teamhurtmore - I completely agree that the monetarist approach isn't working: it seems to me that all QE has achieved so far is a big chunk of (commodity price) inflation. LTRO seems to me to be an incredible misappropriation of capital/risk as banks either engage in a sovereign carry (spanish bond @7% - ECB base rate @1% = 6% free money), or simply park the money back in the ECB deposit facility and artificially improve their capital ratios. These strategies do nothing for the macro situation, and simply inflate bank profit/T1C for a HUGE risk on the ECB balance sheet.
I'm not sure if I agree that the UK government are constrained by the deficit when it comes to pursuing Keynesian spending policies though: we (along with the US and Japan, neither a model of fiscal health) control our own currency and therefore are not at risk of hard default. The bond market knows this and therefore prices our debt accordingly: making us effectively the best looking horse(s) in the glue factory.
My feeling with the real reason for the current trend for austerity is that it is simply political opportunism. Due to the consumer debt overhang a great number of people are worried about their personal circumstances and are currently in the process of deleveraging. I think that there is some overflow from anxiety about personal balance sheet problems to anxiety about national balance sheets: hence the entirely fatuous comparisons between sovereign debt and credit cards / household finances that have been made (initially by Osbourne, but increasingly by Balls & Alexander). These guys know that the comparison is entirely inappropriate, but they can make significant political capital by engaging in this kind of scaremongering around election time. They then have to keep that advantage by setting out on an austerity agenda, even though it is clearly an insane proposition.
More than anything, I'm wondering exactly how much worse things can get before they start to improve. If we really need a big stimulus then maybe WW3 is the only thing that would really push governments in that direction. The fundamental fact is that one man's saving is another man's borrowing: sovereign, commercial and domestic deleveraging all at the same time is never going to work.