (with video) Why Do Governments fail?

Perma Link | By: T Pettinger | Thursday, April 30, 2009 Subscribe to future posts | 0 Comments Links to this post

How To Deal with Very Large Debt
With borrowing forecast to top at least £175bn next year and national debt as a % of GDP forecast to rise to 80% what options does that leave future chancellors?

Options for Dealing with Public Sector Debt 1. The Borrowing is Necessary. National Debt at 80% of GDP is not the highest in the world nor is it unprecedented for the UK; during war, the UK has borrowed over 200% of GDP. If we seek to reduce debt too quickly, it could push any fragile recovery back into recession, cause more unemployment and this would only aggravate public borrowing. Running a fiscal deficit is an effective way to boost AD and help the economy recover. It is this economic recovery which is the key to restoring public finances. • However, borrowing from the markets will not be easy in this climate. The UK faces grave international competition from other countries with large debts. Investors may have less confidence in holding UK debt if they fear the inflationary impact of quantiative easing. If markets lose confidence in the government's ability to pay, it could affect sterling and make it very difficult to borrow - creating a crisis in the UK.

2. Rely on Monetary Policy. To boost economic recovery, it would be better to rely on monetary policy - low real interest rates, quantitative easing. This can boost spending, prevent deflation without the problem of having to borrow. This could mean interest rates stay low during any recovery as fiscal policy tightens. In the worst case scenario quantitative easing could be used to inflate away the UK debt, but, this would lead to a collapse in Sterling and effect confidence in the UK for many years to come. • Quantitative easing remains unchartered territory. It could be inflationary and it is difficult to predict its impact

3. Savage Cuts in Public Spending. The government may be forced to roll back past spending commitments to health and education. Projects like a replacement for trident e.t.c could be delayed indefinitely. 4. Raise Retirement age. To deal with increased demands on government spending, the government could immediately raise the retirement age. This would significantly cut spending on pensions and improve tax receipts. But, it would be politically unpopular to say the least. However, this policy may have been necessary even without the current crisis. (Demographic Time Bomb)

5. More Sin Taxes. One of the few tax sources not to fall in a recession is cigarette, petrol and alcohol. The government could increase these because demand is relatively inelastic. Maybe the government need to do a combination of all of these, though I doubt they will appear in many political manifestos in the forthcoming election... Perma Link | By: T Pettinger | Wednesday, April 29, 2009 Subscribe to future posts | 0 Comments Links to this post

Impact of 50% Income Tax Rate in UK
I would love to pay the 50% income tax rate - I mean a salary of £150,000 would be a pretty good achievement for an economics teacher! But, putting aside by emotive support of high taxes on the rich - Does it make economic sense? Firstly, the UK have had much higher income tax rates, in the past. In the 1970s, top income earners faced income tax rates of 80% plus. But, it was argued that with these kind of tax rates it encouraged many to leave the UK and find lower tax regimes. Laffer Curve.

The Laffer curve offers a very simplistic model. • If tax rates are 0% the government get no tax revenue.

Earlier retirement 6. Encourages Tax Avoidance. But. Substitution Effect. 3.4 billion. even the most optimistic predictions of tax receipts mean it will only make a small dint in the forecast £175bn annual deficit. It is hard to predict. However. If people target a certain income . 60% or 70% marginal tax rates. The total gross could be £7 billion.g.a higher tax rate may make them work harder to maintain their target income. Higher income tax will reduce VAT revenues as high earners have less to spend • Income effect. e. Higher income tax gives a greater incentive for high earners to look for innovative ways to avoid paying tax. The Effect of Higher income Tax 1. The difficult question is knowning where this tipping point is. Live in countries with lower income tax rates. 4. .g. 2. This explains why higher income tax rates don't always cause people to work less The crucial issue is what is the rate that causes people to go and live in Switzerland or retire early? It depends on the individual and there is much conflicting empirical evidence about the impact of higher tax rates. there must be a tax rate at which increase the tax rate causes a fall in tax revenue e. the IFS claim the impact on tax revenues could even be negative. forming a company and paying yourself dividends rather than income. to some extent it may depend on the strength of the economy and whether there are less jobs in that income tax bracket. The government hope the new tax rates will raise a net of £2.• • • If tax rates are 100% the government get no revenue because what is the point of working if all the income is taxed? Therefore. because people start to work less. Disincentive for companies to invest in UK 5. Higher tax encourages people to work less because work is less attractive. Is it 50%.

