Monday, 6 July 2009

The warnings of an impending fiscal crisis are there...

As housing markets crashed around the world, there was one common response from policy makers. They cried, like a Greek chorus, "we never saw it coming". For politicians, the financial crisis came like a thief in the night. It was totally unexpected, unanticipated and unique.

Of course, those of us with slightly more reliable memories will recall the countless articles from first half of this decade that clearly warned that the double digit annual increases in house prices were unsustainable. Despite the self-serving claims of ignorance and surprise, there was a mountain of evidence that things were going badly wrong with the property market. Moreover, it didn't take a genius to work out that the financial system was so heavily implicated in the bubble, that when it finally burst, UK banks would be in deep trouble.

What about those fiscal deficits? When the UK slides into a crisis, and the government can not raise sufficient funds to cover the difference between expenditure and tax, will politicians be able to plausibly claim that they "didn't see it coming"?

Today, the Telegraph spelt out the dangers of the policies now being followed by the Bank of England and the Government. It quoted Mr. Congdon, of Lombard Street Research, who pointed to the:

"..... “horrifying” consequences for leading western economies of bailing out their banks and attempting to stimulate markets by cutting taxes and boosting public spending. He said the markets had failed to digest fully the scale of fiscal largesse and said “current gilt yields [public debt] are extraordinary low given the size of deficits”."

It is there, as clear as snow, that if government deficits continue to grow, yields will rise and the economy will suffer. In other words, deficits don't resolve recessions, they create them.

When this crisis finally blows, the excuses of ignorance will seem very hollow indeed.

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