For or Against Quantitative Easing

With their fiscal policy being so restrictive, the government seems to be relying on monetary tools to bring the economy out of recession. The low interest rates and the introduction of quantitative easing (QE) are clearly expansionary, with the aim of increasing demand in the economy.

I have previously explained the effect of the low interest rates, so I will explain the theory behind QE. It is often described as simply ‘printing more money’, but this is slightly misleading. QE is normally used when normal monetary policy fails to achieve the objectives of the Bank of England. It involves the Bank buying financial assets from banks and other private sector firms with electronically created money, thus increasing the excess reserves of the banks. The banks are then expected to lend more, so therefore increasing the amount of demand and consumption in the economy. Through the multiplier effect, the initial value of the QE is increased and should have a more imposing impact on the economy.

However as we know, the UK is still in a period of stagnation, showing that the monetary policies aren’t having the desired effect. This is most likely down to the conflicting fiscal policy that is aimed at reducing the budget deficit and is reducing demand in the economy further. There are also other reasons, such as the time lag that is expected from QE. So maybe it hasn’t been given enough time to take full effect and produce the results politicians are hoping for. The issue of time is also the reason that we cannot implement more QE, as the result could be a huge increase in the level of inflation as demand rises to too high a level. More QE will also lead to a lower exchange rate; this means imports become more expensive to buy. Here lies a problem as the UK has a high level of imports. The increased cost of imports would lead to an increase in the prices that we see, so affectively firms would be importing inflation.

The unpredictability of the level of increase in inflation is why some economists believe QE is not worth the risk. It could eventually lead to making the initial problem worse for the economy. In my personal opinion, QE is necessary considering the situation the UK is in and the lack of demand. It seems to be one of the only available options left to us, considering the Eurozone crisis and the world economy in general is also negatively affecting our economy.

Is the deficit that important?

I often hear on the radio or read in the newspaper that the government is aiming to reduce the national debt and this is the reason for the strict fiscal policies they are implementing. That is an incorrect statement. The government cannot be looking at reducing the national debt, since the UK has such a high deficit at the moment.

The deficit is the difference between how much the government spends and how much it collects on a yearly basis. Our national debt however, is the total amount we owe. So the deficit in fact adds to the amount of debt, we as a nation owe. The difference between the deficit and the debt is especially important because when politicians talk about reducing the deficit, all that really means is that our debt isn’t growing as fast. It does not mean we’re actually getting out of debt.

Reducing the deficit is such a major objective as it is growing at a faster rate than the economy. This means a rising debt to GDP ratio, which in the future could provide the country with a debt that is out of control. Obviously this presents a problem, as shown by the way Greece has been affected by its huge debt, which is resulting in an economic collapse.

The deficit has already been greatly reduced by this government, as it has fallen to 8.3% of GDP, but more needs to be done to reach the 3% figure. Reducing the deficit flags up a certain policy conflict, as the reduction in government spending also makes it much harder for the economy to recover and overcome this period of stagnation. I personally feel that the deficit is a slightly more important focus, because if it continued to stay at such high levels, the effects on the economy would be much more dramatic and damaging than if we stay in a recession for longer. 

UK interest rates and economic growth

Why have constant low interest rates not had the desired effect of increasing GDP like economic theory would dictate?

Interest rates have been at a record low of 0.5% for more than three years now an outcome the monetary policy committee had in mind was an increase in GDP. This increase in GDP would stem from the theory that comparatively low interest rates should increase consumer spending and also investment. These increases contribute to an overall increase in demand in the economy, which in an ideal world would lead to no/minimum inflation while decreasing unemployment as supply tries to keep up with demand.


The increase in consumer spending and investment comes from the idea that such a low interest rate gives people and firms’ very little incentive to save, so therefore spend more. The interest rate means that consumers get very little interest on their savings in banks and it also means for firms that it is 'cheaper' to borrow money from banks to finance ventures such as buying new machinery as they pay less interest on their loans.