2009 Subscribe to future posts | 1 Comments Links to this post Forecast for National Debt . But.the rule that governments should not borrow more than 40% of GDP. I was teaching students about the chancellor's golden rule of borrowing . given the current state of finances. it will be one of those concepts the government will try to keep locked in a cupboard like an embarrassing old relative. Also over the course of the economic cycle.Perma Link | By: T Pettinger | Tuesday. . April 28. It was only quite recently this was frequently referred to by the government with a sense of pride. annual government borrowing should not exceed 3% of GDP.Why Increase? Just recently.

However. the Labour Government then decided to increase real spending on health and education significantly. It was this large increases in spending that caused the UK to have a budget deficit of 2. For a brief time Labour pursued tight spending plans. This led to a brief budget surplus in 2000. It is this rapid deterioration that has spooked the markets more than anything .it gives the impression the government are losing control.This year we are facing borrowing of over 12% of GDP and a public sector debt rising towards 80% of GDP (and this is with HM Treasuries optimistic forecasts) The UK does not have the highest National Debt as a % of GDP (list of countries) but it has experienced one of the most rapid deteriorations.7% of GDP even at the end of the economic boom in 2007. The scale of the recession (output fell a record 1. And it doesn't help the government's forecasts soon start to appear overly optimistic. Collapse in Tax Revenues. Why Has Debt Risen So Sharply? Ambitious Spending Plans.9% in the .

For example. Falling profits leads to declining corporation tax Bankruptcys. But.5%. alcohol and cigarettes are some of the few taxes that have not . The UK population is slowly ageing creating a bigger dependency ratio Expansionary Fiscal Policy. Lower spending in addition to VAT cut to 15% have led to a fall in tax revenue. the recession has caused the opposite. especially in the city who have been hard hit by the credit crunch so income tax receipts have fallen. sickness benefit. It is these earners. Government forecasts for tax revenues assumed full employment. rising house prices and growing tax receipts. Long term demographic trends will not help the UK deal with future debt burdens. the number not working (but not classed as unemployed) has risen by 250. Highlighting how disastrous the collapse in normal tax receipts have The Sin taxes of petrol. 16% of the total income tax is paid by the top 1% of earners. But as a % of the total rise in national debt.1% in November and an extra 0. Lower VAT. In addition to rising unemployment there has been a rise in the number of economically inactive.000. This fiscal expansion amounted to 1. this fiscal expansion looks relatively small. To Deal with the Downturn the government cut some taxes and increased spending. • • Falling House prices and lower number of property transactions have reduced stamp duty Rising unemployment and lower bonuses have hit income tax. Rise in Economic Inactivity.first quarter) and falling asset prices has hit tax revenues drastically. • • • Lower corporation tax. decreased in the past year. other benefits like housing benefits and lost income and NI allowances. Rising Unemployment. this could include incapacity benefit. Unemployment costs the government in terms of jobseekers allowance. Since 1997. Long Term Demographic Trends. Rising number of bankrupt firms have led to large numbers of tax bills being left unpaid.

According to the IMF. the government's forecasts for 2010 still look overly optimistic. 2009 Subscribe to future posts | 0 Comments Links to this post Dismal Economic Forecasts So Alistair Darling didn't even try to put a positive spin on the UK economy.especially given need to restrain borrowing in future years. It is hard to imagine how a quick bounce back could materialise .Slow Economic recovery.1%) Yet. This year borrowing was £90bn. Given the state of economy.2%) UK . But faced with the uncompromising economic data. As we mentioned in .been Bank Bailouts. I guess he could have boasted the UK is no longer the sickest economy in the G20.4% growth in 2010 looks far more realistic. Britain has already spent nearly 20% of GDP on bailing out the banks. the IMF's forecast of -0.5% (though IMF forecast -4. (Guardian) Related • National Debt Perma Link | By: T Pettinger | Monday.forecast of -5. The government have had to spend billions on buying shares in failing banks.forecast of -3. April 27.forecast of . • • Germany .25% in 2010 and 3. The problem with over optimistic growth forecasts is that it means government borrowing will probably be higher than the Treasury want to admit as well.6.2% in 2011. The Treasury predict growth of 1. Next year it will soar to £175bn or nearly 12% of GDP (the highest peacetime borrowing requirement ever) National Debt will rise from 50% now to a peak of 80% in 2013/24 (though some fear national debt could reach 90%) .7% Growth for this year • Japan . he didn't really have much alternative.

