Saturday, Nov 28, 2009

Halligan's right wing rant of the week.

Sunday Telegraph: Tories should maintain hardline on UK economy

"Amidst ridiculous talk of Gordon Brown's "resurgence", the Tories now say they're "going for growth". In the absence of detailed policies, one can only guess what that means. I worry the Conservative leadership is having second thoughts, yielding to the siren calls of the economic illiterates " Glad this guy isn't buying my shares.

Posted by tpbeta @ 07:16 PM (1547 views)
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1. drewster said...


Why do you call it a right-wing rant? The last paragraph spells out the problem clearly:

"The UK must retrench its national accounts. If that doesn't happen soon, the gilts market may prevent the country from rolling-over its debt – a disastrous outcome that would see borrowing costs soar."

Which part of that do you not agree with?

Saturday, November 28, 2009 08:04PM Report Comment

2. tpbeta said...

The bit I disagree with is "Amidst ridiculous talk of Gordon Brown's "resurgence", the Tories now say they're "going for growth". In the absence of detailed policies, one can only guess what that means. I worry the Conservative leadership is having second thoughts, yielding to the siren calls of the economic illiterates "

'Economic illiterates', for Liam Halligan, means anyone who thinks we don't face a massive inflation wave in the immediate futur, or thinks we face a deflation problem, or who think the output gap might exist, or that Quantitative Easing doesn't do very much, or that premature spending cuts will plunge us into renewed recession if not depression. In other words, most economists.

Which makes him a pretty unreconstructed Thatcherite. I don't mind him being wrong but he barely bothers to argue his case. I highly recommend this video if you want to see to see Liam getting taken down a peg.

Saturday, November 28, 2009 08:50PM Report Comment

3. devo said...

right wing

left wing

same bird

Saturday, November 28, 2009 09:19PM Report Comment

4. drewster said...

Thanks for the full response. I've watched the video, I agree Liam's arguments on inflation seem confused. He compares the UK to Japan, but then says inflation is imminent - even though we all know Japan has faced flat prices and asset-price deflation for two decades.

In this particular article though, he's addressing the question of government borrowing & spending. That's separate from the inflation / deflation debate. Just because he doesn't agree with Keynesian economics, doesn't make him an "unreconstructed Thatcherite". The policy of spending our way out of trouble hasn't been proven to work - Japan has nothing to show for it but bridges to nowhere and the highest debt-to-GDP ratio in the world. Japan was only able to run a huge fiscal deficit because they had a high savings ratio and a current account surplus (i.e. they were net exporters). The UK doesn't have those luxuries, hence the fears of a gilt-buyers strike. Same applies to the US.

Saturday, November 28, 2009 09:37PM Report Comment

5. icarus said...

Net saving by the private sector needs a budget deficit or a trade surplus. It's a matter of national accounting that government deficits are the obverse of non-government surplus (private savings). If the indebted private sector rebuilds its balance sheet by spending less than its income, government must spend more than its tax revenue, unless the country runs a current account surplus. If the gov't deficit doesn't grow to meet the savings needs of the domestic private sector national income will decline and, if private sector debt is high, this can lead to debt deflation. Japan's private saving is the obverse of Japanese government deficits and trade surpluses.

This is, of course, not a carte blanche for profligate government spending.government.

Saturday, November 28, 2009 10:14PM Report Comment

6. icarus said...

oops....omit the last word

Saturday, November 28, 2009 10:15PM Report Comment

7. tpbeta said...

Drewster - it's not strictly true to say Japan has nothing to show for their spending policies. It's widely thought, if not generally accepted, that had they not done so they would have faced a 1930's style deflationary cycle and a 1930's style depression. Giving their companies and banks time to repair their balance sheets after a housing bubble implosion was critical to preserving what was otherwise a very competitive economy.

Of course that level of spending isn't an option for us, because we don't have an otherwise successful economy. Doesn't alter the probability that if (and a big if because I'm far from convinced the Tories will actually do this) we cut the budget after the election then GDP will head south pretty quickly. That's what happened in Japan in 1997 when they briefly tried it and that's what will happen to us.

Saturday, November 28, 2009 10:44PM Report Comment

8. drewster said...


I think many of us here on HPC would be glad of a little debt deflation, which would push down house prices!

Your logic is sound, but you're missing the point slightly. If the bond vigilantes demand a higher interest rate on gilts, what happens next? Look at Iceland - interest rates shot up to 18% after its crisis (they are now down to 11%) as the country became desperate for funds. If the UK has to pay e.g. 8% interest on new debt, that will require a corresponding cut in public services or rise in taxes (or both). By making smaller cuts now, we show willingness to service the debts and keep the bond markets happy. That avoids deep cuts later.

