Ritchie and macro

The two don\’t go all that well together.

Nationwide’s house-price data saw a monthly drop of 0.9 per cent in August, its sharpest fall since February. The news prompted a sell-off in sterling, which plumbed a three-week low against the euro.

So that\’s the FT. In response Ritchie tells us that there must be lots of government spending to expand the economy and:

It has to be import substituting to protect the pound.

Erm, why?

A falling exchange rate is in and of itself expansionary of the domestic economy. It promotes import substitution and promotes exports, both of which are expansionary.

So, why on earth would we want to stop the decline of the value of the pound, exactly that thing which produces domestic expansion, in order to promote domestic expansion?

Further, why, when the pound is falling and thus expanding the domestic economy, is this proof that we must go and do something to expand the domestic economy?

Some time ago Ritchie revealed that during his first term on his economics and accounting course at university he decided to ignore all of the economics because it was obviously rubbish.

Shows, don\’t it?

2 thoughts on “Ritchie and macro”

  1. The other questions to ask of someone inflating demand are:-
    1. In not tackling the structural deficit now, how can you avoid Greek-style collapse later? At what point would the time be right.
    2. Most serious economists would agree that house prices are still above the long-term average, with the decline arrested last year by record low interest rates. When will they adjust back to normal? How much longer do we maintain the apparent wealth of home owners at the expense young people who cannot afford to buy?
    3. Low interest rates mean low returns to savers, the biggest saving being for a pension. How much longer do we maintain current consumption at the expense of future retirement?

  2. The low return to pension savers via low interest rates has nothing to do with government policy. It’s to do with demographic (and geographical) realities. Interest rates are set by the market.

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