(If the chancellor was seeking to balance the budget at a time such as this.It is not the highest debt in the world. especially with demographic factors placing stress on future borrowing. Nor is there any real alternative to government borrowing. 2009 Subscribe to future posts | 0 Comments Links to this post Budget Deficits and Inflation The US has experienced its first period of deflation for over 55 years. and we have had worse figures in the past. However. the excess reserves of the banking system have ballooned from less than $3bn a year ago to . despite strong deflationary pressure.4%. Therefore. meaning the impact of rising money supply adjusted for velocity of circulation is low. the deepest recession since the 1930s and falling asset prices. April 22. Falling output and falling demand has put a downward pressure on prices. Why Threat of Inflation in a Period of Recession? At the moment. Perma Link | By: T Pettinger | Wednesday. but adjusted for velocity of circulation. it is not inflationary. some economists are fearful of inflationary pressure in the US. yet inflation is absent.) But. the problem will come when the economy recovers and the banks desire to resume normal lending. Retail prices recently fell 0. even though the monetary authorities have been increasing the money supply (through quantitative easing and buying toxic loans). In fact. inflation has not appeared. it does represent a very quick deterioration making the governments past 'golden rules' look meaningless. where the Money supply is rising quickly. Yet. Due to monetary intervention in the US. it seems a paradox that money supply (M2) is growing 15%. the US is in a protracted recession. This is because in a recession. the recession could be devastating. It will also mean future chancellors have many difficult choices. the velocity of circulation falls. The velocity of circulation will rise and this will magnify the effects of the increased money supply. (see: Money Supply and Inflation in US) It is a similar situation in the UK.

£474bn) now. it may become much harder to finance gilt sales increasing risk of having to resort to money supply measures. Budget Deficits. US national debt as a % of GDP is likely to rise from 70% of GDP to over 80%. But. there is a risk that any recovery may be much more inflationary than is usual. if markets become fearful of UK and US ability to pay back. It could prove a difficult balancing act for the Federal Reserve to remove all the excess liquidity they are creating now. that budget deficits can cause high inflation (e. (source: FT) Therefore. It is mainly in developed economies where markets are reluctant to buy debt. the markets appetite for government debt could get saturated as borrowing around the world increases. UK public sector debt is currently 47%. In the developed world budget deficits are rarely inflationary because markets are usually willing to buy government bonds which are seen as a rock solid investment. At the moment. like Zimbabwe) But.g. If budget deficits are financed by selling bonds they don't have to cause inflation. but on the worst forecasts. The recent failed gilt auction doesn't bode well. Dealing with the excess rise in money supply may prove more difficult. inflationary pressures may prove to remain muted. since a weak economic recovery is forecast. it is a tricky balance and the impact . it could also rise close to 80% of GDP. High levels of debt could put more pressure on the government to finance the debt by increasing money supply. However. I think the UK and US will be able to finance their deficits without resorting to printing money. Also. But.more than $700bn (€536bn. The problem is exacerbated by the rise in government borrowing in both UK and US. it is a fair point that worrying about inflation in the deepest recession since the great depression is to get your priorities wrong. The most immediate concern is the scale of the downturn and the prospect of deflation.

of higher borrowing. Related • Problems of Government Borrowing • Money Supply and Inflation • What is more likely inflation or deflation? Perma Link | By: T Pettinger | Subscribe to future posts | 1 Comments Links to this post Weak Economic Recovery At times of gloom we tend to fasten on to glimmers of hope with an over eagerness. there was a slight rise in mortgage lending in March. Therefore when interest rates were cut. The Recovery will be weak because: • There is no pent up demand. data showing a small recovery in the housing market may prove to be a temporary blip in a more protracted downturn. 1991. For example. people could spend more. but. The primary cause of the recession is bad balance sheets at banks leading to a contraction in bank lending. I would anticipate house prices to continue to fall for at least 12 months. Yes. It will take a long • • . Housing Market could continue to depress demand. interest rates rose very high reducing spending. The recession. Balance Sheets. they can only go up. then it is likely to be a weak and fragile recovery. If the economy does manage to recover this year. consumers are likely to try and increase their saving rates for a substantial time. Now. Also. interest rates are close to 0%. but. in 2009. quantitative easing on future inflation is hard to predict with any confidence. In the last recession. we could mention that falling prices are due to a temporary effect of falling oil and food prices. Also after a decade of borrowing. with the inevitable repossessions and bankruptcies has added to their problems. Hopefully the pace of decline may slow. price to earnings are still high. it was from a depressingly low level. and banks still reluctant to lend.

