The economy is nuts ... or is it? Economists just don't know!

Updated: Feb 13, 2018

The Brexit debate is taking up so much of Britain's attention, that other very important 'weird' phenomena are taking place and being left behind. I list some below for easy reference:

  1. In America, they currently have low inflation and low unemployment! This phenomena is so unusual that even Janet Yellen, the outgoing chairman of the Federal Reserve cannot explain it. She does however believe it is temporary. Also ...

  2. Followers of the news will have noted that the U.S Congress has just willingly agreed to allow the government to borrow and by extension allow the deficit to grow by over a trillion dollars over the next 5 years. By old school theory, this means that effectively in future you can kiss the world's Number One economy goodbye. Yet the world does not seem unduly perturbed by this, and are just as happy to lend that government money at low rates just as before. This agreement to borrow without restriction is as much to help fund the tax break that Trump just gave the rich as anything else.

  3. In the UK, the low taxes have failed to stimulate investment into manufacturing that the Tories predicted. It has also failed to lower the deficit efficiently. Many blame this on Brexit and its uncertainty, and certainly that can't help, but maybe that's not the only reason. Poor investment is is also the reason that many give as to why productivity is so low and encouraged everyone to not raise wages, because they say we would go bankrupt. Part of this weirdness is the fact that full employment normally causes high inflation.

  4. Other measures they have taken have lead people to question their unemployment figures and lead people like myself to claim the 'gig' economy is nothing more than smoke and mirror illusions. Effectively cutting a full-time job into 2-3 pieces and lowering unemployment benefits because the government claims , they are voluntarily staying at home to watch TV is a cop-out.

  5. Labour wants to borrow money to invest, and claim that renationalising some industries will not cost the taxpayer anything, either because they will simply wait until their contracts are up for renewal or else that borrowing to buy them back is only a short-term cash flow problem that will solve itself over time. This, of course, is counter-traditional thinking. Please note I did not say counter-intuitive. This is because the reasons I will cite below, this new thinking is actually quite intuitive.

The thinking goes like this. What if productivity, investment, growth, unemployment and minimum wage are not simply cause and effect factors? What if they are in fact somehow related in a different way? If that is the case then everything we have been doing so far is wrong because we have no idea what the long term effects are doing, and perhaps the post-world war economics that stimulated growth in the past century is the only real way to grow. What is needed is stimulation of demand, and not austerity measures. It would help explain the Chinese and Indian boom as well as the US and EU and UK slumps.

The articles I read have a common theme. The basic premise is that investment is not a just question of taxation (and money they may have available). It claims that it is in fact related to the demand of the market place. Since austerity measures tend to lower demand, low prices follow, but according to this theory it will also cause companies NOT to invest.

When central banks respond to what they observe is happening in the market, it is highly possible they are in fact pre-affecting it. It has long been thought that high interest rates are a cause of low investment because of the cost to companies. That is what everybody thinks, because that is what everybody is taught, but what if that is wrong? What if a company invested because demand was rising and ignored the interest rates? Since in high employment times this would tend to drive up wages, the tendency would be to invest in new technology, new machines that increase worker productivity which in turn leads to higher wages. This in turn leads to a further stimulation in demand and VOILA! You have broken the downward spiral everybody dreads, and reversed its direction. No longer are you a victim of your circumstances but instead you are driving them. I can see it now, as the next Labour government comes into power, another note on the Chancellor's desk.

"There's still no more money, but now everybody's hungry and sick as well!"

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