The way forward: quantitative easing

The economy is growing faster than expected - 0.8% in the third quarter, from July to September.

Paul Krugman, the Nobel winning economist, argued in the New York Times last week that "premature fiscal austerity will lead to a renewed economic slump." However,this does not seem to be the case: tightening fiscal policy has improved confidence in the economy. The credit agency, Standard & Poor, announced that Britain's AAA status is now "stable." Spending cuts will be a cataylst for a virtuous circle: improved confidence leading to a boost in private consumption and investment. On the other hand, high levels of public spending will only serve to crowd out the private sector.

But as fiscal policy tightens, there needs to be another path to stimulate output. This is where monetary policy comes in. The MPC should expand the money supply through quantitative easing. This will reduce the cost of money. Yes, short term interest rates are already near zero, but long term rates on bonds and mortgages need to be lower. This is the way forward.