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MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

UK News — GDP Stronger Than Expected

Posted by WARREN MOSLER on July 23rd, 2010

As expected, boom time for now as the massive deficit spending raised savings and incomes, recharging consumer batteries, and supply the financial equity to fuel the subsequent expansion.

Look for rate hikes to add gasoline to the fire as well.

The risk of slowing from fiscal tightening is way down the road.

In fact, it’s usually the automatic stabilizers that tighten things sufficiently to throw the economy into reverse.

Again, years down the road.

Someday they may learn to use proactive fiscal rather than let the automatic stabilizers reverse recessions…

UK Headlines:

U.K. GDP Jumps Most in Four Years as Recovery Ignites

Bank of England Rate Setters Surprised By High Inflation,says Spencer Dale

U.K. BBA June Mortgage Approvals Fall to 34,813 From 36,418

Osborne Tells Cabinet He’s Cautiously Optimistic on Economy

10 Responses to “UK News — GDP Stronger Than Expected”

  1. hbl Says:

    You’ve said you expect a multi-year expansion in most major economies… But there seems to be evidence that housing bubbles in countries like the UK, Australia, Spain, Canada, and others have corrected to a much smaller degree so far than in the US.

    Is it that you expect these non-US recoveries to be resilient enough to survive falling housing prices and household wealth?

    I suppose regulatory forbearance in the banking systems plus a slow enough moving combination of falling house prices and rising incomes could fit with sustained multi-year recoveries, but it seems to me the downside risks are still sizeable. Maybe that’s still 2-3 years out though given how slow moving the start of the US housing correction was. And Japan did manage to keep growing its real GDP in the 1990s despite a huge real estate bubble correction, so as I consider it, perhaps the odds of ongoing expansion are reasonable, however subdued it might be…

    Reply

  2. warren mosler Says:

    Yes, downside risks, but in general my bent is deficits seem large enough to offer underlying support for multi year growth.

    Reply

    Paul Reply:

    This post-Keynesian economist (until last week Economic Advisor to the Acting Leader of the British Labour party before a move into the trade union movement) has a gloomier view: http://duncanseconomicblog.wordpress.com/2010/07/23/gdp-reaction-and-warning-from-the-us-data/

    There are plenty of other economists here warning that the massive hit to public spending incl capital spend will send us into double dip pretty quickly.

    Reply

  3. BFG Says:

    Warren,

    In the US, total net debt issuance is negative. I don’t think the deficit was large enough to overcome the fall in private sector debt, and the automatic stabilizers are working too quickly. The private sector are reducing their debt at a faster pace that the treasury can issue debt.

    Do you not see this as a worry? Taken as a whole balance sheets are still shrinking.

    Reply

    beowulf Reply:

    BFG, hopefully Congress will extend the Bush tax cuts that expire at the end of this year. It seems like a no-brainer to block an additional $300 billion a year (2% of GDP) drain from the private sector. But if there’s one thing Congress has a gift for, its doing nothing.
    http://www.bloomberg.com/news/2010-07-23/bernanke-says-extending-bush-tax-cuts-would-maintain-stimulus-to-economy.html

    Reply

    Tom Hickey Reply:

    Maybe, but politically it would be suicide for House Democrats. I very much doubt it will happen. The House won’t pass an extension and have to explain it to Democratic constituents. It’s no non-starter, IMHO. They will oppose extension as adding to the deficit.

    The “austerians” are going to end up taking the US down the deflationary road by forcing both parties to avoid increasing the deficit and debt. Krugman estimates that on the present course, which seems unlikely to loosen and may even tighten, deflation will bite in the first half of 2010.

    Reply

    Tom Hickey Reply:

    Oops. I’m behind the times. Should be 2011.

    strawberry picker Reply:

    Tom I found this funny, Irving Fischer actually believed finding more gold in the ground was going to fix things (rolls eyes) – why can’t the goldbugs see how futile a goldbacked monetary system is, at least we don’t have to find new gold mines to expand the supply today(sigh)

    “The U. S. is headed toward a period of business depression… beginning within the next two years, which may exceed that which preceded the War. … The only thing that will save us is a new gold policy or the discovery of a new process or additional gold fields. If the fall [of gold production] is not prevented by design or accident we shall throttle business, wringing out all profits and experiencing all the evils of deflation.”
    – Irving Fisher, Time Magazine, Jan. 20, 1930

    ” The Fed was largely responsible for converting what might have been a garden-variety recession, although perhaps a fairly severe one, into a major catastrophe. Instead of using its powers to offset the depression, it presided over a decline in the quantity of money by one-third from 1929 to 1933 … Far from the depression being a failure of the free-enterprise system, it was a tragic failure of government.”
    – Milton Friedman, Two Lucky People, 233

    “I am myself persuaded, on the basis of extensive study of the historical evidence, that… the severity of each of the contractions – 1920-21, 1929-33, and 1937-38 – is directly attributable to acts of commission and omission by the Reserve authorities and would not have occurred under earlier monetary and banking arrangements.”
    – Milton Friedman (1912-2006) Nobel Prize-winning economist, economic advisor to President Ronald Reagan, Source: ‘Capitalism and Freedom’

  4. Duncan Says:

    Warren,

    I’ve responded to this over at my blog:

    http://duncanseconomicblog.wordpress.com/2010/08/02/some-thoughts-on-fiscal-policy/

    Reply

    WARREN MOSLER Reply:

    very good! posted back.

    Reply

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