Forex Flash: Wrong fiscal/monetary mix can lead to wrong side of history - Fidelity

FXstreet.com (Barcelona) - Trevor Greetham, Director of Asset Allocation at Fidelity Worldwide Investment believes that a failure to find the right balance between fiscal and monetary policy can be dangerous for countries.

He notes that Chancellor George Osborne described the UK government's economic strategy as one of monetary activism and fiscal responsibility, but he feels that the world is coming round to realise that a loose monetary, tight fiscal policy mix is unlikely to lead to a recovery in growth when interest rates are close to zero and consumers are intent on paying down debt.

He writes, “The UK should follow the successful US lead and ease back on austerity until a recovery is well under way. The boost to infrastructure spending needs to be much larger and it should be financed by additional borrowing. Recent experience in Japan shows that a complicit central bank would keep interest rates low.”

Greetham feels that the alternative of continuing with tight fiscal policy settings risks an over-reliance on ever more aggressive quantitative easing. Further, a continued slide in the pound on the foreign exchanges helps the export sector but it would usher in a more extended period of stagflation with rising food and energy prices squeezing incomes and keeping the consumer mired in debt. He finishes by writing, “We are living in a time of great experimentation that academics will study for generations to come. Countries that opt for the wrong fiscal-monetary policy mix will find themselves on the wrong side of history.”