Tag Archive: President Obama


Osborne's Autumn Statement speech revealed more borrowing

Switch in focus from growth

Austerity is still the answer but now the question has changed. ‘How do we rescue the country’s economy, eradicate the deficit, and return to growth?’ has been replaced with, ‘how do we ensure that the cost of borrowing doesn’t increase?’


When governments borrow money they do so by selling bonds (gilts). These can best be described as IOU’s where investors buy a certain amount of bonds to be repaid, plus interest (yield), over an arranged period of time. Keeping down this yield is paramount to a government’s ability to repay its debts. If the government becomes insolvent then it will default and trigger the kind of austerity measures currently seen in Greece.


Britain’s coalition is trying to ensure that the country is still seen as a safe haven for money markets. When investors suspect that a country is unlikely to be able to repay its debts then credit lines dry up and the governments have to offer higher yields to convince potential investors that the extra reward merits the enhanced risk. An example would be Italy where a lack of liquidity has led to yields of eight per cent to be repaid in just three years. This contrasts with Britain’s relatively luxurious position of selling, at just over two per cent, bonds that don’t have to be repaid for a decade.


So Chancellor George Osborne is understandably keen to maintain cheap borrowing levels and avoid massive interest repayments.


How is the coalition maintaining market confidence?


Just how one keeps borrowing down is the dividing point in the country’s political landscape. The Conservative led government hopes that by maintaining their austerity programme to eliminate the structural deficit over the course of the parliament, they are keeping the faith of the markets. But austerity comes hand in hand with lower investment, lower spending and lower growth. The UK economy has flat lined and as a result borrowing has to increase to fill the void left by lower tax revenues. The government’s argument is that avoiding austerity measures and allowing the yield on UK bonds to grow by just one per cent would mean every family in the country paying an extra thousand pounds so Britain could repay its debts.


The Director of the Institute for Fiscal Studies, Paul Johnson, appearing on the BBC’s coverage of the ‘Autumn statement’, noted that due to declining growth increasing the amount Osborne has had to borrow, he has to factor in more cuts than previously to eradicate the structural deficit:


“He’s had to take another 15 billion [pounds] away from public spending in the years after the next election. Now he hasn’t told us how he’s going to do that, he’s simply said that in his forecast he’s taking an extra 15 billion away, that’s enough for the OBR (Office for budget responsibility) to say he will meet his target. Had he not pencilled that in the OBR would have to have said he’s going to miss his targets.”


Osborne’s analysis is that should this happen the effect would be to shake the markets’ confidence.



So what of the opposition?


Polls are currently reflecting the public’s lack of faith in Labour’s economic plan. ComRes found that 21 per cent of people trust Labour with the economy whilst 50 per cent do not. Ed Balls’ argument for his economic philosophy has hit a wall. The party’s message is that spending more and therefore increasing borrowing costs will lead to lower borrowing costs. On the surface the claim appears illogical and they have failed dismally in getting across any sort of economic argument to support the claim.


The coalition has found political capital in claiming that despite inheriting a huge deficit they have maintained a low level of borrowing costs. This appears true when compared with European neighbours like Greece and Italy, but does this tell the whole story?


Today’s bond market:

  Price Yield
US Gov 10 yr 100.00 2.00
UK Gov 10 yr 113.27 2.23
Ger Gov 10 yr 97.23 2.31


The above graph shows that the UK does indeed borrow a similar amount to both the USA and Germany. If the theory of cutting the budget deficit to increase the attraction to borrow follows, then you would expect them to have similar budget deficits:


Budget Deficit (% of GDP)

US 9.3
UK 8.7
Greece 7.0
Germany 1.1


So far so good.


But the US, despite the best efforts of the Republican Party, isn’t following a similar austerity plan to keep favour with the markets.


Upon arrival to the White House President Obama initiated an $800bn bill and recently fought hard for a $447bn package of tax cuts and government spending. Hardly austerity measures and when combined with the life and death struggle to raise the debt ceiling, which had it not been achieved would have led to an American default, would surely deter any nervy investors. Yet that isn’t the case, so Chancellor Osborne’s theory of ‘austerity or exorbitant borrowing costs’ appears to fall down.


The example of America’s economic situation is much more consistent with Britain’s position than the European countries. Britain hasn’t defaulted on its debts for 300 years, it has its own currency, an independent central bank and control of its own monetary policy. Our flexibility is far greater than the likes of Italy and Greece and is as such a far safer economy to invest in.


