First, I would like to discuss credit easing, which I do not think will work. To start with it is too small an amount. Twenty billion in loan guarantees will not provide the security needed to put confidence back in a market of an economy worth £1.4 trillion a year. It will not have a multiplier effect, because the guarantee is only for the first twenty billion. After that the risk of the market returns again on any further trades, even if the trade was initiated from the original twenty billion credit easing programme, which most will not be. It will also only affect unique risk, not systematic risk, which is the real problem the market faces. On top of that it only reduces the risk for the supply side of debt. The demand to buy goods through consumer credit has not been increased through reducing risk. This is also needed to enable growth.
I also think that the Chancellor is looking at the problem in the wrong way. He has stated he intends to increase capital investment by £30 billion, however the way he has gone about it makes me wonder how he expects to achieve that. Yes capital investment is a good idea, it restructures the economy and provides the means to produce more goods, or make manufacturing and trade more efficient. The problem is the execution of the plan. The method of funding is flawed and the incentive to provide the said funds is unlikely to work.
Since the Thatcher government the conservative party have become obsessed with debt as a method of providing investment and returns. I do not know why? And it perplexes me to this very day (perhaps Monetarism?). It is an obsession, to the point that they do not even understand any other way of doing it. They have become stuck in one way of thinking, which has impaired their judgement to a dangerous level. But it is not just them. I watched an interview with Will Hutton, in which he publicly exclaimed the difficulty of the current economic situation and how few options there are. I disagree with him.
The big problem in my opinion is that they are still using debt or credit as the main method of investment. Why? They do appreciate debt is the worst product in a recession, especially when there is high risk. Why you say? The price of debt is the interest rate, which rises when the risk increases. This makes debt based products more expensive when there is high risk, which occurs in a recession. There is another option, equity. Equity is the opposite of debt when risk increases the price, which is linked to value, falls. This makes equity the ideal method of investment in a high risk environment.
So why are they using an investment model which is not structured to work well in the current environment? And more importantly why are they not putting efforts into expanding equity investment? The £30 billion capital investment programme, for example could be funded by foreign investors in a much better way and that will stop Ed Balls arguing, "Where are you going to get the money from?" To start with the investment in equity products from abroad would get the funds needed to the best projects. Savvy investors will not want to put their money into a project that could likely fail, so the money will circulate projects that are most likely to succeed.
In addition to that and to address Ed Balls incessant attacks, the money would come from abroad. The foreign investment would act like a credit to the economy increasing the size of the funds available. Nothing has to be cut or taken away from anything else it is a simple addition to the economy. So to answer Will Hutton, there is a lot you can do if you do not get yourself stuck into one way of thinking, which the Chancellor and the majority of economists clearly have. If the Chancellor wants a solution to the lack of investment and a reduction in systemic risk, I would recommend he put his efforts into attracting foreign investment in UK equity products.
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