Judging the impact of QE
The BBC carries this interesting video discussion with De Anne Julius about the impact of the Bank’s Quantitative Easing programme designed to support demand and lending in the UK economy. She emphasises the importance of gradually withdrawing the QE programme and she argues that the main effect of QE so far has been to hold down the interest rate on government debt (gilts) but that there is little evidence so far that QE has enabled a rise in lending to consumers and small businesses. The Indy’s Big Question looks at QE in their edition today.
read more...»Gloomy summary
Here is a summary of four reports posted on the Business and Economics sections of the BBC News website over the last few days. Be warned - none of them are particularly hopeful, the green shoots of summer giving way to autumn mists.
Debt repayment - a virtue or a curse?
This useful article from the BBC looks at debt, repayments and savings for individuals in the UK. In July UK households actually paid back more debt than they took out for the first time since the Bank of England started recording this data 16 years ago in 1993. At the end of that month total household savings amounted to £1.1 trillion, and total outstanding lending to individuals stood at £1.46 trillion (which is almost a trillion more than in 1993). Of this, £1.23 trillion was mortgage debt and £231m was other forms of consumer credit. Households are now starting to get the message about repaying that debt, with the average individual paying back £10 more than they borrowed in July – but the average personal debt standing at £24,000 is going to take an awful long time to pay back at £10 a month.
read more...»King confirms green shoots
CPI inflation has fallen to 1.6%, and RPI inflation started to recover to -1.3%, in the measure of the annual rate to August. Is this good news?
For CPI, it means that the rate is moving further away from the target of 2%, which would be a concern if it was to continue on that trend, but the RPI measure indicates a slightly lower level of deflation, which should be a welcome sign. However, in both cases, it depends upon the reason as well as the expectation of what happens next. In a speech to the Treasury Select Committee, Mervyn King suggested that inflation is likely to be volatile over the next year, and focusing on GDP, he said that there were signs of a recovery to positive growth in the third quarter of the year.
But he remains very cautious; although the European Commission forecast the UK to grow 0.2% between July and September, this is less than in France or Germany, and Mervyn King suggested three factors, or headwinds, against which UK growth would have to struggle in order to become positive.
read more...»Mature Banking
A post from student Tom Hosking
Where does parmesan cheese come from? It may surprise you to know that it is most likely to have come from a bank! Banks in Northern Italy have been running a cash-for-cheese loan scheme for the past fifty years. This year, demand for the scheme has risen 15% because cheese makers are struggling in these hard times.
read more...»The Wealth Effect
Economists often mention something called the ’wealth effect’ - referring to the link between the level of personal wealth and our decisions about how much to spend or save on goods and services. In our AS macro lesson today we were flagging up ideas about what causes a recession. Some of the causes are from overseas, for example the impact on banks and businesses from the fall out after the global credit crisis. But many of the root causes of a recession are home-made.
And it seems for the UK that people across every region have been hit by a sharp reduction in the value of household wealth.
The BBC reports that “in the course of 2008 alone, £815bn was knocked off the wealth of households in the UK.That amounted to an average of nearly £31,000 for every household in the UK.”
How is wealth stored (and accumulated?)
In property - there has been 9% cut in the market value of all residential property, from £4,077bn to £3,693bn
In pension funds and other investments - the financial assets of households, such as the value of pension funds and investments, also dropped by 9%, to £3,687bn
Asset prices have been falling - but the borrowing used to finance much of this does not go away
Net financial wealth adjusts household wealth for unpaid credit card bills and outstanding mortgage debt. This has fallen by 12% in the last year.
Little wonder that for many people the priority at the moment is to cut back on borrowing, increase saving and try to rebuild their ‘balance sheets’.
Much the same applies to the banking system too! Lenders are making it tougher to borrow and accumulating deposits of cash to give themselves a stronger ‘capital base’ for the years ahead.
In recent months, share prices have surged ahead and the FTSE-100 is now back above 5,000. There are signs too of a revival in the property market.
Will the wealth effect now start to prompt a recovery in demand for goods and services? Keep a keen eye on the housing market and the stock market.