time for banks to improve their balance sheets and gain the confidence to return to normal lending criteria. Or maybe it is just greed . Often we see a mania for a certain type of investment only for it to implode . at the moment I think many would just take any kind of recovery. Deflation would definitely depress consumer spending for a long time. The government has been forced to increase borrowing sharply to finance bank bailouts. April 20. Perma Link | By: T Pettinger | Monday. • Government Debt. The Herding Effect. Why is It Difficult To Spot Asset Bubbles? We don't like Bad News. . Perhaps human nature is inherently optimistic. The recession has been global in its impact leading to a sharp reduction in world trade But. I would anticipate the UK and US would avoid deflation due to their policies of increasing money supply. Recent Posts • When do Recessions end? The economic recovery will be slow.e.people would rather hear forecasts of rising wealth rather than grim warnings. from Tulip mania in the 16th Century to the 20th Century dot com bubble. it might be an issue for the EU.g. the government will have no room for further fiscal expansion and may have to increase taxes sooner than economic conditions would warrant. In 2010. Prospect of Deflation. Housing boom and busts are common in UK. and there is even a chance of a double dip recession. 2009 Subscribe to future posts | 0 Comments Links to this post Why Do We Fall for Bubbles? One feature about unsustainable asset bubbles (boom and busts) is the regularity with which they occur. • • Global Downturn. but. it seems consumer rationality often falls by the wayside at the prospect of a quick buck. fiscal expansion + automatic stabilisers of recession. 2011.

if bubble collapses. Short Termism Many people in the chain are not thinking about long term sustainability. shortage of supply. Bankers often get commission for making short term profit. If market sentiment is bullish on a commodity . When house prices rose in UK 1997-2006. Rising asset prices encourages speculators into the market creating a self fulfilling prophecy of rising prices. taxpayer) loses when the bubble bursts It's Different this Time. but don't lose money if the market goes down. It looked like a classic stock bubble. It becomes a one way bet. When house prices are rising mortgage companies have more incentive to sell mortgages with small deposits. Fundamental Gullibility. Mortgage salesmen get commission for selling mortgages and they are more concerned with short term performance related pay rather than long term sustainability of the mortgage. . The strongly held belief that the majority must be right. Banks feel more optimistic so become more willing to lend. A bubble commodity gives chance of huge bonuses. people believed or wanted to believe that the internet meant different rules applied. Rising asset prices changes peoples behaviour.who am I to go against all those specialists? Bubbles create their own momentum. When price to earning ratios skyrocketed for internet stock.and someone else (i.Psychologists have often noted a herding effect. demographic factors to suggest house price to income ratios could rise above long term averages. You benefit from bubble . warning bells should have started to ring. But. many pointed to low interest rates.e. But. bankers don't have to pay it back.

2 million by 2010 . It will force a change in lifestyle for many. Lower incomes for the unemployed. People just think they will be able to sell at the right time. also will lead to further house price falls and losses for banks making . they just want to get on property ladder. The rise in unemployment will cause a rise in home repossessions. housing bubbles. Although insulated by unemployment benefits (and other benefits like housing benefit) many will see a substantial drop in income which makes paying bills and loan repayments difficult.People just like the prospect of making a quick buck. it's just people don't give negative warnings much attention. Lack of Information. When many ordinary people buy a house. It's Not Difficult to Spot. They want to buy a house to live in it. Rise in Home Repossessions. but. If this means getting a mortgage 5 times salary then this is what they will have to do. Related • Boom and Bust economic cycles • Boom and Bust in US Housing market Perma Link | By: T Pettinger | Subscribe to future posts | 0 Comments Links to this post Problems of Unemployment With UK unemployment forecast to rise to 3. 2.what will the economic and social costs be? 1. People do spot credit bubbles. they don't think in terms of long run house price to income ratios. They aren't buying to benefit from rising house prices. This is one of the most stressful and painful experiences for those concerned. And bubbles can be a way to do it.

