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Why we wont get out of this recession for a while!

The cause of the recession was a default on debt. However the BOE has tried to counter this by lowering interest rates and then pumping money in so people can obtain more debt. But the people dont want more debt and cant afford it. Hence a large bubble in housing still remains. I see a steady decline in GDP/Assets over the coming years with increased inflation due to QE. Not a pretty picture for anyone.

Reply 1

MagicNMedicine

Your post does not make sense. You say people don't want more debt and can't afford it, hence a large bubble in housing still remains? Surely if people aren't borrowing then that deflates the housing market and brings it back in line with trend growth.

In any case the BofE lowering interest rates has not really made much difference to first time buyers or people wanting to increase their mortgages to move up the housing ladder because the lenders are refusing to lend to most people so effectively the lenders have tightened monetary policy in the housing market regardless of the BofE's actions. The main effect of the BofE actions is it has kept mortgage repayments for those already on the housing ladder down, so that it allows people more disposable income otherwise the consumption part of aggregate demand would have collapsed.

Like you say people don't want more debt and most people are trying to pay down debt and save instead of spending so the issue is one of a saving glut and people not spending, so it is the correct monetary policy to keep interest rates low to try and get people to spend more and discourage saving.

The real reason we won't get out of this recession for a while is because we are relying on monetary policy for stimulus and monetary policy has pretty much reached the limits of its effectiveness as we are in a liquidity trap. We need to be combining this monetary policy with a fiscal stimulus in order to get out of the recession.

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