Prime Minister David Cameron’s austerity policies, which helped U.K. debt beat world peers in 2011, are backfiring in the bond market with the economy on the brink of a recession and borrowing needs approaching records.
Gilts lost 1.92 percent in the first quarter, the worst start since 1996, after returning 17 percent last year, according to Bank of America Merrill Lynch indexes. Falling revenue means government bond sales in the next 12 months will be 64 percent higher than the average over the past decade.
While Cameron came to power almost two years ago saying recovery from the worst financial crisis since the Great Depression depended on eliminating the budget deficit and preserving the nation’s AAA credit rating, his Conservative Party now trails opposition Labour in opinion polls. Gross domestic product is projected to shrink for a second quarter and reducing upper-income tax rates amid the biggest government spending cuts since World War II has traders leaving gilts.
“The government policies in the U.K. have succeeded in implementing more austerity than in stimulating growth,” Ed Yardeni, president and chief investment strategist at Yardeni Research Inc., said in a telephone interview on April 11. “Bond markets do well in weak economies, but not if weak economies are weak because they are saddled with huge, unsustainable debt.”
Let's review some UK stats:
The UK economy has contracted in three out of the last five quarters. While one of those contractions was mild (-.1%) one was actually worse than two quarters during the world wide recession (-.5%). This, or course, begs the observation: this was a really stupid time to think about austerity policies.
Total UK GDP is sill lower than at the height of the previous expansion.
The above chart shows UK debt/GDP. While it has been increasing, it's hardly at crisis levels.
The government budget deficit increased as as a result of the recession, during which two things happened: the UK aided the financial sector and increased social welfare spending.
However -- and this is the big rub -- the UK, so far, is missing the boat. What needs to happen is for the government to borrow cheap and then (drum roll please) invest. This does two things. First, it sustains growth during the slowdown. Second, it provides the platform from which future growth springs.
For example, see this article I wrote on my home town of Houston, Texas as a great study on the importance of infrastructure. Without public highways, Houston would be a shadow of itself. Instead, it's the 4th largest city in the US with a very strong local economy. However, the road system is key to the city; without it we'd be much smaller and far less important. And, the basic road system was built over the last 30 years and continually improved upon. Think about the return on that investment in terms of economic growth and development.
5 comments:
For one, the UK is not Texas. There are not wide expanses of empty area to built wide major highways, nor is there the necessity to build them there. About the "great study on the important of infrastructure", all the article shows is a map of the Houston area pointing out the suburbs and how they grew over the past 10 years. That certainly doesn't appear to be much of a study. You could have showed a map of virtually any metro area throughout the US highlighting the growth of suburbs over the last decade. That all occurred during the housing boom. Now do you really think that if you build some more stretches of highway that people will come and economic growth will boom? Right now homebuilders own plenty of land out on more remote streches of highway and they can't sell any houses there....
You advocate more public spending in the UK. Ok. But that will require more money printing. Look what money printing has done to their economy thus far:
http://www.tradingeconomics.com/united-kingdom/inflation-cpi
Change the dates to begin in Jan 2004, and you'll see that inflation rates in the UK are at higher levels than at any time over the past 8 years, despite very weak economic growth. Their cpi went over 5% just some months ago, and they've averaged about 3.5% on the cpi over the past year and a half. That is a disaster and it's kept real incomes down. More printing will result in more inflation...
Anon
Actually, there are plenty of other projects the UK could engage in -- updating the current public transit lines, increasing the efficiency of the electricity grids (The US could do the exact same)
As for the growth of suburbs, none of that could happen without a decent highway system. In Houston there are four major township areas that have established themselves as dominant economic areas where commuters go back and forth into the downwtown area. The tax base increasing, school systems are developing, businesses are starting etc.. That's the point. And all four of those areas now have bigger and bigger tax bases.
Yes -- if you build it they will come. As you pointed out, build a highway and development follows, as has happened in virtually every major city where a decent highway system exists. The suburbs follow. Thanks for making my point for me.
Build it and they will come is total BS. It's called malinvestment. Look at China and all their ghost cities and the largest shopping mall which has no visitors.
Government spending is inefficient and wasteful. The only people who benefit are the vendors who get to rip off the taxpayers by overcharging for their products and services; like $200 hammers!
Government should cut taxes and spending.
Here you go: http://blog.trejdify.com/2012/04/peter-thiel-has-solution-to-global.html
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