I have a few issues with that table - the main one being GDP. Before the recession, the UK had a higher GDP than France, and I was under the impression that France's recession had been worse than ours (seeing as it's part of the Eurozone), and yet it's positioned us as lower than France in that table.

It's obvious why, currency conversion - because of the different currencies at use (why it's been converted into dollars rather than euros is beyond me), but the pound has fallen against the dollar more than the euro has, so the pound can now buy less dollars than the euro (in relation to before), this makes the UK look worse in that respect to what it actually is.

You could say that the pound falling is a byproduct of the recession, which it is, but it's also been detrimentally effected by policies such as quantitative easing - that devalues the pound BUT it's aim is to actually help towards GDP (greater money supply -> more money flowing -> banks more willing to invest).

Because it allows you to buy more things than you should actually be able to afford, which, in the short run, will lead to greater consumption and, therefore, demand. Greater demand increases investment and productivity, which is exactly what is needed to pull us out of recession. The side effects are that we have to pay back more during the good times - but that's easier to afford.

It's not just me saying this, btw, it's pretty much every single Government in the Western world.

Yeah, of course. But we're talking about the entire economy here, people defaulting on their debts has a smaller impact when we're talking about the entire economy.

And if we're talking about Government debt, then it won't default on its debts (well, it hasn't since the start of time, who knows what the future will bring), and due to the way that Governmental debt works, through securities and such, it doesn't have to pay back in large chunks, anyway, it mainly just has to pay the interest for very long periods of time.

Assuming you had no debt and you weren't running a deficit before the recession ...

If you have a moderate or large debt, and you have a moderate or large deficit, and you try to "Stimulate" the economy through larger deficits all that is going to happen is you're going to see higher inflation and higher interest rates which will have as large (or larger) of an negative impact on the economy as the positive impact from an increase in spending.

Whilst it is true that budget deficit can lead to higher inflation, that would only occur if there was full employment of resources (or near-full) within an economy to start with - it's only when increases in aggregate demand outstrip increases in aggregate supply that inflation occurs. If aggregate supply is able to increase inline (or roughly inline) with aggregate demand, then inflation will not occur.

Aggregate supply will be able to keep up with aggregate demand increases during a recession quite easily because a lot of the resources (of factors of production) have become unemployed during the recession. But I think this is going nowhere as it's simply going to turn into a keynesian vs monetarist debate.

I am interested in, however, your theory as to why both inflation and interest rates will increase. Higher interest rates tend to help reduce inflation, and vice versa.

That's only true if you follow a Keynesian model which was (essentially) proven wrong by the staflation in the 1970s ...

The economy is a system that naturally preserves homeostasis in multiple ways. When inflation is fairly high people who make investments that are measured in currency require a greater return on their investment in order to over-come the losses due to inflation, and since most of these investments are loans their natural tendancy is to increase the interest rate on the loan to a level that is (roughly) equal to:

risk assoicated with the loan + inflation + the return of a truely safe investment

Having noticed this relationship economist attempt to control inflation by manipulating the interest rate (though the manipulation of treasury bonds which are the only safe investment) to have the counter-pressure of higher interest rates happen before they're caused by inflation. The government only has so much control over the system, and as they increase the quantity of debt either the return on bond rates will rise or inflation will rise which results in (overall) higher interest rates.

Although I'm not aware of staflation, (I am reading up on it now), one could argue that the results at the end of the recession could support either Keynesian or monetarist point of view, when both ad and as will be increasing rapidly, and we'll see what happens with inflation at that point.


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Interesting on the interest rate thing. I was just going by higher interest rates -> lower consumption -> less ad -> less inflationary pressure.

As for firms investing, I thought of it as higher inflation -> consumers become less predictable -> investment becomes riskier -> investment drops, waiting for inflation to come down, though it makes sense that they would continue investing but demanding a higher interest rate.

It's written stagflation I think.

(as in stagnation plus inflation)

Yeah, I realised that when I searched it. :)

EDIT: After doing a quick read up of it, I don't really see how this proves or disproves keynesian model in anyway. It's simply where both ad and as are in decline, but as is in decline faster than what ad is (or as is decreasing and ad isn't moving). This can be down to anything that raises the costs to firms (as greater costs = lower supply), including commodity prices.

In some ways, the fact that the recession happened when it did is a good thing, I mean if it happened a year or so later, the price of oil would have been incredibly high, and we could have also seen stagflation on top of everything else that was going on.

There is no economic model than can adequately describe every economic phenomenon. Saying that staglation "disproves Keynsian economics" is extremely short-sighted.

By that logic, the recent economic phenomenon has disproved the assumption that markets are self-regulating, and that businesses act in their own long-term self-interest at all times (which the entire banking sector disproved). So I guess that means that we disproved neoclassical economics.