Wednesday, 14 December 2011
UK debt: don't worry, someone will buy it
One hears lots of arguments expounded in favour of Chancellor George Osborne's debt strategy - basically, going hell for leather for cuts and hoping that the debt stocks falls (er, it won't).
One of the most common goes like this: we have to cut to keep our credibility in the bond markets. Otherwise investors will flee, interest rates will rise and the monetary side of the equation will be hurt as badly as the fiscal-public spending side is bleeding. British debt prices have been falling (above) - pretty much the only good news the Treasury has had for months.
I don't believe this one. Low bond yields are a sign of depression, not recovery. And they threaten the health of the banks that hold them just as much as they lighten the debt load on the taxpayer (a little). I don't believe any of them, actually, but this one's a bit of a red herring that looks convincing on the surface. So it's important to address.
And preventing any steep rise should be child's play at the moment. Start from the position that investing in bonds is a relative decision. It's British sterling-denominated debt or something else. Not nothing or nowhere. Not under your bed. Where would you put your money? In euro-area debt? Er, no. In the bank? Not at these interest rates. In companies via shares? Too risky at the moment.
So the present monetary crisis may well present the British with an opportunity - to reduce the pace of their deficit reduction programme while still keeping the money rolling in.
It would be a bit like the American debt situation, which is puzzling some people. American bonds are continuing to do really well, even though the economy is strengthening and there should be the usual flight from safety as investors take more risks. You won't be surprised to hear that they don't want to take any risks, don't want to put any more money in the Eurozone, and don't want to place their bets on the 'real' economy - even though it's been strengthening for months. So the American public debt position is a little better than it looks, at least in terms of the short- to long-term.
You know what I say? People's money has to go somewhere, as this incredibly detailed but I think important London Met Working Paper demonstrates. It'll now flood into sterling pretty much whatever happens.
The worse the Euro-crisis gets, the more room there is for a Plan B which involves borrowing more than we planned. I wouldn't call this exactly luck. But it might help us to weather the storm.