Even when economy recovers unemployment is likely to keep rising. Unemployment is said to be a lagging indicator. 7.Periods of high unemployment create a higher natural rate of unemployment (underlying rate of unemployment) . The high unemployment of the early 1980s shocked the country in being a contributory factor behind riots such as the Brixton riot. . The impact will be a sharp rise in public sector borrowing 5. 2009 Subscribe to future posts | 1 Comments Links to this post Fantasy Economics What Would You Do If You Were Chancellor of Exchequer? For mock interview practise I often ask students what they would do if they were chancellor of exchequer. Cost to Government. It's such as open ended question they often struggle to know where to start.certainly a feature of the 1980s. Higher unemployment leads to an increase in spending on benefits. April 17. Unemployment can take a long time to fall. Older workers who are unemployed often end up leaving the labour market altogether. The unemployed will spend less causing a further fall in consumption and lower economic growth. 3. Social Instability. Perma Link | By: T Pettinger | Friday. This is known as the hysteresis issue. This is particularly problematic because of the unemployment concentrated in high paying finance jobs. But prolonged unemployment can be a trigger to social unrest. Demotivation.future lending difficult. . This makes economic growth more difficult 4. Here the unemployment was highly localised. .creating disguised unemployment 6. There is strong evidence long periods of unemployment make it difficult for the unemployed to re-enter the labour market. Negative Mulitplier Effect. sometimes moving to other benefits like sickness or disability allowance. The government also receive less income tax and VAT.

Current Crisis. At the moment. It's hard to know what else could be done in the current crisis.fiscal policy. it is necessary to run a large budget deficit to provide a fiscal boost. Petrol. lower interest rates. lower exchange rate. the fall in tax revenue has been so sharp there is little room for further fiscal expansion. increasing money supply would soon have an effect in bringing the economy out of recession.. There's no reason NI and income tax have to be separated. The biggest problem facing the world is global warming. This is a tax based on the principle that taxes should be based on external costs.What I Would Do? Integrate National Insurance and Income tax.. 2009 Subscribe to future posts | 1 Comments Links to this post Difference in Response to Great Recession The UK and Eurozone have responded to the great repression in different ways. It's not as if the government have been investing national insurance contributions into a giant pension fund for when the baby boomer generation retires. I know one thing I would definitely be doing if I was chancellor .I'd be fervently praying all the current policies . This is a fine line to tread. April 15. Perma Link | By: T Pettinger | Wednesday. Boosting growth will have to come from monetary policy.Fatty / unhealthy foods. Lorries and anything which created external costs to society. Therefore. The biggest cause is coal powered electricity generation. Give Firms incentives to make workers shareholders in the company they work for. .g. I would put a large tax on coal powered electricity and use the tax revenue to subsidise carbon free electricity generation I would also tax more . E. But. Pigovian Taxes. The UK tax system is too complicated.

Monetary Policy. Quantitative Easing. Also. In the UK it is more straight forward.pointing to the boost to exports. This reflects the ECB's greater concern about future inflationary pressure and a desire to keep the Euro strong. The UK.1.often pointing to this as a strength . the UK has been keen to borrow as much as the markets will stomach. 5. They have been more concerned about the negative effects of higher borrowing. The UK has been hit hardest by the current downturn. have seemed unconcerned about the Pound's corresponding decline . Related • When Do Recessions End? . EU countries have not been immune from this. Fiscal Policy. it is more difficult for the ECB to decide which countries bonds to buy. The ECB are reluctant to consider this. EU countries have been more sceptical of fiscal expansion. Germany have displayed a greater fiscal conservatism. on the other hand. the EU remains reluctant. The UK adopted a policy to purchase bonds through the creation of money. However. Bank Bailouts. 4. The ECB have reduced interest rates more cautiously and have interest rates 1% higher than in UK.reflecting their ability to weather the economic shock. 2. 'Printing Money' is an anathema to the German influenced ECB. 3. but has also embraced unorthodox policies to try and recover. UK (and US) interest rates were cut much quicker and more sharply. The UK has been forced into one of the most extensive bank bailouts within the EU. The UK feel higher borrowing will enable the government to kickstart the economy and to take the place of falling private sector spending. Exchange Rates. Firstly. The UK is pressing ahead with quantitative easing. This reflects the scale of the banking crisis within the UK and also the importance of the banking sector to UK. The ECB have seemed relatively unconcerned about relative strength of the Euro .