This seems like justifiable plan, but the theory is under the constraints of ceteris paribus, meaning that it will work with all other things staying equal, so no other interferences on the economy. This highlights a limitation that can be seen in many economic theories and is the reason why economists cannot predict the future of an economy, which does not live up to the expectation of many people.

The interference that is stopping this seemingly painless answer to our problems are the fiscal policies also being undertaken. The restrictive fiscal policies are a way of reducing the national deficit (not national debt as the media often publicises). The government are rightly trying to reduce this deficit to a reasonable level, which allows the national debt to become manageable.

Austerity reduces government spending in the economy, which directly reduces the demand in an economy. It also leads to a potential reduction in consumer spending as benefits or public sector wages are reduced. This reduction in demand and other factors such as low confidence counteract the increase in demand that should be seen due to the low interest rates. In addition since interest rates are low but have not really increased demand in the economy to a sufficient level, they will have to stay at this record low for the foreseeable future, while different monetary devices are used such as quantitative easing.

Urbanisation- always a good thing for the economy?

Economic growth often implies the conversion of rural land to urban uses as regional economies transition from a rural-based economy to an urban economy based on industry and services. We all generally agree growth is a good thing, but it is not as clear to me as to whether urbanisation is a result of growth or facilitates the growth.

Urbanisation occurs naturally as firms and the public try to reduce the amount of time and money spent on commuting and transporting goods or services. This then counteracts the cause of labour and factors of production immobility, so decreasing the level of ‘forced’ unemployment. It also has the effect of potentially improving prospect for jobs, education and housing. Living in cities permits people and their families to benefit from the increase in the number of opportunities due to proximity, variety, and competition. This all contributes to the demand in an economy, which is needed to drive economies forward and fund an increase in GDP.

However as with most if not all economy changing activities, there are unintended consequences of urbanisation. The main consequence being the social impact of the influx of people, it is often associated with increases in: crime, inequality and congestion. In addition there is a lot of opposition to urbanisation from environmental groups for obvious reasons as it will increase the demand for resources that contribute to global warming.

It is clear that urbanisation has positive implications on economic growth; I initially would have argued that it cannot have this effect if there is not already a certain level of growth occurring already for the cities to be able to handle the rural flight. A city needs to be able to have the capability to supply the increase in population or it would just not work and also there would be no attraction for the new population in the first place. My view has changed since looking into the subject more closely and realising that what is helping the developing countries while they experience big increases in GDP is the increased urbanisation of their most successful areas. India is a great example as it is going through huge urbanisation and is showing that it is an integral part of the economy initially growing.

On the other hand there are examples, as ever, to show that this is not true for all countries. Parts of Africa are going through structural changes and urbanisation is a big part of those changes. I would suggest that even though these changes are occurring, they are not bringing about anywhere near the same level of growth as in India. The reason for this is Africa’s urbanisation is driven by the ‘push’ factors, which are environmental overload and degradation, resource scarcity and conflict in rural areas. Whereas India’s urbanisation is due to the ‘pull’ factors, that result from economic opportunities in the cities. Africa has experienced little industrial growth to go alongside this fast growth of cities, and some African cities are imploding due to infrastructure dilemmas. African urbanisation therefore runs oppositely to general urbanisation that provides greater access to jobs, basic services, and social safety nets.

I ultimately think that urbanisation provides more positives for an economy than negatives, providing the country going through it can handle the increased demands that it brings with it. I feel urbanisation is more welcome and has a greater chance of making a real impact when it is done due to the 'pull' factors I highlighted earlier. However as Africa gets to grips with its levels of urbanisation I see the potential for it to progress using the resources that it has, which could even see it eventually becoming a big force if it exploits its huge energy providing potential.

The idea of a direct democracy isn't as positive as it seems

The three arguments in favour of direct democracy are that it:
Promotes responsiveness
Provides better signals than elections about voters policy preferences
Enhances the legitimacy of decisions made.


Although this sounds all good in theory, there are many problems associated with direct democracy. Firstly, a low level of interest from the general public means that a lot of people  don't participate, but the process and debate is ruled by interest groups or political parties. Also the best-funded side has the better chance of gaining the most support.


