Monday, 3 May 2010

The Governor of the Bank of England should study economics.

The Governor recently made the absurd claim that paying off the national debt will result in such severe austerity that the party that wins the election on 6th May 2010 will be out of power for a generation. To explain the flaws in this claim, it is important to distinguish between the alleged austerity resulting from national debt repayment and other sources of austerity.

For example, the UK is a relatively small nation which is exposed to the world economy: about a quarter of what it produces is exported. This means the UK’s economic policies cannot diverge too much from those of its trading partners. To illustrate, if there is a double dip in the US and Europe due to incompetent economic management, the UK will have to endure “double dip” too, or at least it will have to endure a slower recovery from the recession than it might.

However, assuming the UK’s trading partners are more clued up than the Governor of the Bank of England (and that is doubtful) there is no reason for national debt repayment to result in austerity. For a full explanation as to why not, see here.

If I haven’t got the Governor of the Bank of England in check mate, will someone explain why not?


Update (15th May). The Governor seems to have change his mind in the last few days. In this Wall Street Journal article he seems to suggest that any deflationary effects of a deficit reduction can be countered by continuing with Q.E. Quite right!

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