where rising wages have made their exports very uncompetitive. However. unfortunately. But.9 percent. unfortunately it could be much worse for countries like Ireland and Spain. could see unemployment touch 19% by 2010. • Housing Market Slumps. The Euro provides currency stability. On the one hand it insulates countries from an Icelandic style meltdown. That is desirable in the present situation. data suggests that the recession is hitting all economies . 2009 Subscribe to future posts | 0 Comments Links to this post Difficulties Facing European Economies The current economic crisis is often seen as an Anglo Saxon crisis. The strength of the Euro is a mixed blessing. On the other hand many Eurozone countries are suffering from a strong Euro. April 14. Combined with excess supply. Already high. Whilst the US and UK have witnessed spectacular housing slumps. The EU has become increasingly reliant on world trade. like the UK has benefitted) . Both economies became reliant on a construction boom that has switched to a slump.Perma Link | By: T Pettinger | Tuesday.even those without the same exposure to volatile housing markets. Spain. Originating in America and affecting the UK the most. The global downturn has seen a sharp fall in exports.see problems of falling house prices. Many European leaders (Germany and France) felt (hoped) they would be relatively insulated from the crisis because of their relatively lower exposure to the banking crisis and slumping housing markets. Firstly. it limits the response of European countries to the crisis. 1. The Euro has Proved Strong. Problems Facing Europe • Slump in Global Trade. and a shortage of banking credit. EU unemployment is likely to keep rising. • • • Lack of Flexibility. this has particularly affected Germany.5% Unemployment. In Italy it was -3. This is especially the case for fringe Eurozone members like Greece and Spain . In February Germany saw industrial production fall a record 2. which has a forecast of GDP growth of -3%. it removes option of depreciation to improve competitiveness (surely Greece and Spain would like to devalue. house prices could fall significantly creating many problems for economy . bubble prices.

Many eastern European countries are facing even more serious problems. Secondly.or even admit them into the Euro. Ukraine's national debt has been labelled highly risky.2. But. Swiss CPI recorded an annual price falls of 0. but the economy displays signs of real problems. Unlike the UK where 0% RPI reflects falling mortgage payments. the Swiss economy ran as calmly and soundly as .well a Swiss clock. . However. If not tackled quickly. Swiss GDP is forecast to contract by 2. The main problem in the short term is the impact of deflation. the impact of deflation can be difficult to dislodge . well oiled by the billions of inflows to private Swiss banks. It is every Central Banks worst nightmare. Italy over 100% of GDP) or a fiscal conservatism and concern over borrowing too much. not only is the international community trying to crackdown on tax havens like Switzerland. deflation can be one of the most damaging effects on the economy as it discourages spending and investment. the danger is that this decline in output could be exacerbated by the deflation. 3.2%. EU countries have proved more reluctant to pursue expansionary fiscal policy . There is pressure for the EU to bailout their eastern neighbours . but.either because of large public sector debt (e. both policies would place a strain on the Eurozone which faces enough of its own problems. Traditionally. As mentioned several times.as Japan found out.g.g.4%. 2009 Subscribe to future posts | 0 Comments Links to this post Problems of Swiss Economy It's a little surprising to find myself writing a post about the problems of the Swiss economy. April 9. Thirdly. This rate of deflation is expected to fall to 1% by mid summer. • Eastern Europe. Related • Europe heading towards recession • Greece Economy • Irish economy in recession Perma Link | By: T Pettinger | Thursday. this deflation reflects a fall in general prices. the ECB are more conservative in cutting interest rates and adopting unorthodox measures such as quantitative easing. e.

through intervention on the foreign markets. This involves basically selling Swiss Francs to reduce the value. If the Swiss France depreciates against the Euro. China is likely to look to depreciate the Chinese Yuan to boost a lagging export sector. Relying on a weaker Swiss Franc is problematic because: • Other countries will also try devaluing their currenciess (this is sometimes known as beggar Thy Neighbour Economic policies) • Switzerland has a current account surplus. which tends to increase value of currency. The problem of this approach is that many other countries are looking to devalue their currency too. It makes Eurozone exports less competitive and reduces price of many goods in the Eurozone. Perma Link | By: T Pettinger | Wednesday.The response of the Swiss has included attempts to devalue their currency. undermine the status of the Swiss France as a strong currency. has so far been forced to write down about $43 billion. UBS. April 8. The hope is that this devaluation reduces deflation because: • Exports are cheaper. the Swiss financial giant. 2009 Subscribe to future posts | 0 Comments Links to this post Good Time To Buy A House? . increasing demand • Price of imports rise. Switzerland may be forced into more unconventional policy methods which will Even Swiss banks got burnt by the subprime crisis. Japan has also suffered from the strong Yen and will be looking to weaken the Yen.