Saturday, November 28, 2009 11:25PM Report Comment

9. devo said...

who are these so-called 'bond vigilantes'?

name some

Saturday, November 28, 2009 11:36PM Report Comment

10. icarus said...

8 drewster - of course there are problems with out-of-control budget deficits. As usual,it's a question of striking a balance. What I'm trying to do is question the widespread notion that government deficits are necessarily bad. I think we're a long way from the massive interest rates (bond yields) on gov't debt that the UK experienced in the 70s-80s.

Saturday, November 28, 2009 11:57PM Report Comment

11. drewster said...


They aren't particular individuals. It's a term used to describe the idea that gilt-buyers (pension funds, insurance companies, banks, foreign central banks, and other foreign investors) might get so annoyed with the low yields on offer that they stop buying gilts until yields rise.

Out of those groups it is mainly the foreigners who are of concern. Roughly 36% of UK debt is held by foreigners (the figure is even higher for the US). If they show reluctance to buy gilts, then higher yields will have to be offered to encourage them to buy.

I'm not the best economist or writer, so I'll just cite an article which more clearly states my point.

@tpbeta - the following article also explains why we can't just follow the Japanese path to more borrowing.

FT: Why sovereign bond yields will explode
It will not be business as usual for government bond prices. That is because current bond yields and the increasing insolvency of our rulers are the biggest disconnect in financial markets today.
Some will note that, when Japan’s bubble economy collapsed, it was able to run huge budget deficits and raise outstanding government debt from 60 per cent to 140 per cent of gross domestic product, while still experiencing a fall in bond yields from 8 per cent to 1 per cent.

But this “miracle” was only possible because Japan’s household savings were huge and invested at home. Japan did not need foreigners to fund its government deficits. Even today, foreign ownership of Japanese debt is only 6 per cent compared with 50 per cent for US government paper.
The Japanese “miracle” of the 1990s cannot be repeated in the US, the UK or even in Japan this time. The US and the UK will still have very low domestic savings rates with government debt heading towards 100 per cent of GDP. Neither is likely to suffer from prolonged deflation as Japan did. [This statement isn't backed up.] And both the US and the UK are heavily dependent on foreigners for financing that debt. So Treasury and gilt yields will rise sharply and the dollar and the pound will slide.
But quantitative easing programmes will have to end sooner or later [This statement isn't backed up either; QE could continue for a long time.]; and eventually the private sector will start to borrow again. Then yields on government debt will start to rise, back towards at least the average level of the 1990s and perhaps even higher as inflation expectations gain hold. That will end today’s bubble in bond markets and very probably in equity markets too, as these feed on the same source of liquidity and are priced off bond markets by the addition of a risk premium.

If we're spending more money on interest payments, that leaves less free cash for public spending.

Sunday, November 29, 2009 12:14AM Report Comment

12. drewster said...

Halligan has posted a new article, with which I largely agree:

Telegraph: Benign neglect may turn the dollar from a safe haven to a dangerous place to be

The US government is shouldering a vast $12 trillion debt pile – that's 12, followed by 12 zeros.

The dollar's weakness is based on fundamentals – not least America's jaw-dropping debt. The trade-weighted dollar has lost 22pc since March. One reason is that, since the spring, the Federal Reserve has been printing money like crazy – both to bail out Wall Street and service America's rapidly growing debt.

A weak US currency makes commodities more expensive (seeing as they're priced in dollars). Expensive oil damages the economy of the world's biggest oil user. And as the dollar falls, America's huge commodity imports cost more, making the trade deficit even worse.

On top of all that, a falling dollar makes it even more difficult for the US government to meet its massive borrowing needs. Just to service existing debt, America must sell $205bn of Treasuries this year, a total set to hit more than $700bn a year by 2019 – even if annual budget deficits shrink. Selling long-term sovereign debt, in a currency expected to fall, is not easy.

Sunday, November 29, 2009 01:01AM Report Comment

13. tpbeta said...

Drewster - I do mostly agree with Halligan's new article - which to me is a red alert that I may not have thought it through properly 8-)

Sunday, November 29, 2009 09:34AM Report Comment

14. drewster said...


I'm not sure either - icarus's savings=debt point really threw a spanner into my logic.

Sunday, November 29, 2009 12:34PM Report Comment

15. mark wadsworth said...

Icarus at 5, good summary.

But surely the ideal sort of position is equlibrium, i.e. govt spending and tax receipts in balance; overall private savings close to nil* and no trade surplus or deficit?

* Run up debts when you are studying or buying your first house, build up savings when you pay off mortgage and save for retirement, then run down savings in retirement and die with nothing, having spent it all.

Sunday, November 29, 2009 12:48PM Report Comment

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