Second, there is a 'tyranny of the majority' problem which means the biggest groups in society will use referendums against the interests of minorities, no matter how correct/useful the claims of the minorities might be.


Finally, opponents of referendums argue that they are highly irrational. Referendums mean that voters look at the short term politcal outcomes due to them having to consider issues out of context and without being able to weigh them against others. In addition, it would also be very costly and take up too much time to get people to vote on every government decision.


Taking account of these factors, I feel that direct democracy is good for state government in certain situations. For example when the decision concerns something controversial or very important decisions. Otherwise, representative democracy is the option that  is much more practical.

Legalising drugs in the UK

I honestly feel that decriminalising all drugs in the UK is the only way we can successfully end our societies problems with drugs. I personally feel the  'War on Drugs' has been a failure, which has lead to the drug trade going further underground and become harder for the police to stop, meaning the problem is not being solved but just hidden. The Governemnt continues to defend it's drugs policies, even as the evidence against it mounts up to a level that will surely trigger change.


If we decriminalise drugs, then we bring these problems into plain view, we can see the full picture of the UKs drug problems and then we can start to make changes and address them. I dont feel we should legalise all drugs, but  we should legalise those which are not particularly dangerous, and also provide more dangerous drugs on the NHS for rehabilitation purposes.


If we did this we could:


. Set age restrictions and quantity restrictions


. Make clear the risks assosciated with each drug; just as cigarette packets  show you pictures of the many different ways in which they will kill you.


. Be sure of the purity and roll out consistent quality drugs, as most often the dangers assosciated with drugs come from impurities, or being told false information about what it is from a misinformed drug dealer.


. Tax it and make billions of pounds off it.


. Make harder drugs available through the NHS on prescription, and make drug abuse the medical issue that it is, rather than a criminal issue. This would allow us to treat and rehabilitate addicts with professional care, rather than just throw them in prison. Because many of those who are sent to prison return to drug use when they are released, and are unable to get a job due to their criminal records, this could in turn give them an incentive to use crime to fund their habit and the cycle continues while no problems are solved.


I realise there would still be a black market for cheaper drugs, but I dont think it would be half the problem it is in todays society. Just take a look at Portugal and you will see that legalising drugs can be a positive thing.

The Robin Hood tax

They say...'In a nutshell, the big idea behind the Robin Hood Tax is to generate billions of pounds – hopefully even hundreds of billions of pounds. That money will fight poverty in the UK and overseas. It will tackle climate change. And it will come from fairer taxation of the financial sector.


A tiny tax on the financial sector can generate £20 billion annually in the UK alone. That's enough to protect schools and hospitals. Enough to stop massive cuts across the public sector. Enough to build new lives around the world – and to deal with the new climate challenges our world is facing.


As a result of the financial crisis, the International Monetary Fund (IMF) has calculated UK government debt will be 40% higher. That 40% equates to £737 billion pounds, or £28,000 pounds for every taxpayer in the country. Having to pay back that debt means cuts in vital services on which millions of people around the country rely.


Total cost to the UK of financial crisis in terms of lost output according to the IMF was 27% of 2008 GDP.


So it's time for justice. It's time for justice for ordinary families and businesses. For the one in five British families faced with a choice between buying food or paying the heating bill. For the millions of people around the world forced into poverty by a financial crisis they did absolutely nothing to bring about.


The Robin Hood Tax is justice. The banks can afford it. The systems are in place to collect it. It won't affect ordinary members of the public, their bank accounts or their savings. It's fair, it's timely, and it's possible.'


I say... this tax will not be considered by any main political party and is essentially a non starter. It would help to kill off londons perception as the worlds biggest financial city as it decreases competitveness. Financial services is the most important industry that the uk has left. We don't have mines, we don't have car factories, we rely on financial services more than almost every other country in the world, so therefore taxing bankers like this is not the way forward.


Also it may be described as a tax on banks but it won't be paid by banks. It's an operating cost, so will be passed on to their customers: individuals with bank accounts and pension funds, companies that will raise their own prices, etc. In other words, it will make everything slightly more expensive and all investments gain slightly less return.


