Four concerns about our economy

There are may positive opportunities for our economy. But before I come to those, in a later post, I’ve four concerns about our economy.

First: The government have one chance only in their decisions on spending cuts. They must not fudge the issue. The country is braced for severe cuts. Business, the markets, and the nation won’t be happy if the government come back for a second set of cuts because the first set of cuts weren’t enough to solve the problem. 

Second: A further round of quantitative easing by the Bank of England – the printing of money – to prop up our economy is likely to create more problems than it would solve.  Printing money, rather than earning money, is inflationary. Additional quantitative easing would be a ‘beggar thy neighbour’ policy, which may start a bout of competitive currency devaluation. Here, I’m in agreement with Liam Halligan that this is a dangerous policy.

Third: Inflation is not under control, with the Consumer Prices Index remaining stubbornly over 3%, a full percentage point or more over the BoE’s target.  As I’ve argued, earlier this year, inflation is pernicious. It penalises those of fixed incomes, and makes investment decisions uncertain. I’m hoping that the government will press the Bank of England to refocus on inflation.

Fourth and final concern: Our balance of payments, the difference between what we sell and what we buy as a nation, is negative, which means we have to borrow to finance this. By lowering our exchange rate, it makes imports more expensive. This means that the commodities we buy, such as oil, become more expensive [Producer price inflation is running at 9.5%]. Again, my favourite economist, Liam Halligan, has something to say about this.

These are the dangers. Later this week, after the spending cuts are announced, I’ll post the opportunities for our economy, and there are many.

One thought on “Four concerns about our economy

  1. The cuts will be an absolute disaster for the country. A minimum of 800,000 people thrown out of work, onto a landscape of over 2 million already unemployed and with only 500,000 vacancies – do you really think the private sector will magically expand to recruit all of these people? I think not. Unemployment is a cancer on society, and it is much, much more important than keeping a few well-heeled businessmen happy.

    A word on inflation – better economists than I (Danny Blanchflower, for one) suggest that a sharp hike in inflation would be no bad thing – it would make the deficit easier to pay back, for starters. See here for more:

    http://www.bloomberg.com/news/2010-06-15/unemployment-hurts-more-than-inflation-commentary-by-david-blanchflower.html

    Like

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