A plan for economic recovery

I'm sick of seeing left wing ''commentators'' peddle the myth that cutting public spending in a recession is bad. In 1921, America entered a depression. It lasted for 1 year. That 1 year equalled the first year of the Great Depression in terms of output last. President Warren Harding CUT TAXES and CUT SPENDING. The economy recovered quicker than at any other time in history, and was only beaten by the recovery that happened because of the Reagan tax cuts. By cutting the size of the state, Harding created extra capacity in the economy. But slashing taxes, he created extra demand and the recovery came because he essentially did nothing and let the people spend the money they work for.

Britain is in a uniquely horrible position. If the Credit Rating Agencies downgrade our debt rating, the yields on gilts will jump because investors will view government bonds as more risky, and they will want more of a risk premium. This will send borrowing costs through the already broken roof.
In 1981, the budget was panned by 364 economists, but these academic economists didn't understand market principles. The markets saw the very tough action against the deficit and realised Mrs T was serious about reducing the deficit, and investment flows increased. Of course, the 2% interest rate fall also helped. In delicious irony, the economy started to grow a few days after the publication of the economists' letter.

Academic economists are not market operators. Most, with a few honourable exceptions, don't understand the ''irrational exuberance'' of the marketplace. They abide by Keynesian principles (despite Keynesian economics being the most flawed economic theory of all time e.g. Keynes said that recessions were caused by a lack of effective demand, yet he never explained why people all of a sudden decided to stop spending at exactly the same time. Also, the idea that governments can prime the pumps is a lie. Governments don't create wealth. Central banks do. Governments consume wealth. Because we had a massive deficit (against Keynesian advice), they had to take the money from somewhere else and redistribute it.

Both Brown and Darling have said ''a lot of what Keynes said was right and still applies today.'' This quote just proves that Darling and Brown have never read the General Theory of Employment, Interest and Money. Keynes advocated building up a fiscal surplus during the good times in order to prime the pump during the bust. Brown built up a massive deficit before the crisis hit.
Even though I am a card-carrying Conservative, I am not a fan of Cameron. However, he was right to say that a ''monetary crisis needs monetary solutions.'' This is entirely correct. Fiscal policy is useless. We should slash spending now, and massively increase the QE programme, which, contrary to the uninformed armchair economists, will not cause inflation. There are massive output gaps in America and Britain, and these will stop inflation from rising for now. Also, capacity utilisation on average around the world is around 60%, so there is too much spare capacity for massive inflation.

The Bank of England should buy corporate bonds and not gilts. Most of the asset purchases have been gilts and not corporate bonds. Purchasing lots of corporate bonds will create extra reserves, and therefore extra liquidity. If the EU and the Asian bears start to do this, the recession will be over in a matter of months. And when the output gap closes and spare capacity is reduced, the central banks of the world can engage in open market operations to start selling back these bonds.