Finally... A sensible article in Moneyweek!

HAMISH_MCTAVISH

http://www.moneyweek.com/news-and-charts/economics/uk/eocnomic-growth-market-monetarism-ngdp-20200?utm_source=newsletter&utm_medium=email&utm_campaign=Money%2BMorning#comments

I may need to have a lie down.:)

HAMISH_MCTAVISH

SO should we replace Mervyn King with a robot?

What if the recession wasn't real? What if the UK economy could return to its former growth path quickly and almost without any cost? And what if all that was needed to start this process was a short statement from Bank of England governor Mervyn King?

A growing number of economists believe just that. They are called 'market monetarists'. And, led by Bentley University's Scott Sumner (read his great blog, TheMoneyIllusion), their ideas are suddenly being endorsed by some of the biggest names in economics and banking.

Market monetarists say that central banks should instead target a given rate of nominal gross domestic product (NGDP) growth instead of a given rate of inflation. NGDP is simply the sum of all spending in the economy in a year – it's what you'd get if you didn't bother to adjust GDP for inflation. A central bank might pick a target of, say, 5% NGDP growth, consisting of 2.5% desired inflation plus the 2.5% long-run trend growth in output. But how would it work in practice?

Well, say the market monetarists, imagine two possible states: an optimistic state where the people expect good times, prosperity and growth; and an otherwise identical but pessimistic state where the people are uncertain and fearful about their economic future. The citizens in the optimistic state will invest, borrow and spend freely which will lead to prosperity; uncertainty and fear in the pessimistic state will lead to self-fulfilling stagnation.

However, the poorer world could become the richer one, with a collective change of mindset. Here is where our market monetarist central bank comes in. Its role is as the great persuader. It creates those expectations of prosperity.

To change minds, the market monetarist central bank must be credible. Let's say that the Bank of England is not perfectly credible, in that its board of governors is divided between policy hawks (those who want to tighten monetary policy) and doves (those who want to loosen it). People might reasonably doubt its commitment to reflating the economy. How would the Bank of England persuade the economy back to health?

First the Bank would need to set an explicit target for NGDP growth. It would have to promise to buy unlimited quantities of assets (using newly created money) to achieve this target. As it set about its task, month by month, trillion by trillion, people would come to accept its commitment to the policy and begin to spend in the expectation of future inflation. The expected numbers would drive the real numbers. Spending would rise and the real resources of the economy would be fully employed, which would achieve the Bank's 5% NGDP growth target.

PaulF81

Sorry Hamish. Merv has indicated the BOE's remit will be a closer targetting of M3/M4 as well as controlling individual asset classes through specific legislation. The deputy governor indicated future house price bubbles could be controlled by introducing limits to LTV or multiples.

I think we are going to see a greater mix of regulation together with base rate in future to target inflation and also M3/M4, rather than a sledgehammer to crack a nut. When will this start? It already has.

http://www.telegraph.co.uk/finance/personalfinance/consumertips/tax/9013764/Income-tax-payments-hit-record-high-of-153bn.html

Why use monetary policy when you have a serious fiscal issue which can be tackled at the same time by applying same drag that increased rate rises would? No brainer really.

At this rate, the government looks to be on a good footing to eliminate the structural deficit.

geneer

Flight2quality wrote: »

What you mean is finally an article you don't get frightened by because you know property is in a bear market now?

You also know monetary precious metals are in bull markets and this is the reason you don't like moneyweek because they have been right all along.

You have constantly disagreed with them and constantly been wrong trying to argue the bull market for PM's is over, every time there is a dip. You will be singing the same tune every dip over the next few years as gold and silver continue up in their bull markets. Property will continue in its bear market as moneyweek keep saying and you will be constantly wrong as usual.

Hamish prefers ray "house prices wont crash (sept 2007)" boulger for his weathervane credentials.

pbouk

when you say " sensible " you mean its something that you agree, with but if its something you dont agree with it must be a load of rubbish!

homelessskilledworker

I am with one of the readers who say's that recessions are not bad things.
The main purpose of them is to clear out dead wood and create something stonger going on. Those who made risky gambles are punished and where moral hazard has a place.

The problem with the UK has been the tinkering and trying to control what wants to die, which will make things worse in the long run.
Any top perfoming athelete will tell you that you have to weaken and hurt the muscle first before it can get stronger.