Economist Paul Krugman believes austerity rain will lead to an austerity flood

Labour will need to work hard to convince the country that stimulus is the way to go with even former Liberal Democrat leader and Keynesian, Lord Paddy Ashdown, subscribing to the government’s argument. During a debate with Alistair Darling in response to the ‘Autumn Statement’ he reiterated the party rhetoric; “debt as high as Italy yet borrowing rate lower than Germany.” Labour has to show that this is a distortion of cause and effect to gain any credibility for their argument. Ashdown’s party has always wanted to join the Euro despite the disadvantages of the loss of a sovereign monetary policy. These monetary conditions are again ignored in the austerity hypothesis. Italy cannot print money into the system in order to devalue; it has no control over interest rates and is tied into a political entity that is forcing austerity measures that only increase the likelihood of default and further disincentivise investors.


The 2008 Nobel Prize winning economist Paul Krugman states in his blog: “it turns out contractionary policy is contractionary after all. As a result, despite all the austerity, deficits remain high. So what is to be done? More austerity!”


Perhaps the Labour Party would be well served to adopt this point in favour of the distinctly less successful ‘too far too fast’ campaign.





The world leaders need a leader


Is this the international leader the world requires?

The world calls for a leader as governments across Europe collapse, yet it may be that the man for the moment was the first to fall victim to the economic crisis.


Gordon Brown had a turbulent three years as Prime Minister and domestically it all went wrong from him. The 10p tax fiasco undermined his government, his inability to appease his cabinet undermined his party and by calling a ‘lil old lady’ a bigot, he undermined his relationship with the public.


But whilst Brown failed to find his feet as a domestic Prime Minister, he did much to bolster his curriculum vitae as an international leader to call on when there is a crisis. As Prime Minister he convinced Europeans that the banking crisis was a global problem, stabilised devolution in Northern Ireland, and even got the Chinese to agree (in principle…. kind of) to the Copenhagen climate agreement.  But his greatest achievement was the G20 summit in London where the leading nations agreed to inject $1 trillion into the global economy.


Perhaps the most lasting achievement of Brown’s international ventures was his ability to pull China into the negotiations. The rising superpower has over $3 trillion in reserves and is the key to economic recovery; it must be pulled, tugged and cajoled into opening up its chequebook and buying foreign goods. The problem is that the country is export driven and wants to keep its currency artificially low to protect this interest. But the leadership can be forced into realising that it is in their interests to intervene as a strong Europe and America mean a strong market for Chinese goods.


But as with Churchill before him, Brown’s successes on an international stage were not enough to ensure a further term as Prime Minister. So where will the leadership come from?


China must be thrust to the forefront of the G20. This is what Obama and Brown realised and did so brilliantly in 2009 but seems to have been a lesson not heeded, as the latest instalment in Cannes was really the France, Germany and Greece show. China does not willingly push to spend its money externally without a guarantee of a return, so when austerity measures are placed at the heart of a meeting their politicians will happily take a further step back.


The traditional world leader is of course the United States of America, but President Obama is in no position to take up the mantle. The ‘greatest democracy in the world’ continues to fail as a system. He’s struggling to operate due to the severe restraints of a filibustering Republican House of Representatives home to a lunatic fringe of ‘Tea Party’ politicians. An approaching election will do nothing to free up time to rally the world behind a common cause.


So attention shifts from the leader of the free world to the leader of the Eurozone. Germany is the main European power and the head of the Eurozone, it needs to be strong and proactive but its leadership is floundering. Merkel is clearly an indecisive character by nature and it doesn’t help that the country she represents burdens here with a weighty recent history. Memories of the Weimar Republic and the hyperinflation that destroyed the German currency have, in the minds of the political elite, ruled out the use of the ECB as a lender of last resort. To expose the central bank to huge lending, quantitative easing and inflation is still a terrifying prospect for a country where a loaf of bread used to cost a wheelbarrow full of money.

So is there another British Prime Minister to rise to the challenge? Categorically no.


The UK has an awkward international position. Obama has made it a point of policy to look to the east making it difficult for the Prime Minister to maintain the ‘special relationship’. At the same time our European neighbours are increasingly focussing internally, decreasing the UK’s influence on the continent.  Gordon Brown maintained very close relationships with both Chancellor Merkel and President Sarkozy earning their respect and their ear. Cameron has largely undone Brown’s meticulous work, earning the title ‘lightweight’ from Obama and being told to ‘shut up’ by Sarkozy. Though this country’s days of controlling an empire is a distant memory, Gordon Brown showed that Britain could still have a profound effect on global politics. But Prime Minister Cameron, aided by his vociferous Eurosceptic party, hasn’t made friends with anybody and is more isolated than any UK leader in memory.


Chancellor Merkel is the unwilling incumbent of the hot seat and though incredibly hesitant must eventually place her faith in the ECB. Whilst this may prove to take a long time to achieve, the wonderful truth about continuously doing the wrong thing is that eventually you are forced to do the right thing.