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A week gone by: 27 March 2020

A message from Paul Abberley, CEO - with a round-up of the week

by
Paul Abberley

27.03.2020

Financial markets have recovered somewhat in recent days. Having plunged by around a third in value, they are today around one quarter lower. The losses remain precipitous, but there is some reason for a more constructive outlook. Around the western world, governments are committed to doing whatever it takes to support the economy. While there is no guarantee of success, the commitment is evident.

Monetary and fiscal policy has three objectives right now. First, to keep the financial system working.  Second, to minimise corporate bankruptcies to ensure the private sector is still around when we emerge for the crisis. Third, to put money in people’s pockets to ensure not only their welfare but that they can still spend. Healthy companies and healthy demand for their services will create a virtuous circle of recovery. A failure of this cycle could still see the recession become a depression.

But how can we afford all this support? The UK economy went through years of austerity, painful for many because we simply had to balance the books. The current levels of expenditure make a mockery of that programme. So, what happens next? Was austerity unnecessary, or is the current government response a panic reaction which will saddle younger generations with a painful mountainous debt burden? Two competing schools of economics are in active debate right now. Conventional theory sees the current intervention as entirely unaffordable, if laudable. But Modern Monetary Theory insists it’s naïve to see a country’s accounts as equivalent to a family’s. We can create the money we need. Let’s hope the newer theory is correct!

Read my previous note

Mid-week update: 25 March

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