PER 2015
growth as the rate of interest rises and borrowing becomes more expensive or, in severe conditions, the availability of credit dissipates entirely. However, this is not always the case. In the UK, the Monetary Policy of the Bank of England released a forward guidance statement in August 2013, commencing “The Committee intends at a minimum to maintain the current highly stimulative stance of monetary policy until economic slack has been substantially reduce” 5 . In essence, the MPC have refused to change interest rates until the LFS measure for unemployment is below a threshold of 7%, in short; until the recovery is secure. These monetary restrictions have protected the demand side growth of the macroeconomy from being tarnished in the short run by boosting interest rates. The full wrath of the former issue will be felt in the long run as debt-spawning spending in the short run leaves less money for future generations. That being said, this is only problematic if these projects are not productive in the long run such as spending on war, however, long lived resources like roads and railways will not injure the economy in the long term. Not only this; debt-burdened countries such as the US and Japan are reprimanded for overspending through the loss of discretion in their budget priorities. As national debt mounts, a country’s fiscal capacity shrinks leaving less flexibility for state driven stimulus in order to neutralise economic volatility and cope with external price shocks in times of desperation. A principle feature of the pro-austerity argument is one which I have explored earlier on and has been a key component of the recent UK Coalition government’s economic strategy; the notion of ‘Ricardian Equivalence’. This suggests that, due to fiscal drag cut backs in public expenditure will trigger a fall in taxes, allowing the private sector to blossom as a result. If this were true, surely austerity offers countries the chance to cleanse themselves of debt whilst simultaneously maintaining a healthy economy fuelled by the private sector? Unfortunately, the relationship between private and public sector is not black and white. In a time of austerity, it is unlikely that these ‘automatic stabilisers’ will come into play as a constant revenue is needed to close the deficit. Not only will this, but consumption and investment levels only soar if supported by sufficient levels of confidence. That being said, global consumer confidence levels are on the rise since the financial crisis; improving by one index point to 97 in the first quarter of 2015 since the last of 2014. Whilst global economic giant Germany proves that savings are not necessary for a flourishing economy, such growth cannot be sustained in the future if set against a backdrop of national debt; although the topic polarises the views of economists. Overspending restricts policy makers’ fiscal ability, making them more vulnerable to economic turmoil, as well as putting a dent in their credit rating which can have an adverse effect on short term growth. Although the Chinese certainly have a formula for economic success; it’s not perfect, and I suspect some sort of ‘balancing act’ might be necessary in the coming years to ensure their growth is wholly sustainable. Should the Western world not see the error of their ways and adopt a savings intensive (and thus debt-free) economic model akin to that of our far-Eastern cousins, they might live to regret it in their bumbling search for long run prosperity.
5 MPC Forward Guidance Statement (August 2013) - http://www.bankofengland.co.uk/monetarypolicy/Pages/forwardguidance.aspx
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