Sunday, November 02, 2014

Keynesian rebirth

Anatole Kaletsky writes about the takeaway from six years of economic troubles?.  Keynes was right. In a crisis, fiscal policy is effective and monetary policy is close to impotent.

 "Monetarism overturned the Keynesian fiscal consensus that prevailed from the 1930s to the 1970s, by introducing one simple assumption into the models that guided governments and central banks. The case for Keynesian fiscal stimulus in deep recessions was simply assumed away by asserting that interest rates could always be reduced sufficiently to stimulate private investment, discourage private savings and so restore growth. As a result, the private sector as a whole would never suffer for long from a shortfall in spending. Therefore government borrowing would never be needed to balance inadequate private demand."

However, it appears that this is not the case when there is household de-leveraging that will not be affected by the level of interest rates and, as a result of the economic slump that ensues,  firms are too cautious to invest

No comments: