Saturday, June 19, 2010

Greek myths and Obama’s double-dip warning

The latest exhibits in the case for why the UK public debt ‘crisis’ is over-hyped are two graphs from the Federal Reserve Bank of Atlanta (via Bill McBride).

On the left, ten-year government bond spreads relative to Germany – this is a pretty common yardstick for the interest paid on government borrowing. On the right, five-year credit default swap spreads – roughly, the cost that buyers of government bonds pay to insure themselves against the risk of default:

Both tell the same story. The brown line going crazy is Greece; the red line calmly plodding along the bottom is the UK; wobbling in between are Italy, Spain, Ireland and Portugal. The lower the better, so the markets view UK public debt as being pretty safe.

The tumult centred on Greece has been hurting other parts of the eurozone, but not us. Why the Lib Dems have chosen to use the Greek crisis as an excuse to change their minds in favour of bigger and faster spending cuts is a question I can’t answer. (The charts also appear to show total indifference to the arrival of our new, deficit-hostile, market-friendly government.)

In fact, the main risk that the European trouble poses to the UK is that if their economies suffer, it’ll become harder for us to shift our exports, thus hitting our own economy again.

On that wider subject, and on the subject of what David Cameron calls the “international consensus that dealing with our budget deficits is vitally important”, Barack Obama yesterday wrote to his fellow G20 heads of government:

Our highest priority [at next weekend’s summit] in Toronto must be to safeguard and strengthen the recovery. We worked exceptionally hard to restore growth; we cannot let it falter or lose strength now. This means that we should reaffirm our unity of purpose to provide the policy support necessary to keep economic growth strong. … In fact, should confidence in the strength of our recoveries diminish, we should be prepared to respond again as quickly and as forcefully as needed to avert a slowdown in economic activity.

We need to commit to fiscal adjustments that stabilize debt-to-GDP ratios at appropriate levels over the medium term. … We must be flexible in adjusting the pace of consolidation and learn from the consequential mistakes of the past when stimulus was too quickly withdrawn and resulted in renewed economic hardships and recession.

Yes. We can.

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