However I do see the appeal of getting more money back fromnthe rich banks thats essentially caused the credit crunch, but this is not possible with this rbin hood tax. The only hope of this ever working is if every other major country in the world implemented this tax as that would rule out banks leaving the country.

Scotland can survive as an independent country

Firstly, whether Scotland should be independent mainly comes down to one thing, economics. The SNP’s argument is that Scotland would be in a stronger economic position were to go its own way. The statistics and figures seem to say the same thing, GERS (Government Expenditure and Revenue Scotland) is still the most widely accepted calculation of expenditure and revenue in Scotland and it shows that, due to Scotland’s geographical share of North Sea Oil and Gas, Scotland has consistently been in surplus and contributing to the Scotland and the rest of the UK. Scotland has about 8.3% of the UK population, but it has been providing at least 1% above that in total revenue for the whole of the UK.

Because Scotland has large amounts of oil which brings in around £3billion of revenue every year, an independent Scotland would have the cushion of being able to lower business taxes without having to cut public spending excessively. The oil revenues could make up the gap for the short-term. With lower business taxes, Scotland would hopefully encourage international investment in the country which in turn would bring revenue and jobs, ultimately in the aim of producing more tax revenue in total.

Many people use the example of Ireland and relate it to Scotland’s situations. Oil is the one big difference between Scotland and Ireland which means that Scotland can pursue a lower tax economy and encourage this growth. Once revenue streams are increasing through general taxation, oil would then be an added bonus that could be invested in capital projects like roads, rail and ports to keep Scotland economically competitive

Secondly we have to understand what independence is. There is so much that links Scotland to the rest of the UK; there is a very tightly integrated market, we share a majority language, close cultural ties, a monarchy and many other things. Independence means that all of this will remain, the only difference being independent will make is that Scotland’s parliament becomes a totally separate and complete parliament.

Another important part of the argument regarding Scottish independence is the currency Scotland undertake, this is an issue I will discuss in a future post.

Should Greece just default?

The question for Greece is whether to continue its recent path - continued attempts at austerity, which do little to tame the deficit, followed by just enough bailout from the EU to avoid default - or whether to finally admit the obvious: it should default on its sovereign debt, abandon the euro, and go its own way.

If Greece defaults, the country gets immediate relief from the crushing interest payments on its debt, leaving it with a relatively modest primary deficit which excludes the big interest payments Greece is faced with now. If this were to happen, the pressure for austerity would as a result weaken. This would allow Greece to choose policies that encourage growth, rather than ones that shrink the deficit but hold back growth by imposing higher taxes.

By abandoning the euro and adopting a properly valued currency, Greece can restore its international competitiveness. This means greater employment demand from both domestic and foreign sources. Some believe a Greek default is a necessary first step that will provide Greece the breathing room to fix its economic policies in a calm, realistic manner.

The potential negative of default is that Greece will likely lose access to international credit markets for a long period of time, although it will be a much safer investment after default than it is now. But being cut off from foreign lending for a few years is not a disaster, it might encourage cuts in the wasteful and unnecessary parts of the Greek governments spending.

A bigger risk of default is that ending the crisis might reduce pressure for Greece to address the economy's fundamental problems: a convoluted tax code, disproportionate regulation, and an unsustainable public sector.

Growth for China

Is there even more growth on the horizon for China? The figures would suggest there could be, as their inflation fallen to a 20 month low. China has a GDP that outstrips nearly all countries in the world, even whilst it has been suffering a minor backlash from the Eurozone crisis and reduced demand from European countries. 


An easing inflation rate allows China and its government to create growth without worrying about causing significant price rises, which would possibly cause more examples of public unrest which would echo past reactions from the Chinese public.


However China should aim to make the most of this chance for growth as the IMF have predicted that China's growth towards the end of 2012 could be cut to 4% due to the Eurozone economy slump caused by the crippling debt crisis.

