Former adviser to chancellor George Osborne, Tory MP Matthew Hancock, has made a massive error in his analysis of the American economy, writes Duncan Weldon.
Tory MP Matthew Hancock has made a massive error in his analysis of the American economy, writes Duncan Weldon
Tory MP and former George Osborne advisor Matthew Hancock has written a post for the Spectator’s Coffee House blog claiming that Labour are drawing the wrong lessons from America.
He accuses Ed Balls of getting “his figures wrong” on the US deficit plan and makes the bizarre claim that the US plan involves cutting faster than his own government’s plan. This is despite the IMF last week describing the UK plan as the “largest fiscal adjustment” of the major economies.
People who live in glass houses shouldn’t throw stones and Hancock himself makes a colossal factual error. His whole argument is underpinned by the notion that if countries do not quickly deal with their deficits then the bond markets will extract a high price. He uses the example of the downgrading of the US last week and claims that this has caused US interest rates to rise.
“The consequence? US interest rates have risen, just as they would do here if we were foolish enough to abandon our plan… The down-marking of US debt, and the reaction of US interest rates that followed, shows the gamble we would be taking if we abandoned our plan.”
The problem with this claim is that it is factually incorrect. US bond yields fell after the downgrade – something widely remarked on in the financial press and something he really ought to have checked before publishing the article.
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32 Responses to “Matt Hancock is drawing the wrong lessons from America”
Guido Fawkes
A case of “Buy the rumour, sell the fact” or in this case sell the rumour, buy the fact.
More likely it is the case that bond market vigilantes are pleased that deficit cutting is now firmly on the agenda and political focus is being given to the issue.
See this:-
Goldman Sachs economist Alec Phillips also said this week that the “modest rally in Treasurys” may be a result of investor expectations that growth will slow as the government deals with the nation’s debt.
He noted that the “modest rally” in U.S. Treasurys at first could have been interpreted as “surprising.”
Ed's Talking Balls
I think that S&P’s views were unequivocal: a country without a credible deficit reduction plan (i.e. the US) is at greater risk of losing its AAA rating than a country with such a plan (i.e. the UK).
ong ah kun
Matt Hancock is drawing the wrong lessons from America: Tory MP and former George Osborne advisor Matthew Hancoc… http://bit.ly/eaahgB
Duncan Weldon
Guido,
But the point is that US interest rates did not rise after the downgrade as Hancock claimed, a simple factural error.
He has now updated and is claiming that they did rise (soemthing the FT & WSJ missed!) by pointing to the 5yr chart, an odd choice, here’s the full data set from US govt:
http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield
Across the cruve from 1 months to 30yrs US bond rates are the same or lower as they were pre-downgrade on Friday.
Now I fully accept that the US has the global reserve currency and that the S&P news was taken as a reason to sell risk (hence stocks and commodities dropping) and buy (oddly enough) USTs, a simple ‘risk off trade’. I expect that a downgrade in the UK would different effects.
But none of this changes the simple fact the Hancock based his argument on a factually incorrect claim.
Leicester John
RT @gregbeales: Are the deceits catching up with Tory spinners? @leftfootfwd on @MattHancockMP http://bit.ly/gtJOFu