I just read an interesting article that I felt was worth sharing.

http://www.forbes.com/sites/johntharvey/2013/05/01/austerity-leads-to-austerity/

The key points:
- Deficits lead to growth by increasing incomes and reducing unemployment
- Surplus's lead to recession by reducing incomes and increasing unemployment
These tie in with the standard business cycle.

Other point to note:
- Governments such as the US and UK can never default on their debt because it is denominated in their own currency. These governments have central banks with the legal power to print unlimited quantities of the respective currencies.

These points mean that given the current point of the business cycle, we should be increasing Government spending rather than decreasing it, using this spending to put money into people's pockets which in turn will increase demand and create jobs.

Presumably the point about "unlimited" printing of money will depend on the currency in question being trusted by the rest of the world. My understanding is that this means we need a stable inflationary environment.

I am not really clear on how QE works and affects the UK economy. Is QE being used to buy Government debt and if so, is this newly printed money then being used to finance a deficit in order to increase income? If not, what is it being used for and why. If the Government is printing money and increasing inflation without putting the newly printed money in the hands of those that create demand, surely the GBP is doomed?

And if the GBP is doomed, what happens to a portfolio of equities. Shares will still exist in companies but there will be a vast change in the fundamentals of companies and a large increase in volatility. Valuations will be difficult and these assets will be held on paper, as good as illiquid until valuations are restored to fair "real" values.

Let's discuss.

Unlock the rest of this article with a 14 day trial

Already have an account?
Login here