Lars and Britmouse got there first, but let me point you towards Vince Cable‘s recent speech. The mainstream media focused on Vince’s reference to homebuilding in the 1930s. That is understandable in a country as obsessed with housing as the UK is, but the really interesting part was on monetary policy.
As in the 1930s, homebuilding now would be a sideshow, the real impetus to growth in the 1930s was leaving the gold standard, devaluation and reflation. This is exactly the policies I and others have been calling for. Homebuilding was a consequence, not a cause of the UK’s recovery.
Without the Bank of England supporting the government no policy effort will be successful and this is what Vince says. Furthermore, without communicating that clearly the policy will fail. This is exactly what people like Scott Sumner and David Beckworth have been saying…and know it finds itself in the mouth of Vince Cable:
The right way to understand loose monetary policy is in terms of expectations: of whether future money demand will be growing fast enough to make borrowing to invest or spend worthwhile. It is not enough just to look at the base rate. Look at Japan: because of its persistent deflation, its zero-interest rates still do not reflect easy money conditions. Anyone investing is facing the persistent pressure of falling prices and falling profits.
In the 1930s, the abrupt departure from Gold – so much condemned by the City – had the strongest possible effect on expectations of rising money GDP.
…What tools does the Government have? The first is continued use of monetary policy, and stronger communication of the policy aim it is meant to achieve – robust recovery in money spending and GDP. The Mansion House speeches signalled a clear intention to continue aggressive monetary policy.
Ladies and Gentlemen, that is Vince Cable advocating a NGDP target as a commitment device, exactly what this blog and many others have been arguing is essential if the UK is ever going to recover. There is some hope.