As we forecast, Israel has raised interest rates again, by 1/4% as expected, with effect August. 1 to 1,75%.
At reader RE’s request I will comment on the sharp decline in bank lending. He asks me to do another macroeconomic note despite my having told you I would stop, writing: “When banks are not lending they are not creating money.
“Lending, espcially to small business, is declining and has been for over 18 months. Pres. Obama has propsosed $30 bn in funds for small business but the loans are not actually getting made.
“A chart from the Bank of England [shows] that UK bank lending has really fallen off the chart. This is primarilly due to a freeze up of the securitization markets, but there is anlso more caution in senior bank managers due to the economy.
“Not the case in East Asia where all the economies are growing rapidly because their banks are still making new loans.”
My reply: there are two “Keynesian” reasons for deficit spending. One is that tax receipts are cyclical so they go down when the economy is not growing. Government then fall into deficits.
The other is what Lord Keynes styled “excessive propensity to save” the problem RE wrote about above.
Anecdotally, I have heard from London business friends about the impossibility of getting loans for expansion investment. I agree that things look better in Asia, and even in Europe where the need for deficit spend in Germany, for example, is falling thanks to improved tax receipts.
I find it utterly hypocritical that Germany is alone among member nations in refusing to sign off on the new muddle of capital adequacy reforms proposed the Bank for International Settlements, the so-called Basle III, for fear that German banks would have to reduce lending in order to improve their capital ratios.
My economic studies were run by Keynesians (it’s generational). Richard Nixon said “we are all Keynesians now.” Ronald Reagan ran budget deficits as did George W. Bush whose veep said “deficits don’t matter.” I have been programmed to favor stimulus over premature deficit-slashing.
But while being a certified Republican, I am also a liberal one. So I believe in progressive taxation. That is why I was happy US unemployment benefits were renewed. And why I am willing to echo Warren Buffett calling for fewer tax cuts on people with means, so as to cut the deficit fairly.
The real debate today is whether the prospect of deficits ahead is itself deferring capital investment, hiring, and growth. When you get down to the wire, this is a myth unproven by any economic studies which fits interests of richer Americans.
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