Duncan’s Economic Blog

More on the double dip

Posted in Uncategorized by duncanseconomicblog on October 8, 2009

Former BOE Deputy Governor Sir John Gieve has been talking to Bloomberg.

“The immediate risk that they’ll be very aware of is a false dawn,” said Gieve, who left the central bank at the end of February.

“We’re likely to see quite a difficult and slow recovery,” Gieve said. “Recovery back to the sort of growth we’re used to may be quite slow. Banks will take some time.”

Gieve’s caution on the economy echoes the minutes of the central bank’s decision last month, where policy makers noted that “promising indications” from asset markets could signal “false dawns.”

“I am expecting a bit of a bounce in the output figures in the second half of this year, but does that mean that the recovery is well established?” Gieve said. “You’ve got quantitative easing, you’ve got very low interest rates. After all that, it should cause a bounce.”

The economy is also showing some signs of persisting weakness. Manufacturing production slumped in August to the lowest level since 1992, the statistics office said this week.

The main risk, short term, is that everyone thinks the recovery is over, we tighten too quickly, and we see a sort of ‘W’ emerge,” Gieve said. “The manufacturing figures are a reminder that it’s too early to say it’s definitely over.”

And yet Osborne is still pushing the argument that cuts need to start now?


5 Responses

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  1. newmania said, on October 8, 2009 at 8:51 am

    Does this not prove that throwing freshly printed monmey at the position does not do any good , gets us deeper in debt and brings the IMF close to the door …and your answer is

    Spend spend spend

    As ever

    • duncanseconomicblog said, on October 8, 2009 at 8:57 am


      I argued before QE started that it was worth a try but might not work. I’ve been arguing for the past month that it’s not currently working. Yesterday I said it might be propping up asset prices but not helping the real economy.

      I’ve been arguing since March that what we need is an infrastructure based stimulus package and an active industrial policy based around rasing investment.

      I’m afraid though this does involve some spending.

      My argument is ‘spend, spend, spend’ as long as we face a liquidity trap and possible deflation.

  2. newmania said, on October 8, 2009 at 11:17 am

    I argued before QE started that it was worth a try but might not work.

    Oh ho….wiggle room ,….you’ll slither far in New Labour with that ability . I was just right which is a nice simple position .I agree with you on investment you drive me potty by confusing it with continuing to flush resources down the plug’ole on unaffordable Public Sector Salaries and Pensions Socialist meddling and all your other peccadilloes .
    Which Party however would you , in all honesty , say is likely to stand up to the Unions so as to divert what we can afford into not cancelling the high speed rail link for example ?

    I think we both know the answer to that Duncan something you may wish to think on over your first spoonful of humble pie

    PS Having said that you are way ahead of lefty opinion which is still generally in complete denial

    • duncanseconomicblog said, on October 8, 2009 at 11:32 am

      (long reply)

      Wiggle Room?

      I said back in March:

      “I suspect, given my views on credit, that the bank lending channel is one of the more important ways that monetary policy effects the economy. I also suspect that the bank lending channel is currently blocked. If I am right, QE will see an extra £75bn pumped into the economy (as gilts are taken out and cash put in through central bank purchases) and, probably, a £75bn rise in the money supply. The worry is that this will have little effect on the actual economy.
      So, should we try QE? Of course. Either it works and provides a stimulus that prevents, or lessens, a slide into deflation or it doesn’t and nothing happens. Either way it does not cause hyper inflation as some seem to suggest. Hyper inflation is not caused by monetary policy alone, it caused by monetary policy in conjunction with social and political breakdown. Zimbabwe and Weimar Germany ‘printed money’ to finance most government expenditure in the absence of a functioning tax base. The UK is a long way from that.”
      And then in September:

      “This is what we are now seeing. QE is succeeding in driving the money supply higher but having little impact on credit. And it’s credit that is the vital variable.
      With the banking system still broken, the transmission mechanism of monetary policy is still impaired. Fiscal policy must come to the fore.”
      Anyway. I will admit that I did not envisage QE having such a large impact on asset prices. In that regard I was wrong.

      QE could still work but would require much more direct action on the existing problems in the banking sector.
      Equally QE might be working – we can’t tell how bad things would be in its absence.
      But my point has consistently been that with the banking system broken (although a complete collapse was avoided) and with private sector demand depressed, then the State needed to step in.

      There are two separate issues here, the long run and the short run. In the short run we need to run a deficit to maintain demand in the economy.In the long run I want the level of investment raised. I think we agree on that. Where we disagree is in how to achieve that. You think the State can best cut taxes, regulation, etc and then the private sector will get on with it. I’m not so sure. I don’t confuse investment with public sector employment and all public spending. Some public spending is investment, some isn’t. But public spending has a vital short run effect on the economy.

      Historically the UK financial sector has not been great at encouraging long term, sustainable investment. This is where I think the State, guided by the public good, can help. There’s a great Heath speech from about 1972 that I’ll try and drag out. Adressing the IoD he said something like ‘You told us you needed stability before you would invest. We gave you stability. You told us you needed the right incentives. I gave you the right incentives. And still – you’re not investing’.
      The Tories would obviously be more likely to ‘stand up to the unions’. But I don’t think that is a necessarily a good thing! The last thing we need now, given depressed demand in the economy and rising unemployment, is downward pressure on wages. I don’t think you cut your way to prosperity. As I’ve argued before, there’s a collective action problem here. It’s perfectly rational for any firm to cut costs. But one firm’s cost is another’s revenue stream (suppliers) or customer (staff wages). In aggregate this perfectly rational behavior leads to worse economic circumstances for all.
      Anyway, thanks for putting me ‘way ahead of lefty opinion’.

  3. newmania said, on October 8, 2009 at 1:02 pm

    As I’ve argued before, there’s a collective action problem here. It’s perfectly rational for any firm to cut costs. But one firm’s cost is another’s revenue stream (suppliers) or customer (staff wages).

    Cutting costs is not the purely destructive process you assume it to be , we have had to find new ways of doing things and surmount considerable inertia . The result is that we have a Company that might conceivably be worth investing in . Without that investment itself is no help its just another way of throwing money at rubbish , that is certain what has happened around me .
    Supply, value , productivity competitiveness , these are all missing in action , it seems . I may know about 5% as much about it as you d Duncan but the old intestinal instinct seems to have been on the money thus far . I do not trust your mystic incantations and I recall much of your apologia from the last time the IMF came for a chat with Callaghan ( From a book I `m not that old ….. )

    Anyway you are now so politically far out it hardly matters if you are right

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