Thursday, 12 March 2009

The gilt market explosion

The UK government is now building up public sector debt at the fastest rate in peace time. This fiscal year, it intends to borrow almost ₤130 billion. It is extremely likely to borrow a similar amount next year. Moreover, this borrowing doesn't include the ₤1.2 trillion of taxpayer's money that is now on the line, guaranteeing bank assets and recapitalizing the banks.

It is time we woke up to the fact that we are in the midst of the greatest financial revolution since the UK left the Gold Standard. This public debt strategy - taken together with zero interest rates and quantitative easing - is a reckless economic policy experiment. To put it mildly, these initiatives are untried, untested and could lead to total macroeconomic chaos.

Why? Why is Brown and Darling doing this to the UK economy? The simple answer is an unwillingness to confront the consequences of past mistakes. For almost 40 years, the UK has gone through a series of asset price bubbles, with each one being wilder than the one before. These speculative cycles has landed the UK with the greatest financial crisis in our history.

However, Brown is like a gambler cannot leave the table. Rather than go home and acknowledge his losses, he has decided to put everything on one last turn of the wheel. He would prefer to see an explosion in public debt; set zero interest rates, and print uncountable amounts of new money - rather than honestly explain to the electorate that living standards must fall as part of the inevitable post-crisis adjustment.

The UK desperately needs a government that can honestly present the reality of our situation. We need to hear that the massive credit explosion and the housing bubble carried an enormous cost that we must now pay in terms of jobs and income levels. We need to hear that we will have to pay considerably more tax in order to clean up our banks. Above all, we need to hear that we have no "get out of jail" card and that we can not inflate our way out of our current difficulties.


Anonymous said...

Interesting post.

My reservation is that it matters what the money raised by issuing these gilts is spent on. If the money is loaned to solvent operations; spent efficiently on infrastructure projects - etc, then there is no problem in principle.

Of course, I'm not convinced that the money will be effectively used - but without considering this question, it is difficult to credibly claim fiscal policy irresponsible.

I consider, for example, the widespread use of PFI to have been even more reckless than significant government borrowing to invest in the same capital projects.

Anonymous said...

More debt to solve our debt problem - that sounds like a strategy.

Electro-Kevin said...

You're absolutely right, Alice. But still no end to the madness in sight.

Mitch said...

Only a change of government can change direction.Brown has no vision to offer and will not admit any past mistakes.

Anonymous said...

aSteve: When was the last time money raised by the State was "loaned to solvent operations; spent efficiently on infrastructure projects"?

Loaned to basket cases in marginal Labour seats, and wasted on hopelessly-managed infrastructure projects is more likely.

Anonymous said...

There isn't anyway to pay back this debt, it is simply too large. The banks should just be put into bankruptcy and the bond holders can fight over the assets in court. It is quite immoral to try to dump these debts on the poor taxpayer.
The government is already trying to inflate its way out via QE and it is probably going to work. Don't expect the truth from our politicians, it isn't going to happen.

Anonymous said...

Alice, I was not aware the British liked truth. We have pursued policies that have led to repeated economic and fiscal disasters since 1945 (one might even say before). There is no evidence that any of this has imprinted itself on the national pysche to the point where we would collectively accept and address our failings.

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