Yet another baillout for Greece

http://www.bbc.co.uk/news/business-17308804


Greece has now met the conditions for another huge bailout aimed at helping their free-falling economy. I do not for one second believe that this will solve the problem in its entirety. I believe that this bailout will help Greece slightly, but it will still be a shrinking economy for quite a few years to come. Also the level of austerity could crush any hope of growth for Greece and send it back into free-fall, increasing the chances of another bailout or debt swap deal.


However I do not feel the Eurozone has got any other viable choices than to help nurse Greece back to full economic health, as Greece will not voluntarily leave the Euro and the countries of the Eurozone can not be seen to be just abandoning countries who go through economic turmoil. From the start the Euro was seen as a great leap forward and many of the countries, if not all, believe the structure is not broken, so kicking Greece out of the Euro is not possible unless the Eurozone has been seen to be offering as much help to Greece as is realistically possible.

Greek debt swap

More investors have been signing up for Greek debt swap in order to allow the country to remain in the Euro if 75% of private lenders agree. For more info read http://www.bbc.co.uk/news/business-17283781


I would argue this is just wasting time and therefore delaying the imminent collaspe of an economy suffering from gross mismanagement. We should not be wasting resources saving Greece, but should be trying to find a way to make their default and withdrawal from the Euro as painless as possible. If the private investors do however agree to a debt swap, then Greece will eventually need another huge amount of money from Europe as their GDP has reduced a huge amount. Greece can not hope to survive without further help. I fail to understand why the Eurozone is still willing to throw 'good money after bad' as their money could be used to either help countries such as Portugal, Italy or Ireland who are struggling but have a realistic chance of a good recovery. Or the money could be used by the individual countries to stimulate growth in their own stumbling economies.

How the Euro restricts the options in the current economics climate

Interest Rates- With their own national currencies, countries could adjust interest rates to encourage investments and large consumer purchases. The euro makes interest-rate adjustments by individual countries impossible, so this form of recovery is lost. Interest rates for all of the EU countries are controlled by the European Central Bank.

Currency Devaluation- If countries weren’t part of the Euro they would be able to devalue their currencies in an economic downturn by adjusting their exchange rate. This devaluation would encourage foreign purchases of their goods, which would then help increase growth and improve balance of payments as there would be more exports. Since there is no longer an individual national currency, this method of economic recovery is also lost.

Government Spending- A third way they could’ve adjusted to the economic crisis was through adjustments in government spending, such as unemployment and social welfare programs. In times of economic difficulty, when unemployment increases and more people need unemployment benefits plus other welfare funding, the government's spending increases to make these payments. This puts money back into the economy and encourages spending, which helps bring the country out of its recession. However because of the Stability and Growth Pact, governments are restricted to keeping their budget deficits within the requirements of the pact. This limits their freedom in spending during economically difficult times, and limits their effectiveness in pulling the country out of a recession.

Why they thought the Euro was the way forward

The Euro is fundamentally a tool to enhance political solidarity. This political motivation began when the idea of the European Union and a single currency was first conceived. While it also has the economic effect of unifying the economies of participating countries, it ultimately does much more for the European Union.

Economically, the euro's advantages include:

Elimination of exchange-rate fluctuations - Any time either a consumer or a business made a commitment to buy something in a different country in the future; they stood the chance of paying much more or less than they had planned. The euro eliminates the fluctuations of currency values across certain borders.

Price transparency - Being able to easily tell if a price in one country is better than the price in another is also a big benefit, both for consumers and businesses. With price equalisation across borders, businesses have to be more competitive. Pricing still varies, but consumers can identify a good deal with more ease.

Increased trade across borders - The price transparency and elimination of exchange-rate fluctuations contribute to an increase in trade across borders of all the European countries.

Increased cross-border employment - Not only can business be conducted across borders more easily, but people are more easily employable across borders. With a single currency, it is less hassle for people to cross into the next country to work, because their salary is paid in the same currency they use in their own country.

Expanding markets for business - Business can expand more easily into the other countries. Rather than having to set up separate accounting systems, banks, etc. for transactions in countries other than their native one, the euro makes it simple to operate from a single central accounting office and use a single bank.

Macroeconomic stability - Because of the European Central Bank, introduction of the euro also helps to lower and control inflation in the EU countries.

