What is the cure for the UK’s sick economy?

8th September 2011

There were yet more signs of weakness in the economy this week, after all, and something has to be done. Economists were startled by figures for industrial production – hit by shutdowns in oil and gas production – falling by 0.2% in July.

The Guardian reports that the economy will remain close to stalling speed for the rest of the year, as the world slips perilously close to double-dip recession, according to a new forecast by Paris-based thinktank the Organisation of Economic Co-operation and Development.

It appears the UK is sliding towards some form of renewed recession, if indeed we were ever out of the last one.

There is no doubt that the economy is sick – but what is the cure?

Another round of pumping money into the economy through quantative easing (QE) is being touted as a possible sticking plaster at some stage.

However, many commenters are warning of the danger of this route.

Jeremy Warner says in the Daily Telegraph: "What more asset purchases would undoubtedly do, on the other hand, is further devalue the currency, thereby putting a renewed rocket under inflation, which in the UK is already approaching 5pc. It is hard to see how pro-inflationary policy of this sort would in any way benefit the economy….

"Just at the point when the inflationary squeeze on disposable incomes caused by elevated inflation looks set to ease, more QE would only further add to the pressure on real wages and cash savings. Indeed, the only clear winners would be investment bank bonuses, which reached near record levels in the last bout of QE."

thedocument makes some interesting comments on the report: "QE is never "needed." History has shown time and again that its effects are more destructive in the long term than any short-term benefit received. The game here is that bankers get rich very quickly off QE by playing intermediary between central banks and the economy. They have convinced politicians and the public alike that currency and interest rate manipulation are essential to economic management and stability when exactly the opposite is true.

"If interest rates were left to float and currencies were not abused, long-term growth would be much more stable, our politicians would not be able to run rampant on spending, and a culture of speculation would not be necessary for protection from the malfeasances of government."

Mindful Money's economist blogger Shaun Richards says on his blog: "When I hear cries for more of this the bit that I find is missing is the explanation of what good it would do. For example a scientific experiment would draw from previous evidence and as we have rather a lot of it (the £200 billion of QE we already have) the silence on this subject from proponents of more QE is deafening.

"Indeed as the bank of England website tells us that the rationale for QE was/us.

"But the objective of policy is unchanged – to meet the inflation target of 2 per cent on the CPI measure of consumer prices. Influencing the quantity of money directly is essentially a different means of reaching the same end.

"So as we are above our inflation target and indeed well above their own logic as expressed above is that they should be withdrawing not adding to the stimulus.

"What never seems to get an answer from the proponents of QE is the answer to this question. Why should it work now when you have spent £200 billion already for little or no result? I might add, what do you think has changed that will mean it will work now as your call for it implies your previous effort has not worked?"

He adds that the media have failed to stress the point that the Chief Economist of the Institute of Directors was wrong when he said that more QE was "sensible"- "It simply isn't", says Shaun. 

James comments on the blog : "I am increasingly of the view that the  major advantages of QE are that:

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