BRIC Watch: Brazil climbs out of recession
The BBC reports that one of the BRIC nations - Brazil - is emerging from the recessionary stage of the economic cycle. “The largest economy in Latin America expanded by 1.9% in the second quarter from the previous three months.”. The article also flags up three policies that may have helped to bring about a turning point in the economic cycle: “Brazil has poured money into large-scale public infrastructure projects, cut taxes on new cars and passed tax breaks on companies and individuals.”
Can you name an example of a “public infrastructure project”?
Why might the government have chosen to cut the tax on new cars?
What is a tax break?
As a linked article Steve Schifferes from BBC news looks at the financial costs of the credit crunch and the many government bail-outs of banks and other lenders that have fallen into deep trouble because of toxic debts
“The world’s largest economies have spent $10,000 for every person in a bid to fix the financial meltdown of the past year.....most of this bail-out money was in the form of guarantees to the banking system, and as that system pulls out of the crisis, governments stand to recover most but not all of that money.”
A2 Macro: Domestic and External Headwinds
As part of an introduction to a deeper analysis of economic cycles one of my A2 groups considered some of the domestic and external economic headwinds that will shape the next stage of the business cycle - not least the likely pattern of any recovery in activity. The aim of the exercise was to emphasise the importance of the inter-connected nature of modern economies. And also to reinforce the idea that policy decisions taken inside the UK economy can be blown off course by external shocks.
Here are some of the ideas
Domestic influences
Consumer expectations - about future changes in taxes, unemployment, house prices, real incomes
Business expectations - the state of confidence / pessimism about sales, costs, credit availability, cash-flow and profits
Scope for further monetary policy decisions - e.g. extension of quantitative easing, edge policy rates to zero
Fiscal policy changes - need to scale back borrowing, control G, likely sharp rise in the tax burden
Access to credit and the cost of borrowing - are the banks and other lenders sufficiently recapitalised to start lending?
External influences
Shape and strength of recovery in economies of our major trading partners
Ability of the global economy to coordinate a sustained recovery
Growing pressures for protectionism / economic nationalism
Volatile exchange rates
Volatile international commodity prices
Large swings in direction of foreign direct investment / international capital flows
It is really important for A2 macroeconomists to keep abreast of the news and develop a deeper awareness of what is happening and the mutliple inter-relationships between economic, financial and political forces. Are we in a substantially brighter position than six months ago? What causes turning points in cycles? The anniversary of the collapse of Lehman Bros is an opportune moment to take stock of where we are.
Some suggestions for reading
Telegraph: Too early to celebrate the end of the recession
Guardian: Recession is officially over, according to leading thinktank
The Times: House prices rise 0.8% to fuel rebound hopes
World Economic Forum drops UK a place in competitiveness rankings
I always take the annual rankings of international competitiveness with a pinch of salt. There are plenty around - the latest has just been published by the World Economic Forum - all of which have a different methodology and emphasis. That said they do offer some interesting and useful insights on the current state of health of any particular country and also some of the underlying strengths and weaknesses especially on the supply-side.
The World Economic Forum places the UK as the 13th most competitive economy in the world in the new rankings - down four places from the 2007-08 table.
According to the WEF our main strengths are:
*An efficient of labour market (ranked 8th globally)
*We are ranked 8th on the technological readiness pillar.
*The country continues to have “sophisticated and innovative businesses, characteristics that are important for spurring productivity enhancements.”
But the fragile nature of our financial system is the Achilles heel this year
“The drop in rank is largely attributable to a weakening of the assessment of the country’s financial market, which has slipped from 5th to 24th place since last year, based on rising concerns in the business sector about the soundness of banks (126th) on the back of several banking-sector bankruptcies and bailouts. In this context it is not surprising that a significant and growing weakness remains the United Kingdom’s macroeconomic instability (71st, down 13 places since last year), with low national savings, an exploding public-sector deficit (related in large part to recent efforts to bail out the financial sector), and consequential public indebtedness”
Keynes v Friedman
A cross posting from my blogging colleague Jon Mace
Today’s extract in The Telegraph from Edmund Conway’s new book looks at Milton Friedman and Monetarism. Economics students need to have a sound awareness of the Monetarism versus Keynesian debate. Friedman and Keynes came from opposing ends of economic ideology. They doctrines have dominated economic thinking and policy over the last 50 years. In short Keynes placed greater emphasis on unemployment than inflation and gave warning that the state of the economy could be improved by some government interference. Friedman argued otherwise.
Conway provides a good analysis of the difference between these two economic giants:
“Inflation is always and everywhere a monetary phenomenon,” Friedman said. In short, by pumping extra money into the system (as the Keynesians were prone to doing) governments would drive up inflation, risking major economic pain. Friedman believed that if central banks were charged with maintaining control of prices, most other aspects of the economy – unemployment, economic growth, productivity – would take care of themselves.
While Keynes had asserted that it was difficult to persuade workers to accept lower wages, classical monetarist theory argued otherwise: that lower incomes for workers and lower prices for firms were acceptable in the face of rising inflation. The growth rate of an economy, argued Friedman, could be determined by controlling the amount of money being printed by central banks. Print more cash and people would spend more, and vice versa. It also marked an important political departure: whereas Keynes argued politicians should attempt to control the economy through fiscal policy, Friedman advocated giving independent central banks control over the economy using interest rates
The piece then goes on to examine the successes and failures of the two doctrines over the last fifty years. I always think it important for students to have an awareness of the changing economic conditions and favored policies over the decades, it only helps them to ingrain a deeper understanding of the theory.
He finishes the extract with an excellent quote from Martin Wolf:
Just as Keynes’s ideas were tested to destruction in the 1950s, 1960s and 1970s, Milton Friedman’s ideas might suffer a similar fate in the 1980s, 1990s and 2000s. All gods fail, if one believes too much.
The article in full can be found here.
Most Popular Topic Tags on the Economics Blog
recession, demand, economics, price, unemployment, prices, inflation, investment, costs, profit, downturn, supply, trade, debt, employment, confidence, euro, gdp, competition, capacity, risk, production, china, oil, incentives, exports, expectations, housing, pay, manufacturing, sterling, food, profits, property, mortgage, tutor2u, globalisation, banks, revision, slowdown, borrowing, usa, retailers, emissions, deflation, airlines, innovation, dollar, supermarkets, entrepreneur, efficiency, monopsony, elasticity, aqa, welfare, consumption, economist, productivity, keynes, saving, google, wealth, opec, depression, moodle, depreciation, jobs, competitiveness, credit crunch, economic cycle, cars, tim harford, externalities, stocks, infrastructure, environmental, strategy, carbon, vle, monopoly, subsidy, evaluation, eu, management, losses, protectionism, inequality, spare capacity, environment, poverty, bank of england, budget deficit, construction, behavioural, wages, macroeconomics, carbon trading, steel, commodities, output gap, skills, japan, oligopoly, imports, currencies, bbc, stagflation, contestable, agflation, cpi, farming, newsnight, choices, regulation, survey, taxes, government failure, itunes, minimum wage, lse, climate change, paul mason, population, intervention, keynes society, aviation, amazon, fiscal stimulus, single market, pricing, dan ariely, cartel, nationalisation, pollution, eton college, interest rates, shareholder, london, rationality, redundancies, market failure, rpi, mpc, shipping, behavioural economics, germany, robert peston, india, rsa, reputation, currency, quantitative easing, facebook, income elasticity, current account, stakeholders, brazil, coffee, savings, microsoft, monetary policy, crowding out, barriers to entry, collapse, multiplier effect, suppliers, economies of scale, price discrimination, uk economy, development, quiz, apple, surplus, taxation, labour market, tesco, free, scrappage, behaviour, tragedy of the commons, opportunity cost, open source, vat, smoking, cost of living, poverty trap, merger, growth, speculation, edinburgh, discrimination, ownership, cost benefit analysis, northern rock, global, ireland, supply chain, oecd, shareholders, scarcity, balance of payments, petrol, liquidity, duopoly, etonomics, iphone, trade deficit, starbucks, happiness, budget, human capital, subsidies, capital, immigration, eurozone, takeover, ecb, paradox