Duncan’s Economic Blog

The Tories, the debt and ‘the markets’

Posted in Uncategorized by duncanseconomicblog on September 14, 2009

Paul noted recently that Philip Hammond got a little confused on TV.

Hammond was trotting out the new Tory line that we need to be tough on spending to appease ‘the markets’. 

Last autumn, around the time of the stimulus package, the right wing line was that this would cause the markets to stop funding the UK government or that Sterling would ‘crash’.

The same lines re-appeared around budget time.

Sadly for the Tories, the crash didn’t happen. So now, with a wonderful twist, they are peddling the line that the only reason ‘the markets’ haven’t lost faith in the UK is the prospect of a Tory Government.

In this were the case (that the markets were happy lending to the UK, due to the prospect of a Tory regime) the cost of borrowing would surely be related to the likelihood of a Cameron government.


The chart below does indeed show some correlation.


Are the Tories right then? Not really. Not unless the prospect of a Tory government is somehow holding down US bond yields too:


Cameron/Osborne/Hammond might be really into cutting, but I doubt they’ll make much impact on the US Federal Deficit.

As I’ve explained before

There are a vast number of factors that determine yields – the expected rate of inflation, the likely course of short term interest rates, the perceived strength of the economy, the attractiveness of other assets – not to mention technical reasons such as pension funds matching their liabilities to long term, stable assets.

The Tories either know this and are being willfully dishonest or they don’t. Which would be kinda scary.


8 Responses

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  1. Paul said, on September 14, 2009 at 9:52 am

    Am I interpreting what you say correctly? My interpretation: It doesn’t matter that much what happens to UK public spending – UK bond yields will be determined by a whole range of much more infuential factors within the world economy.

  2. duncanseconomicblog said, on September 14, 2009 at 10:05 am

    I’m saying that the state of the public finances is only one factor amongst many. And the UK will never default, so it’s certainly not the most important factor.

  3. dannyboy said, on September 14, 2009 at 4:00 pm

    Duncan – good one. The trouble is that while the tories seem embarassingly naive on economic issues, so too, I’m sorry to say, are the vast majority of the population (even the well educated ones), so they may well get away with it.

    In terms of averting the economic disaster in waiting that is a tory government, how best to expose their economic vacuity without boring the public with terms like output gaps, multiplier effects and ricardian equivalence?

    The fact is that the public in general have had a scare and now perhaps regretting their debt binge, and will therefore project the same reasoning to public finances. Keynsian gobbledygook like the paradox of thrift is mostly lost on them, and in any case is easily swept away by a coupel of minutes of hyperinflation scaremongering in the telegraph.

    Finally to answer paul, it seems to me a rather important factor in determining uk bond yields will be the degree of increased domestic bond buying demand that emerges. If we posit a signifant private sector retrenchment and increase in savings, those savings need to go somewhere.

  4. dannyboy said, on September 14, 2009 at 4:29 pm

    Galbraith is on record the other side of the pond saying exactly what duncan is saying.


    To answer my own question above, the way to deal with deficit hawks in public debate is for a united front amongst key governments including, especially, the germans. Achieving that will be difficult, but would definitely wrong-foot the tories.

    • duncanseconomicblog said, on September 14, 2009 at 4:31 pm

      You’re right. The problem is people think in terms of personal finance and don’t grasp that goverment borrowing is different. Thatcher was very skillful at talking in terms of ‘household economics’.

  5. dannyboy said, on September 14, 2009 at 5:02 pm

    There are two objectives regarding making the case for public spending. Firstly, that it is economically imperative and the reasons why it is sustainable at least for a time. Secondly, and this is critical, people need to be convinced that the money won’t be wasted. While I am strongly in favour of having the public sector pick up the slack, I personally remain to be convinced on this latter issue.

    There is an issue with exit strategy though, and it can be seen in the demographics. We can suggest that for some time private sector saving will support deficits, however at some point, after the major part of the boomers have retired, that saving is likely to turn to net private dis-saving and would require very significant deficit reductions.

    If I were a deficit hawk, I’d be pointing that out and asking whether it is fair to saddle future, smaller generations of the young with bailing out what remains of baby boomer wealth. This is a fair question regardless of ones ideology, and no doubt it will be a big issue over the next 2 decades, during which time the age issue and the issue of inter generational equity is going to be a very hot political potato.

  6. Dividing Lines said, on September 15, 2009 at 1:50 pm

    Only been reading this blog for a short time, but it’s most enjoyable.

    I agree (but I’m no economist, of course) that choking off spending now risks a double dip – but so do a lot of things, including schemes like cash for clunkers which draw forward demand for short-term consumption. And you look to ‘the opposition’ for some sense and all seem to get is opportunism and muddle.

    The problem I have, even when I hear the slightly more realistic note that has crept into politics recently, is that ‘the right time’ to begin cutting will never come as long as the current generation of Labour politicians is in ‘power’.

    To whit, and I simplify somewhat, it wasn’t deemed necessary to control debt in the ‘boom’ years; and, because the boom was unending – thanks to the PM’s genius – there would be no bust in which reserves would be needed. I see it as only too plausible that the ‘draw a line and move on’ brigade will say ‘OK, we’ve learned the lesson, the next boom will be sustainable thanks to our brilliant management of the economy, so we don’t need to cut.’ And that scepticism is reinforced by the psychological flaws that marr the PM in particular, where he can seemingly never admit he was wrong, even when he announces a stunning about-turn.

    So I fear we will kick the can down the road, just so the govt can carry on our merry debt-subsidised march to the broad sunlit uplands of prosperity for everyone and equality for each, the many not the few hard-working families etc.

    Also, I’d be interested to know how you can assert so unequivocally that “the UK will (can? shall?) never default”. Isn’t the willingness to risk debasing the currency – implicit in the risk that we fail to unwind QE in time – the same as defaulting on our obligations, albeit less spectacularly?


    • duncanseconomicblog said, on September 15, 2009 at 2:44 pm

      Thanks for your comment.

      I agree that debt was hihger than would be ideal during the boom years, although would argue that it was because of too little tax rather than too much spending.

      Yes – debasing the currency is the real concenr. But I just don’t see where the ‘inflation’ will come from with credit markets still blocked, zero wage pressure, etc.

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