Sunday, February 22, 2009

Weekend BOM

This is the GTI version

BOM is off-air for a few days while Tyler sorts out a serious admin backup and washes his socks.

But here are some links that caught his eye over the weekend:

Wheelbarrow news

Last week, BBC R4 Today brought us an excellent four-handed economist debate between Liam Halligan and Steven Bell (listen again here). The question on the table was whether the ongoing stimulus tsunami will unleash an inflation tsunami?

The inestimable Mr H strongly believes it will (and see his written explanation here). The equally inestimable Mr B accuses Mr H of being "bonkers".

Now, we have the greatest respect for Mr B - indeed, he's a most distinguished ex-colleague. And in truth he does not say we won't need those money wheelbarrows - he merely says nobody knows how this is going to play out. What you do on policy is a question of paying your money and taking your choice of the bigger risk - slump or inflation*.

But on this one, we side with Mr H. Over the last 12 months our economy has already been given one helluva stimulus, one that dwarfs anything Tyler has ever seen in his entire life. Besides the fiscal boost, and the bank bailouts, we've had a huge monetary boost, comprising not just the 4.5 percentage point cut in Bank Base Rate but a big fall in sterling.

And there's an interesting article in today's S Times by two Goldman Sachs economists, that helps us scale that monetary boost. They say:
"Whatever the cause, sterling’s fall is a big stimulus for the economy. One way of measuring its significance is to translate it into equivalent changes in interest rates. There used to be a rule of thumb that a 1% fall in the exchange rate has the same effect on output as a 0.25 percentage-point cut in interest rates. Our own estimates suggest the effect is somewhat smaller than this - about 0.17 points. But even on this basis, the 27% decline in sterling since the start of the credit crunch is equivalent to an additional cut in interest rates of between 4 and 5 percentage points."

So adding the interest rate cut to the interest rate equivalent of the fall in sterling gives a total interest rate boost of around 10 percentage points. We have never seen its like in our entire history.

Personal wheelbarrow avoidance procedures are now essential.

Oh, admin time has arrived already. We'll stop there.

*Footnote Yes. Quite. We could easily end up with slump and inflation. Just like we had in the 70s. Only worse. More like what Argentina got.

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