of thrift, exploitation, advertising, wiki, public sector, utility, wants, labour force survey, peter day, tax, brand, blog, poland, iceland, foreign exchange, recovery, indirect tax, european union, robert frank, roger bootle, ocr economics, heathrow, hbos, hotels, freight, creative destruction, federal reserve, kaletsky, price war, information failure, spain, crude oil, transport, government borrowing, gini coefficient, sony, leverage, migrants, us economy, animal spirits, fishing, stephanie flanders, waste, information, milk, eu enlargement, anchoring, obama, aggregate demand, entrepreneurship society, needs, forecast, internet, discounting, real income, copper, deficit, contestability, nissan, evan davis, companies, fairness, geoff riley, blogging, standard of living, aqa economics, consumer welfare, martin wolf, renewable, labour mobility, collusion, imf, fair trade, pubs, income tax, obesity, res, disposable income, david smith, corus, national debt, devaluation, consumer surplus, vacancies, sub-prime, tariff, global economy, price capping, joint venture, twitter, accelerator effect, startups, guardian, yuan, youth unemployment, immobility, edmund conway, edexcel economics, redundancy, tata, walmart, relative poverty, sentiment, coal, tickets, vehicles, cash, diesel, base rate, russia, liquidity trap, contestable market, marginal cost, external shocks, movies, income elasticity of demand, libor, broadband, fixed costs, comparative advantage, accelerator, allocative efficiency, economic efficiency, pensions, training, king of shaves, satisficing, trend growth, undercover economist, hot money, congestion, price mechanism, deleveraging, positional goods, migration, jobless, social entrepreneur, apprenticeships, hyperinflation, age structure, cyclical, chris coleridge, monopoly power, financial times, ucas, pay cuts, reserve currency, ryanair, wheat, mervyn king, aldi, law of unintended consequences, carbon tax, gillette, deindustrialisation, yahoo, organic growth, barclays, price volatility, derived demand, liberalisation, house prices, richard thaler, royal mail, markets, diseconomies of scale, veblen goods, paul krugman, schumpeter, pension, demography, structural, logging, green revolution, tax burden, savings ratio, ocr, the economist, nhs, job losses, biofuel, drugs, gold, nelson thornes, scotland, cross elasticity, brics, redistribution, footfall, british airways, research, producer welfare, ebea, income distribution, social costs, ft, enterprise, general motors, natural monopoly, tariffs, o2, deforestation, economic welfare, bonds, asda, will king, automatic stabilisers, landfill, economax, energy, long tail, jim o'neill, disincentives, resources, profit margin, podcast, share prices, external shock, slump, philip allan, hedge fund, students, fiscal drag, hysteresis, ftse, elasticity of supply, buy to let, logic of life, contraction, equity, market structure, global business, oil prices, market power, health, ben bernanke, hedging, enlargement, retailing, supply-side, declan curry, nokia, price fixing, chris anderson, bric economies, diane coyle, dynamic efficiency, stimulus, hamish mcrae, toyota, john kay, fiscal policy, winners curse, zimbabwe, compound interest, contestable markets, frictional, rory cellan-jones, status races, claimant count, green shoots, repossession, eastern europe, healthcare, royal economic society, sustainability, public good, credit, superfreakonomics, vertical integration, inflationary pressure, invention, accession countries, probability, sustainable growth, gnp, fairtrade, freemium, g20, affordability, nairu,All tags
ECONOMICS TEACHER RESOURCE NEWSLETTER
Join over 4,000 other Economics Teachers in the UK and around the world who receive the tutor2u Economics Resource Email newsletter. Get special offers, first news of latest resources, teaching ideas, conferences and workshops.
Recent Threads on the Economics Teacher Discussion Forums:
Posts in: General Economics Teaching
Video Case-study - lunchtime prices slashed
Long Exam Example to Use for Revision Please?
Good hotel in London for school trip
Competitive Markets
Diminishing Returns
Complementary goods - HELP Please!
URgent Help Needed
Equilibrium concept
The price of life
Extended Project Qualification
