“Slashing spending now could push the economy back into recession and inflict further structural damage on the UK," said the Liberal Democrat Shadow Chancellor.
Commenting on George Osborne's Mais Lecture, Vince Cable said:
“Osborne's latest economic commentary shows just how out his depth he is when it comes to the important economic issues.
“Slashing spending now could push the economy back into recession and inflict further structural damage on the UK that will make it harder to sustain our credit rating.
“He is at odds with his leader on when cuts should come and fails to appreciate that what the markets are looking for is a credible plan to reduce the deficit, not a willingness to slash regardless of economic conditions.
“In the current climate it is essential that decisions about the speed and timing of tackling the deficit are based on the state of the economy, not political dogma.”
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That's what was reported on the Lib Dems web site on 24 February 2010.
I'd contend not much has changed since.
Except Vince no longer has the courage to tell the truth.
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Are extremely low rates on UK gilts an indication of the markets faith in Tory/dem policies or the gilt markets realisation that economy is not going to improve anytime soon.
a) The latter
b) BoE policy
c) QE
d) Desperation of those with no where else to go
But not faith in Osborne
Another major difference between us and the PIIGS is that the UK has the longest term bonds of any other comparable country. In fact it has been suggested that we could actually do worse than refinance most of our debt whilst the going’s so good.
Larry, those gilt levels are very much driven by Tory policies. They would soon rise if the UK’s AAA credit rating was lost, which is what would probably happen without the proposed level of cuts.
I’m not saying I fully agree with the policies, but that is what would happen. And you only have to look at Greece, Italy and Spain (and now perhaps France) to see what thay means.
Just go and read Krugman
Very politely there’s as much similarity between us and Greece on this issue and Grimsby Town and Man Utd
Now stop being very, very stupid
Krugman has recently arrived at the conclusion that those countries which can issue their own currency tend to have very low rates on gov debt (excluding zimbabwe), The AAA rating is a bit of a nonsense since I understand the rating is based on the likelihood of default, but how do you default on ink and paper? Greece can default since it cannot create Euros out of thin air.
Richard, if our yields rapidly increased then the UK would be in trouble. There are many differences between the UK and Greece but if UK yields ballooned upwards there would be some serious problems. To say anything different is completely wrong.
But there is no chance yields will balloon so let’s not live in fear of a fantasy
Grown ups get over thinking there are dragons under their beds
So should those debating economics get over fear of the interest rate fairy
Countries that issue their own currency can and do have high rates of interest. It not quite as simple as having debt in your own currency and being able to print money. It all depends on your current account. If you run a consistent current account deficit (like the UK) you are dependent on foreign investors to finance your debt. A foreign investor’s return on a govt bond is the interest rate plus the movement in the currency over the holding period. Print a lot of money to finance your debt, you will cause inflation and your currency will depreciate. Once foreign investors realise this, they will demand higher rates and the higher inflation will force short rates up.
Low rates in the UK are due to QE and the banks being forced to hold singificantly more govt bonds as liquidity reserves, altogether accounting for about £350bn of additonal demand for gilts.
So we’re funding our own deficit without any impact on rates and with inflation falling
Your problem is?
What makes you think there is no chance? As you have previously stated, the UK economy is in a bad shape, there is no growth coming and inflation is high.
I’ve answered that questions too many times to bother again
Larry, you are correct in that if you can print your own money then it should be impossible for you to default. However the ratings give a general idea of financial strength, and the lower a countries rating the more yield has to be paid to sell bonds.
Plus if a country needs to print money to pay off it’s debt, the resulting inflation is going to mean future investors will need to be compensated with a higher yield…….
Ratings might well be utterly worthless….
Except for fee generation for those issuing them
Did US yield rise after they lost AAA rating?
Richard, I agree that ratings are pretty much worthless as shown by their mistakes in before the previous financial crisis.
Larry, their yields didnt rise. But to compare the US (holder of the global reserve currency) to the UK would be pointless. As PaulF points out, the world needs USD. It doesn’t need GBP. And if the Chinese ever decide to significantly reduce their USD govt debt holdings then the yield will quickly rise.