From a personal perspective. mortgage approvals were up in February and March. it is quite easy to see why the housing market crash has showed signs of easing. over time reduce . But. For me the great attraction of buying a house.£850 a month.the kind you would have no chance of getting now) I was paying £937 a month. Now I'm paying £435. was not the fact mortgage payments were cheaper than renting. (This included extending the mortgage term from 32 years to 47 years. There have been monthly reports of price increases (by Nationwide.If you can actually get a mortgage that is. Admittedly.Very tentative signs have suggested a recovery in the housing market. the fall in interest rates have made paying a mortgage a very attractive proposition. but not Halifax). When I took my mortgage out in 2005 (btw it was a self certification mortgage several times income . You don't have to be an economist to see the attraction of buying rather than renting . and confidence has slightly improved. the outlook looks less grim than in 2008. it was the expectation moderate inflation would. the rise in approvals is from a very low base.) To rent a similar house in Oxford would cost in the region of £800 . But.

house prices fell for 4 years. But. • In 2010 and 2011 as the economy recovers. I can only see the unemployment figures worsening significantly this year. £900 a month was a lot. the cost of renting would be almost prohibitive. April 7. But. I can't understand predictions of 50% falls in house prices. periods of rising prices proved to be false dawns. I still think house prices will fall this year. the difference with America is that UK doesn't have the same surplus of excess houses (This surplus of newly built houses will be a problem for Ireland and Spain) Whatever anyone says. the payments would get easier to make as long as my real income rose. I can't see the UK building many new houses. and as quantitative easing takes its effect on inflation. You would be a fool to budget on the expectation that interest rates would remain this low for any foreseeable time period. such as move towards smaller households will increase demand faster than the supply of new houses.the real cost of the mortgage. if I got a mortgage. • American house prices have been falling for over a year longer and still show signs of falling. interest rates could increase quickly. the price would keep rising by at least inflation. Thus in the long term. It also gave the chance of living rent free in retirement. in the UK. Problems Ahead in Housing Market • In the last housing market crash. In retirement. The present recovery in prices may be a similar effect. Rising unemployment is likely to cause a rise in reposessions and depress the housing market. But. This rise in unemployment is likely to counter balance the improved affordability reducing demand for housing. buying a house remains a sound investment for the long term Perma Link | By: T Pettinger | Tuesday. but I knew that if I kept renting. the fall wasn't consistent. 2009 Subscribe to future posts | 1 Comments Links to this post Dealing With Unemployment . Demographic trends. this is as good as saving for a substantial pension.

It is also difficult for the government to decide which industries / firms to save . depreciation in Pound and quantitative easing there isn't much else the government can do. (more: should government subsidise declining industries) • • Creating Public Sector jobs e. Although UK labour markets are already flexible • Better information. However. Although one feature of this recession is that well education workers are losing their jobs just as much as the unskilled. Building new homes by employing unemployed construction workers could deal with a public service issue as well as create employment. education and training to help the long term unemployed find jobs in growing areas of the economy. Arguably the most effective strategy for the government is to increase aggregate demand and allow market forces to create real jobs (as opposed to 'artificial' government sector jobs) The problem is after cutting interest rates. • • • Flexible labour markets to encourage firms to take on workers.g. Supply Side Policies. but loans should be competitive. For example. However.The scale of the recession means that unemployment is forecast to increase to 3 million. construction. After the 1981 recession. These are policies to deal with microeconomic imbalances. . There are many jobs that the government could create temporarily during the recession. There is an element of waiting hoping that the policies will work. a large fiscal boost. Expensive to create any significant number of jobs. Car industries have been calling for government support to stay open.the government may end up saving inefficient firms in an overcrowded industry. What. litter collection. they may be important for the speed by which unemployment falls. unemployment remained high for a long time. this is an expensive way to protect jobs. There may be a case for helping with finance. There are long term policies and won't deal with the current crisis. The justification for subsidising industries is that it protects jobs. After the 1991 recession. can be done to limit the rise in unemployment? Subsidise Declining industries. if anything. unemployment fell much quicker. Last year the government built 300 council houses. but government would at least save unemployment benefits Increase Aggregate Demand.

