Wednesday, October 20, 2010

Empire of Debt

I have a mental model in which Britain's present is America's future. The declining, bankrupt empire and all that.....Of course, the Brits were pretty nimble and financialized so much in the last decades, that they managed to seem in lock step with the US in a real Anglo-American "special relationship". And in the recent bubble years, suburban London was really looking pretty comfortable.

So now what to make of the Tory move to austerity? Well, for one it confirms Carville's line about wanting to be reincarnated as the bond market-- "everyone is scared to death of the bond market"...

Because sterling is no longer a reserve currency, the Brits had no choice, methinks. They really are Reykyavik on the Thames and a funding stop would be a disaster. The US on the other hand can still print the scrip which the rest of the world remains willing to exchange for real goods, and so they are about to do so with gusto.

But it is also a great drama of an experiment in relationship to Keynesian notions of aggregate demand. Because Britain is not going to be a source of growth for the rest of the world. This is a relatively big domino to fall as we flirt with the double dip.

From the Guardian:

On the government's own figures, there will be 490,000 jobs lost in the public sector over the next four years as a result of the CSR; at least an equivalent number will be lost from private sector firms – in the construction sector, for example – that rely heavily on state contracts. Osborne is banking on the rest of the private sector growing quickly enough to absorb all the jobs lost from the public sector and creating at least a million more on top of that.

While not unprecedented, this will be challenging. The last time the UK went through an austerity programme — the mid-1990s — large numbers of private sector jobs were created. But this was a period when the global economy was booming, making life easier for exporters. It was a time when the economy was benefiting from the sharp drop in interest rates and the 25% devaluation of sterling that resulted from Britain's departure from the exchange rate mechanism on Black Wednesday. And it was a time when the banking system was functioning normally. None of those conditions apply today, which is why reducing demand by 0.5% of GDP in each of the next four years will hit growth and make it harder to bring borrowing down.

Colour me skeptical. But given that there will be a sovereign default somewhere on the periphery of the eurozone some time in the next few years, Greece, Ireland, Spain, take your pick, Britain will be well served by this pre-emptive austerity because trying to act after the fire starts would be much more expensive.

But the hit to the standard of living, especially of the poor, will be significant. All to keep debt contracts sacrosant, and the bondholders made whole.

I guess it would be silly to imagine repudiation of the debt and the issuance of a new currency, with confiscation of the fake superprofits of the big banks....

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