Martin Wolf on Cameron's austerity program
Mr
Cameron argues that those who think the government can borrow more
“think there’s some magic money tree. Well, let me tell you a plain
truth: there isn’t.” This is quite wrong. First, there is a money tree,
called the Bank of England, which has created £375bn to finance its
asset purchases. Second, like other solvent institutions, governments
can borrow. Third, markets deem the government solvent, since they are
willing to lend to it at the lowest rates in UK history. And, finally,
markets are doing this because of the structural financial surpluses in
the private and foreign sectors.
Again, Mr Cameron notes that “last month’s downgrade was the starkest
possible reminder of the debt problem we face”. No, it is not, for
three reasons. First, Moody’s stressed that the big problem for the UK
was the sluggish economic growth in the medium term, which austerity
has made worse. Second, the rating of a sovereign that cannot default on
debt in its own currency means little. Third, the reason for believing
long-term interest rates will rise is expectations of high inflation and
so higher short-term rates. But such a shift is going to follow a
recovery, which would make austerity effective and timely.
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