Thank you so much to all those who responded to my last blog. It is wonderful that it prompted much needed debate.
I was surprised though that I did not receive more comments relating to the monetarist subtext of my 'Keynesian solution'.
To return to my analogy of the car engine: what I am most concerned about is what economists would refer to as the velocity of cash circulation as well as the amount of cash circulating. In other words, is there enough fuel flowing into the engine to keep it going.
So when I suggest that we use savings on rent to increase disposable income, I am effectively proposing a boost to money supply to achieve stimulus. However, since this is an 'illusionary boost' it does not increase the actual amount of money in the economy overall. It simply redistributes it into families and onto the high street.
This measure would first of all return cash to the banks as their lending becomes displaced by the new cheaper facility. Since this is premium bank lending. It would force the banks to recover their losses of income from this type of business by seeking out new markets. In effect this is 'new money' and therefore an inflationary aspect that needs to be guarded against. However, given that the banks are still cautious and new business development is practically stagnant, this money will reach the market in a controlled way.
Second of all, this money increases the velocity of small cash transactions. In most cases the rent saving will be relatively modest but, and this is a crucial factor, it is regular: either weekly or monthly. But nonetheless it will encourage some small scale savings. It will not escaped your notice that banks are relentlessly chasing deposits as they struggle to meet their tier 1 capital requirements. Without satisfying this, the banks cannot lend.
The inflationary effect of this increase in small transactions is difficult to assess because it has to be set against the current situation where rent inflation is expected to push up rent by 20% over the next five years. Additionally, since economic activity is low, the economy is at risk of contraction and potentially deflation. These are factors which go some way in mitigating this risk.
Unlike a pure Keynesian approach of investment in infrastructure to promote employment and through this economic activity, I am suggesting that we use investment to redistribute cash and create activity which leads to jobs. In fairness, this is not actually my idea but was inspired in part from the interview given by Lord Heseltine on the Politics Show some weeks ago. He suggested that we harness the potential of normal, everyday activities involving spending to drive economic growth. This admittedly is a different take on that idea.
As promised, I have answered my critics and hopefully explained myself. But more debate and sharing of ideas is needed so as always, I would welcome your thoughts...
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