But. we can limit the extent of the recession. 2009 Subscribe to future posts | 0 Comments Links to this post The Skeptical Economist There are certainly no shortage of books on economics coming out these days.In addition to the demand side policies. I would have liked to see the government create more public sector jobs. The unfortunate truth is that there is very little we can do to prevent unemployment rising. It seems everyone is taking more of an interest in economics. we would have had more room for this policy which would definitely have helped cushion the blow. April 6. It is a great shame.behavioural economics and The difficulty of putting economic value on environment and nature . public borrowing for this year is already hitting 11% of GDP. The Skeptical economist by Jonathan Aldred looks into the assumptions behind many of the economic theory and beliefs. Economics and Happiness Motives of workers and consumers . If we had kept reducing borrowing in the boom years. Some of the issues raised in the book include: • • • • The economics of ethics. we can speed recovery and we can target spending to most effectively deal with the rise in unemployment • Supply side policies for dealing with unemployment • Unemployment in UK Costs of Unemployment • Perma Link | By: T Pettinger | Monday.

It is quite long. April 4. but. Rather than giving importance to utilitarian principles of efficiency Aldred makes a case for looking at a wider determination of what increases economic welfare and human happiness. This length probably gives chance to delve into more depth on issues.whereas economics represents how it actually does work. and sometimes lacks the shortness and snappiness of competitors such as Freakonomics.Aldred chooses a quote from Freakonomics "Morality. Something that is far more important than just considering economic data. it could be argued. Economics is above all a science of measurement. ( I blame the twitter culture.) • • The Skeptical economist at Amazon.. Freakonomics) A significant theme of the book is challenging this assumption of ethic / morality free economics.In Chapter one J." (Levit and Dubner. I think economics needs to give greater weighting to normative judgements of how society can improve real living standards. it will make it less likely to be bought. However. represents the way that people would like the world to work ..uk The Skeptical economist at Amazon.very bad I know.com Related • Does economic growth bring happiness Perma Link | By: T Pettinger | Saturday.co. that's just my opinion as someone with little patience to read long books. . 2009 Subscribe to future posts | 0 Comments Links to this post Link Between Inflation and Interest rates .

25%. (interest rates 0. • 2008 has seen negative real interest rates. This year has seen an unusually fast cut in interest rates.Source: market oracle • • Typically. But. i. why have interest rate cuts been ineffective in boosting economic growth? • Extent of the downturn. Using CPI inflation (which I still feel is best guide to effective inflation) real interest rates have become negative. Worried by the extent of the recession. In fact. nominal interest rates are 1 . certain factors have meant that the current interest rate cuts have been ineffective.e nominal interest rates are less than the inflation rate. As inflation rises. interest rates rise to reduce inflationary pressure.2 % higher than inflation. CPI inflation 3%) Typically. The recession has been so sharp. As inflation falls. many economists still expect CPI inflation to fall in coming months. a cut in interest rates of this magnitude would cause inflation. However. the Monetary authorities have even resorted to unorthodox methods to boost money supply. interest rates can be reduced to boost economic growth. that investment and consumption have fallen dramatically and so the cuts in interest rates have only mitigated the extent of the downturn .

Chart Showing Inflation and Domestic Demand . we may expect the economy to recover quicker than expected and in due course. But. fiscal policy. the worst falls in GDP may have passed. weak sterling) all help the economy to recover. we may see a return of inflation. I think the government and monetary authorities have done enough to avoid CPI deflation. Therefore.• House Price falls provide a powerful negative impact on spending. • Time Lag. Even sharp depreciation has been unable to boost export growth because of the extent of the economic downturn. with house prices falling 20% since the peak.c. There are tentatative signs of economic recovery (manufacturing data showing improvements. but. Lower interest rates should boost spending. fall in house price slowed) e. With quantitative easing this may appear sooner than expected. It is always difficult to predict.t. • Global downturn. this has reduce consumer wealth and therefore reduced spending. rise in mortgage lending. Outlook for Next 12 Months My feeling is that over the next 6-12 months we will increasingly see the various policies (interest rate cuts. Economies in the Eurozone may take longer to recover because of their greater reluctance to embrace expansionary policies. It is quite feasible in the next 12 months. interest rates could shoot up quickly to over 5% to deal with the inflationary impact of QE combined with economic recovery. QE.

Consumer Expenditure deflator is effectively inflation rate. • When inflation is higher than nominal domestic demand. it means real demand is falling.feedb Economics Essay en_US Subscribe Bottom of Form Subscribe via RSS •A Level Economics Blog •Economicshelp. 2009 Subscribe to future posts | 0 Comments Links to this post Top of Form To receive free daily posts.Home •About Author . enter your email address: [more info] http://feeds. Related • Does low inflation always mean low interest rates? • Real Interest rates • Understanding interest rates Perma Link | By: T Pettinger | Thursday.org . April 2.

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