16 October 2009
Hollowed Out State – does State becomes less relevant Economic Policy dependence on global sentiments and financial markets Control over domestic currency US dollar appreciated 13 per cent after 2009 now fallen 12 per cent in last two months Good for the US exports grow imports more expensive US move towards export oriented economy rather than consumption
Forecast UK Deficit PSBR to reach 12 per cent of GDP and national debt 75 per cent of GDP Why worry? S Brittan there is no worry look at past histories deficits to pay for war Also compare with other countries Japan 170 per cent most of Europe above 80 per cent Worry is about buying government bonds and inflation expectations pushing up interest rates
Financial Markets close to collapse after bankruptcy of Lehman Brothers and also near collapse of AIG Financial Markets 3 times size of world GDP Governments worried about financial meltdown all stock exchanges lost 35 per cent of value World GP 60 trillion dollars world financial markets 175 trillion dollars
IMF argument that governments needed to avoid repeat of Great depression of 1929 Needed Global response Governments guaranteeing deposits of investors US Government guarantee of 250,000 dollar accounts through FDIC UK monetary easing 175 billion pounds Partial nationalise Lloyds Bank US bank TALF 750 billion dollars
The Gold Standard conversion of currency into gold 1925 US main depository of Gold UK Bank of England returned to Gold Standard 1925 increased interest rates made UK less competitive increases in unemployment Collapse of US Stock Exchange 1928 US Unemployment reached 25 per cent Election of Roosevelt 1933 Banking Act 1933 Glass Steagill
Retreat from Globalisation Protection and Tariffs barriers to trade Protect infant industries The Rise of Racism Anti Jewish sentiments The BUF Mosley Communist and Unemployment Marches Fragmentation Weakness of Weimar Republic Nazis win elections 1931
Worry about inflation when economy has problems of deflation unemployment rising. Government is a problem even though government can create jobs through stimulus Banks must act though on credit when credit is needed to boost demand Ideology of markets Ideology of Keynesian demand managment
Market liberalism concern with inflation Keynesians concern with unemployment Market economists unemployment should be left to labour markets – workers reduce their wage demands Decline of manufacturing and high paid jobs in the process of globalisation New technology and job replacement
1950 to 1970 Wages rising inequality falling Full employment trade unions Lates 1970s return to markets tax reductions for high incomes Return to inequality Decline of trade unions Wages stop rising
122 recessions since 1945 on global scale UK eight recessions US seven recessions All start in financial sector Falling house prices bubbles Falling equity markets bubbles Ripple effects financial to real economy Banks too big to fail Moral Hazard