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The markets are speaking about UK public debt plans

Here is a long(ish) article stating that because financial investors think the UK government is serious about slashing the public deficit, this is keeping the prices of UK bonds high – which also means the interest rate that firms pay to borrow long-term is less than in a number of other countries.

Obviously, the proof of the pudding will be in the eating. We are now entering a period when the various government departments of Cameron’s administration need to deliver with real cuts, rather than simply talk about them. But it does seem that there is a real difference of perception in how markets view the UK (trying to cut the deficit) and the US (spend, spend, spend!). Other things being equal, it will cost a dollar-denominated corporate borrower more to get financing than a sterling-based one. The UK economy will benefit. Just one more reason to ignore the siren songs of the Keynesians.

5 comments to The markets are speaking about UK public debt plans

  • Jack Olson

    Thank Heaven there is at least one writer in the world who knows how to use that proverb correctly. “The proof of the pudding is in the eating” means that the true test of anything is how well it suits its intended purpose. The typical mushmouth garbles it into “The proof is in the pudding”, which doesn’t mean much except “I am an ignoramus.”

  • Chuck6134

    Maybe England can retake her historical role of hard headed economic realism lost after WW1. God knows the US abdicated any pretense to that role after the 1930s Depression….

  • Laird

    The article is a strange mish-mash of concepts that don’t really hang together, which makes me suspect that the author doesn’t really understand what he’s been asked to write about. In the end he (sort of) gets to the right place, but it seems almost by accident.

    I can accept the idea that the capital markets believe that Cameron’s government will really cut the deficit, which would reduce fears of inflation and thus lead to lower yields (higher prices) on UK sovereign debt. But this wouldn’t necessarily translate into lower required yields on pound-denominated corporate debt; at best, that’s a second-order effect. I suspect that much of the true reason for current higher prices for pound-denominated corporate debt is buried in the very last paragraphs of the article: the relative paucity of new issuances is driving up prices as a simple supply/demand function.

    Near the end of the article is an interesting sentence: “Currency markets are speculating Cameron’s cuts will hurt economic growth and weaken the pound . . . .” If true, that’s a currency risk, which would tend to increase the required yield on pound-denominated debt, offsetting (at least in part) any benefit of reduced inflation worries. In essence, he’s saying that the currency and bond markets are pulling in opposite directions, which seems unlikely (and would create a wonderful arbitrage opportunity). I suspect that someone is wrong here, although I don’t know if it’s the reporter misrepresenting (or misunderstanding) the currency market or foolish currency speculators fixated on Keynesian economics. But an Austrian economist will tell you that governmental spending cuts will not “hurt economic growth”, at least not in the long term; quite the contrary. So if the spending cuts actually materialize, the long-term result will be a stronger economy, a stronger pound, reduced inflation risk, and correspondingly lower real interest rates. A virtuous cycle.

    Of course, “lower” is relative, and simply means rates lower than they would have been absent the stronger economy; it says nothing about the comparison to rates in other markets, which could also be improving (although that doesn’t appear to be the case at the moment in any other major country). It will be most interesting to see if the Cameron government lives up to expectations.

  • Johanthan Pearce

    I suspect, Laird, that the reason for the corporate debt being helped here is that the less that governments borrow, the less that other borrowing is “crowded out”.

  • Laird

    That, too, no doubt.