25/02/2013 Leave a comment
As I wrote over the weekend, today was the day we’d find out what the markets thought of the UK’s credit rating downgrade. For the last three years George Osborne has been arguing that maintaining the UK’s AAA rating was crucial and used that as the primary reason why we should pursue austerity. Were we to lose our AAA credit rating we would be attacked by the bond vigilantes! No one would want to lend to the UK any more! Interest rates would soar ! We would be the next Greece!
Those people who understood a tiny bit about how sovereign debt works disagreed though. They said that interest rates were not low because of everyone loving the opinions of the credit rating agencies and instead offered another explanation. They said that long-term interest rates were low because the markets expected future short-term interest rates to be low. And they expected that because they expected the economy to remain weak. (Full explanation of that here.)
Throughout this debate, those people who whipped up fears of soaring interest rates in the event of a downgrade could get away with their scare-mongering because we still had a AAA credit rating. Today was the first day they couldn’t do that though so today we can put this argument to rest. If the government was right then today we should have seen a huge rise in government borrowing rates as the panicking markets attacked the UK.
So what did happen? Did the bond vigilantes attack? Did the rates at which the UK government could borrow go through the roof?
They didn’t go through the roof. They didn’t go up at all. They actually went down a little. Five year rates went down from 0.86% to 0.83%, ten year rates went down from 2.11% to 2.08%.
So what does all of this mean? I’ll tell you and it is not good. It means that not only did the government’s economic strategy fail, it means it was based on a false pretence all along. Maintaining the AAA credit rating should never have been a priority. The priorities should always have been employment and growth.
You’d hope that with the cutting of the last thread by which the government’s economic policy was dangling, they would have come out today, apologised and agreed to listen to those people who had been telling them this all along. What did they say? Sadly they said what they always do when their economic policy explodes in their faces. That’s right – the news on the rating downgrade is even more evidence that they need to keep doing what they’re doing.
It makes me want to weep. Why not for a moment, reassess the policies that have continually got these things wrong and instead listen to the people who have continually got this stuff right? In the face of such evidence, would it really be that hard?
Sadly, it seems as though it would. A government getting things this wrong is bad enough on its own but their refusal to learn anything from it is simply staggering.
P.S. As of Wednesday, five year rates are down to 0.78% and 10 year rates down to 1.96%. Still no sign of those panicking markets, George.