Just who WILL Osborne listen to?

We’re in a unique political economy, one in which there is no market discipline on the government pursuing the wrong economic policy. The sight of George Osborne starting his speech with the FTSE down 1.8% best illustrates the economists’ problem: stocks had their worst quarter since 2002, but the government keeps to its path.

Last year, Osborne’s broad tent coalition in favour of the cuts were:

“the IMF, the OECD, the credit rating agencies, the bond markets, the European Commission, the Confederation of British Industry, the Institute of Directors, the British Chambers of Commerce, the Governor of the Bank of England, most of British business, two of our great historic political parties, one of the Miliband brothers, Tony Blair, and the British people.”

This year, their absence hasn’t changed his policies. The economic problem is that in this sort of situation, there is no market discipline that will.

We often rely in economics on market discipline to force politicians to change economically wrong policies.  In the ERM at the wrong price, then you will be forced out. Too-high government spending crowding out private investment, then the bond vigilantes will have their day.  But in an economy with no growth and no investment, if cutting spending is the wrong thing to do, there is no market discipline to stop that policy.

George Osborne has been very successful at pointing to the “precious low interest rates” as the best market signal of the economic confidence his policies have created.  It’s something that the majority of the UK press continues to emphasise:  the Economist celebrated the same point at the weekend, the UK’s ten year government bond yields have dropped “closer to the comparable rate in thrifty Germany than most euro-zone countries, including France.”

Fears of exposure to France drove Morgan Stanley’s share price down 10% on Friday. France has a net debt of 80% of GDP, whereas UK has a net debt of 60%. It’s specious.  German Bond yields in 10yrs are at 1.88%, the UK’s is at 2.37% and France’s is at 2.56%.  Versus the sturdy UK, the profligate French (with their collapsing banks) are being charge a whopping two-tenths of a percent more.

The low bond yields are signalling a serious growth scare, not confidence in the deficit. Osborne said last year that “if we don’t get a grip on government spending, there will be no growth.” This year he still maintains that in a debt crisis low interest rates are the “most powerful stimulus that exists”.  But last year growth was very fast, now bond yields are lower together with lower growth and investment.  The two are related.

The growth scare is pushing businesses into deferring investments and buying government bonds instead, and investors into buying government bonds instead of equities. And it is global: we have ultra low bond yields from the US, France, UK, Germany, to even Spain and Italy.  No-one’s passed comment, but Italian and Spanish bonds are back to trading at face value.  The panic in the global banking system has meant that while their stock markets are collapsing in the face of bank deleveraging, domestic investors are only buying government bonds.

In this situation, the economist can only defer to politics, that the terrible lived experience of a debt deflation will change the government from a Hoover to a Roosevelt.  Sorry.

See also:

Balls’s speech gives Labour a solid economic foundationCormac Hollingsworth, September 26th 2011

IMF: Cutting the deficit too fast causes higher unemploymentTony Dolphin, September 19th 2011

IMF boss repeats call for Plan BWill Straw, September 5th 2011

The coalition could end up borrowing more than LabourCormac Hollingsworth, July 27th 2011

15 Responses to “Just who WILL Osborne listen to?”

  1. Sue Davies

    Just who WILL Osborne listen to? //t.co/SysZSUML by @cormacholly #CPC11

  2. Cormac Hollingsworth

    On Osborne's metric of low rates: the worse the economy gets the more credible his policy is //t.co/P3UuBlKX on @leftfootforward #CPC11

  3. Michael

    Just who WILL Osborne listen to? – //t.co/SxRQKpzW

  4. Political Planet

    Just who WILL Osborne listen to?: We’re in a unique political economy, one in which there is no market disciplin… //t.co/yCwlafxx

  5. AltGovUK

    RT @leftfootfwd: Just who WILL Osborne listen to? //t.co/X1rxuRj1 by @cormacholly #CPC11 #NewsClub

  6. Purbeck Pashmina

    His Mum I hope: she had the sense to let him change his name. RT @TheRightArticle: Just who WILL Osborne listen to? – //t.co/t7lBk8nz

  7. Hens4Freedom

    RT @leftfootfwd: Just who WILL Osborne listen to? //t.co/JnKpBeoZ by @cormacholly #CPC11 #NewsClub

  8. Mark Stevo

    “The sight of George Osborne starting his speech with the FTSE down 1.8% best illustrates the economists’ problem: stocks had their worst quarter since 2002, but the government keeps to its path.”

    The FTSE is only down 14% YTD vs the DAX and CAC down 22% and 23% respectively. Yet still Cormac thinks this is a British problem.

  9. Rob the crip

    Which party was in power in 2002, the problem for people it’s which party is the worse, with economics, looking at both Labour and the Tories you’d be difficult to say which one has the worse set of ministers they all seem dozy.

    Neither have big hitters although they do have over weight politicians who dare to tell us our families are over weight.

    But I think both the chancellors the one in power and the one in opposition are shockingly poor.

  10. Anon E Mouse

    The left have been left floundering about looking for something to criticise because they know with Ed Miliband they are doomed.

    If solving the world’s economic crisis is the question then Ed Balls is not the answer.

    If this article is the best the left can present then Cameron will storm into Downing St in 4 years time…

  11. No growth? ‘Keep calm and carry on’ says Osborne | Left Foot Forward

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  12. Awake!

    ‘The low bond yields are signalling a serious growth scare, not confidence in the deficit. ‘
    HAHAHAHAHAAHAHAHAHAHAHAAHHAAHAHAHA
    Anyone for a greek bond?

  13. Stuart Begley

    Low bond yields & equity investment means the UK could be heading into double-dip recession. //t.co/qm8RBCnE

  14. Osborne’s economic policy is to stick his head in the sand | Left Foot Forward

    […] Just who WILL Osborne listen to? – Cormac Hollingsworth, October 3rd […]

  15. The crisis gets worse: For every £4 spending is cut, it only cuts borrowing 75p | Left Foot Forward

    […] Just who WILL Osborne listen to? – Cormac Hollingsworth, October 3rd […]

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