QE2 - Just Print Money

Why did I change from being a fiscal dove in 2008, asking for deficit spending, to being a fiscal hawk in 2010, arguing that UK needed to drastically reduce its deficit? One reason was the dramatic success of unconventional monetary policy or quantitative easing (QE). Printing money and pumping money into the economy seemed to inflate asset prices, making people feel richer and bringing the UK out of the recession.

The success of QE leads to two conclusions: firstly, fiscal policy need not take all of the load; secondly, it's very bad practice to finance deficits indefinitely with printing money, so if you are using QE, you should get the deficit down sharpish.

I agree broadly with the scale of the UK fiscal tightening (however I would have done it more with tax rises, and with wage cuts: I think the spending cuts may be somewhat unrealistic). But it seems inevitable that such as sustained tightening, copied elsewhere, may well lead the country back into recession. To argue otherwise is to base policy on hope rather than logical argument.

In order to prevent a double dip recession/depression I suggest:
a) create moderate inflation, through rises in indirect taxation such as VAT and carbon taxes
b) pre-emptively introduce further quantitative easing, so as to prevent a 'double dip' recession.

The bank of england needs to take account of the 'feedback' of fiscal tightening and act decisively to prevent a double-dip recession. In the future reserve requirements may need to be raised in order to mop up the money.

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