This is an interesting approach. The problem is that such a monetary policy is not a great way for the savings side of the equation and assumes profits of business is the only important income savings component. This may be the case because debt overhang is so intrenched that paying down debt has to be seen as the best alternative to saving. The math justifies Carney's approach because paying down debt needs to be the order of the debt. However, the long term is needed because we are faced with huge debt overhangs. Nothing builds debt more rapidly than banks being involved with the housing market. Banks now operate on a maturity mismatch basis that the monetary theorists do not understand. We need another academic like Lord Keynes to relight the text book for full employment in a fully transformed world economy. Barring that we have to settle for people like Carney to follow a tightrope policy path.
One has to wonder whether a generation of non-saving will develop should incomes not rise because fiscal policy does little more than stimulate a subsidised construction industry funded by foreign banks desperate to avoid restrained lending policies at home. Foreign banks will blow up a home financing balloon in London that only those desperate or stupid will partake in. Best for most to sit tight for four years and watch the debacle? Desperate times call for desperate measures and Cameron seems to hope, like Brown before him, that an impossible mismatch can be undertaken without financial calamity. It is a gamble that I would not recommend since it plays into the weaknesses of foreign banks escaping tough markets in USA, Portugal, Spain, Italy, Greece. Sure they can lend easy money, but should they?
Rebuilding manufacturing industry is a tough challenge because there is a need for small concerns across Britain to invest in highly efficient capital and people with a skill and knowledge base. Producers may see the opportunities but be put off because demand for larger amounts of domestic product justified on the basis of increasing efficiency is not there or still not price competitive with the likes of India or China. Should firms focus on technical niches they might have a growth path. In the past, firms have suffered from undercapitalised and under-skilled employees. It's a fact that modestly efficient work forces cannot hope to compete in the long run with low wage exports from China. The devil is the firm that uses the local skilled labour to undercut the competitors local skilled labour with low wage imports.
Increased capitalisation of the workplace with more skilled workers and state of the art machines are probably only possible in a huge diversified and growing market like Europe, so the membership within the EU is critical for the future of Scottish and British industry. The serious talk of political separation by Scotland is damaging to employment prospects in that region and if achieved with reduce economic opportunities narrowing the options for those wanting to invest in Scotland's skills.
In the end, banks may be the main beneficiary of a lax monetary policy that may catch them off guard with bad loans should consumers not opt to repay existing debts while they can. If they don't the underlying maturity mismatch of home and consumer loans will lengthen and grow.
The maintenance of low interest rates as part of a design for a 'soft landing' from excessive lending to housing sector interests was in the first place appropriate for domestic housing. However, what the British banks did was link the US housing market to returns in the UK. One has to wonder at the outright stupidity of British institutions in letting American banks off load their bad balance sheets to British investors. It was only going to be sustainable as a currency interest rate gamble and like so many, was not justified by the data nor the mathematics.
