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A quote from the article: Left untackled, the budget deficit, which at 11.2% of GDP in 2009-10 was larger than those of almost all other rich countries, would

A quote from the article: Left untackled, the budget deficit, which at 11.2% of GDP in 2009-10 was larger than those of almost all other rich countries, would soon have undermined confidence in the government’s ability to service its public debt. This is the crucial flaw in the article's argument. The UK government is monetarily sovereign, and therefore always able to service its debt. That pretty much destroys the article's argument in favor of austerity. Note that, unlike economists, most bond traders seem to actually understand the importance of monetary sovereignty. This is why you now hear talks about Germany's debt possibly being downgraded, but nothing about the UK or Japan, and not any more about the US (where the only thing that was ever in question was the government's willingness to pay, not its ability).

peteretep 15y ago
> This is the crucial flaw in the article's argument. The UK government is monetarily sovereign, and therefore always able to service its debt. That pretty much destroys the article's argument in favor of austerity. This is almost true technically, but not true how it matters. In order to service "unserviceable" debt, they need to cause inflation. Expected inflation gets priced in to bond yields, and inflating your way out debt ends up being not very useful if you will then need to go back to the money markets at some point in the future. But actually, your central point is also not quite true: the UK government is NOT monetarily sovereign - in theory anyway - because it's the BOE who sets the money supply in practice. And it's for this reason that they have an inflationary target. Can the government intervene? Almost certainly. Will this further fuck market confidence and drive up bond yields? Yes. Do you get to a point where no-one will buy government bonds in GBP rather than USD? Absolutely.

peteretep 15y ago

> This is the crucial flaw in the article's argument. The UK government is monetarily sovereign, and therefore always able to service its debt. That pretty much destroys the article's argument in favor of austerity. This is almost true technically, but not true how it matters. In order to service "unserviceable" debt, they need to cause inflation. Expected inflation gets priced in to bond yields, and inflating your way out debt ends up being not very useful if you will then need to go back to the money markets at some point in the future. But actually, your central point is also not quite true: the UK government is NOT monetarily sovereign - in theory anyway - because it's the BOE who sets the money supply in practice. And it's for this reason that they have an inflationary target. Can the government intervene? Almost certainly. Will this further fuck market confidence and drive up bond yields? Yes. Do you get to a point where no-one will buy government bonds in GBP rather than USD? Absolutely.