Lower interest rates - Because of the decreased exchange-rate risk, the euro encourages lower interest rates.

Structural reform for European economies - The participation requirements of the euro pushed many EU member states who wanted to join to make sure their economy is in order and improve their economic growth. With the requirements of the Stability and Growth Pact, they were also supposed to maintain that control in the future.

People who abuse their health should not be treated on the NHS?

This is a wide ranging debate with people taking many different stances on the statement; I am going to focus on two of the main things people class as others abusing their own health:

1. Obesity

2. Smoking

According to the department of health, obesity can have a severe impact on people’s health, increasing the risk of type 2 diabetes, some cancers, plus heart and liver disease. At the present time the cost on the NHS due to obesity is estimated to be £4.2 billion. It is also believed that the risks of operating on obese patients are higher and the treatment may be less effective. In the UK around 43% of men and 33% of women are overweight, and a further 22% of men and 23% of women fall into the obese category.

In my opinion it depends on why a person is obese, some people have illnesses that mean they are obese e.g. they had an accident which causes them not to be able to exercise, In this case I think someone who for example has a heart attack should be able to have treatment or a heart transplant.

On the other hand people who are obese and do not make any effort what so ever to lose weight, before needing a heart operation or a transplant should have support to lose weight, but if they do not try to better their life even with the support I believe they should pay for their treatment. I think this because there are many other people who are in real need for a transplant who look after themselves, also their procedure will have a higher success rate, than someone who stubbornly carries on in their old ways not making any effort to lose weight.

The other problem is the NHS is stretched already with lack of money and thus causing a lack of staff and if it will cost £4.2 billion for treatment and operations for obese people then this will increase the strain while increasing the waiting time for other people in desperate need of help at no fault of their own. I don’t feel this should be the case as a result of an alarmingly large proportion of people who seemingly do not care about their own health, but expect the NHS to come to their aid when they feel the consequences of their own self-abuse.

Moving onto smoking.  Smokers make a reasoned & adult choice to smoke in the full knowledge of the numerous health risks associated with their habit. This is made clear by the warnings which appear so vividly on cigarette packets.  Smoking is the largest cause of preventable illness and premature death in the UK. It kills 106,000people every year. It causes 84% of deaths from lung cancer and 83% of deaths from chronic obstructive lung diseases

I initially thought smokers shouldn’t be treated for smoking related illnesses if they show no desire to quit, but after doing research I found that smoking generates over £7 billion of duty per year for the country whereas the cost of treating smoking related illnesses to the NHS is approximately £1.2 billion per year. I then realised that they essentially pay for their own treatment five times over. Looking at it in another way smokers also die on average 5 years earlier, therefore there is another saving to the government in pensions or benefits.

I generally agree that people who abuse their own health should not be treated on the NHS, but this is from a purely selfish view as I know I live a relatively healthy lifestyle, but the same cannot be said for all of my family and friends. If it was ruled that my granddad who smokes would not be treated by the National Health Service, I would rightly feel abandoned by the government that runs this country. So I have come to the conclusion that due to the point of the NHS being universal healthcare that is free at the point of use. Nothing should alienate that core principle not even perceived self-abuse. Especially not for a reason that seems to have the general idea of trying to teach them a lesson by letting them suffer.

Role of economics and politics in our lives

At present Economics plays a major role in defining our common future. Most nations make decisions according to economic factors only, so politics, the medium for this decision making, follows the economic evaluations of experts. Economics is a huge part of almost every decision that we make, as well as the decisions that the government has to make for our country.

However economics doesn't take into account the external influences on judgments, for example: cost of illness, illiteracy, pollution, human values and life quality in general, so it is only a partial, although important piece of reality. Economics should be the tool used, with which the aim is to pursue the vision a nation has of its common future.

Politics is the considered sequence of choices made by a government to follow the ideas and future of the people it represents and should stick to the values and principles shared by the public, meaning politics should then take into account all the things, material and immaterial that economics cannot take into account. Politics should then use economic strategies as a way of achieving the aspirations and objectives of country.