Shaw Capital Management Korea: World wide recovery appears to have firmed up. In the UK the statistics have lagged behind the anecdotal signs of the same thing. No one still believes the ONS’s peculiar decision to call a revised GDP drop of 0.2% in the third quarter (now revised down from an initial estimate of 0.4%). The UK now have not merely surveys of purchasing managers but also

employment, production and retail sales figures, all of which suggest that the economy levelled off in the third quarter and could have possibly also started expanding then, and was definitely expanding in the fourth.

Shaw Capital Management: Debit Policy is Working Well in UK & US Part 2 of 2 The reason seems to be that the operation of the ‘inflation tax’ is arbitrary and therefore seen as unfair—those who pay it are often the most vulnerable—e.g. with pensions invested in government bonds—while those with wealth and good advisors can usually avoid it. Ordinary taxation, however unpopular it may be, can be spread across the populace in a fair way, and so can normal ‘Treasury cuts’, which command wide respect as the only way of checking inevitable bureaucratic waste.

Since debt has been issued over a long period on the assumption of such a target, the gain to the Treasury from a burst of inflation would be large; it would act like a windfall tax on bond investors.

Shaw Capital Management Korea: Debit Policy is Working Well in UK & US Part 2 of 2 - So what each of these governments needs to do is put in place a mechanism for the medium term that first brings down the deficit and then ensures that the debt/GDP ratio falls slowly with growth. Meanwhile for some time to come there will be a need for monetary ease as the financial system is nursed back to health; this will keep the financing costs down.

The growth rate of credit to the non-bank private sector remains exceedingly low; while other sources of liquidity have increased as noted earlier, it is still clear that liquidity is not generally available on competitive terms to many small firms and ordinary households.

What has happened so far is that larger firms and wealthier households have benefited from low rates of interest while small firms and poorer households have found it difficult to gain access to finance at all. This is no basis for a modern economy to function well and recover confidently. Yet it is clear that restoring competitive finance when banks have been so damaged will take some time; there is no definite date when one can yet predict it will occur, what with the new capital required, the new procedures to be implemented, the paying-off of government to be done and so forth.

Shaw Capital Management Korea: Debit Policy is Working Well in UK & US Part 2 of 2 - So what each of Our conclusion is that quantitative easing has worked to partially offset the credit crunch and will continue to be needed as the banking system is rebuilt. Furthermore fiscal policy too will need to be supportive throughout the coming fiscal year, 2010/11—even though a process must be set in place to reduce the public deficit over the following 5 10 years. The threat posed by the banking crisis was massive and has not gone away; and while it is premature to celebrate, the policy response has so far been effective. It needs to be continued.