I disagree – sterling may not be like USD but it’s far from a standard currency either
Small state theory really cannot be applied to UK in current situation
Oh dear, JJ Lehto, why do you fall hook line and sinker for the ConDem lies? There are many countries (Japan, for one) with much larger deficits than us who enjoy equally low bond yields. We are in no way comparable to Greece or any Eurozone country.
Japan has run a consistent trade surplus for something like the last 20 years. It doesn’t need foreign financing of its defict as its citizens have more assets than they know what to do with. Similarily the US can run a large deficit as it has the trade currency, hence it doesn’t have to worry about encouraging foreigners to hold its assets. If the US$ loses its status, then the US might have an issue convincing foreigners to fund its deficit, but US investors fund other countries more than they fund the US.
We can have a surplus – we just need to put people to work
Easy
And we have our own currency
Richard I am assuming you don’t believe that we can run a 10%+ deficit indefintely and that there is a more gradual plan to cut the deficit that better balances supporting growth and cutting the deficit. What I am wondering is given that level is obviously hard to estimate, is it not better to start off on a more aggressive approach and then moderate it in response to how interest rates react, than the other way round? Surely if you start off with little in the way of deficit reduction, and rates were to move against you, the high rates impact into the ongoing deficit would be difficult to unwind (the old difficult to put the genie back into the bottle analogy).
There is only one way to get the deficit under control and that is to get people to work
Only when people are at work will it go down
So the focus of Tory policy is completely wrong – we have to spend to get people to work first and then the deficit will tumble
As Keynes argued, it really is as simple as that
Unfortunately theory and practice dont’ always tie up as many countires have found over the years. If the govt decide to borrow money and give me £1000, I would buy an iPad with it, which would have little impact on growth in the UK, with the consumption effect almost entirely set-off by the net import effect.
But govt investment in developing exporting industry jobs would be great, uinfortunately that would take some time.
It’s what I propose in the Green new Deal – and some can be done very very quickly indeed
A country that has its own central bank can borrow money at will, so there will never be a risk of default. Investors know this. The Eurozone is in trouble because those countries have no central bank and have to obey the strictures of the European Central Bank.
This means they cannot grow their economy are borrow as they see fit.
And that is why they are at the mercy of speculatiors.
And the ECB will not lend – which was always the fault at the heart of the Euro
Stevo!!, there might not be risk of default, but if inflation is high then investors are going to demand a higher yield.
That depends on the state of the world elsewhere
If they can’t get a return anywhere they may just live with it
And right now we can QE for some time to come without problem
Though they have gone down slightly, both CPI and RPI inflation are considered high, yet I wouldn’t say that investors are getting high yields at the moment.
Inflation is not necesserily a bad thing because, alongside the devaluation of money, there is a devaluation of debt because debt = money and money = debt!
As I said before, the monetary system is based on debt, so the only real way to get out of debt and expand the economy is to go into more debt. This government is cutting tens of billlions from the public sector yet rather than saving money, they have had to keep borrowing at record rates simply to balance the books.
The government, if it wanted to, could simply create the money free of debt, which means less money will be required to chase unpayable debts hence less money will be needed. True, creating money without limit would likely lead to crippling inflation, but, if done properly, public services could be funded at largely no cost to the taxpayer.
As an aside, as long as low interest rates are maintained (which they will no doubt be for some time) won’t that keep bond yields fairly low?
What sort of position are we going to be in if the present government policies lead to a deflationary crash? The credit crunch in 2008, that happened due to the banks and the financial sector, almost led us to this.
You cannot treat an economy’s debt in the same way as you treat household debt. Money is 97% based on debt so money has to be borrowed in order to circulate it in the economy.
Dear Stevo I came across some interesting books about this whole banking subject
“The Invisible College – The Great European Secret” by William Stuart
William Stuart also has done an hour interview on youtube.
In Islam usury is outlawed because if money can gain money it will mean the rich will be permanently rich and the poor permanently poor,
Stevo!! Inflation is a very bad thing if you are the holder of the debt, which is why lenders would require higher yields to compensate.
But they may nit get them
And traditionally do not
“In Islam usury is outlawed because if money can gain money it will mean the rich will be permanently rich and the poor permanently poor,”
Money making money is clearly the source of inequality of wealth but this does not occur through usury in the islamic sense. It occurs through the ownership of the means of production, i.e. land and capital (goods), which enables the extraction of surplus labour from those who create it.