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06 September 2011

FT: We must listen to what bond markets tell us


Martin Wolf in his FT column argues in favour of fiscal spending, as fiscal deficits are helpful therefore in a balance-sheet contraction, not because they return the economy swiftly to health, but because they promote the painfully slow healing.

So long as the private and foreign sectors run huge surpluses (despite the ultra-low interest rates), some governments must find it easy to borrow. The only question is: which governments? Investors seem to choose one safe haven per currency area: the US federal government in the dollar area; the UK government in the sterling area; and the German government in the eurozone. Meanwhile, among the currency areas, adjustment occurs far more via the exchange rates than through interest rates on safe-haven debts.

What matters is how borrowing is used. In this case, moreover, we need to consider the alternatives. If the fiscal deficit is to be sharply reduced, the surpluses in the rest of the economy must also fall. The question is how that is to be compatible with rapid deleveraging and expanded spending. In my view, it cannot be. A more likely outcome, in present circumstances, is mass default, shrinking profits, damaged banks and a renewed slump. That is what would happen if today’s contained depression ceased to be contained.

Full article (FT subscription required)



© Financial Times


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