Martin Wolf Demolishes David Cameron In One Of The Best Takedowns Of Austerity We've Ever Read
In the wake of that, we argued that Prime Minister David Cameron had to do the hardest thing any politician would ever have to do in the wake of a downgrade: Say he was wrong and spend more money.
But Cameron (and his finance minister Osborne) have no plans to reverse the ship, taking a "beatings will continue until morale improves" approach to the economy.
In a new FT piece, Martin Wolf absolutely eviscerates Cameron.
These two paragraphs are some of the sharpest, best writings against misguided austerity we've seen.
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.
There is so much in the two paragraphs above that if you understand them, you'll know more than 99.9 percent of the population about the debate.
Wolf is right on that the existence of the Bank of England means the government has far more ability to spend than a country lacking its own central bank. He's also right that the U.K. deficit is the flipside of a massive amount of private sector surpluses (savings) which need to go somewhere (U.K. government bonds).
And Cameron's takeaway from the Moody's downgrade is 100 percent wrong. Just as the S&P downgrade of the U.S. had no impact on U.S. borrowing costs, same for Moody's downgrade of the U.K. The message is to grow the economy. That's the U.K.'s key problem, not borrowing.
As we noted yesterday, when David Cameron first came into power with an austerity agenda, he was praised by many centrist pundits for making hard decisions. Now it's ending in shambles, but he can't bring himself to turn things around.