Saturday, April 18, 2009
Cheap credit depends on small state sector
Comparison with post-war interest rate management to enable cheap credit. Suggests that low interest rates and low inflation must be credible over the medium term, otherwise investors will keep away from the markets. Between 1947 and 1949 such belief was lost and the pound lost a third of it's value (sound familiar) as yields on long term gilts rose to 3.6% away from the 2% target. For the current government to avoid a similar outcome then “the only way in which a cheap money policy can be maintained is through the achievement of a sufficiently large budgetary surplus”.