The Unteachable

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?

*Drum roll*


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.


From Triple ‘A’ to Triple Dip?

A few months ago I wrote a post, in which I talked about the real reason that the UK can borrow at such low rates. To summarise it, the main reason is that the markets expect the UK economy to remain weak for the foreseeable future and are therefore prepared to accept low long-term rates now. In that post I did also talk a bit about the UK’s AAA credit rating:

…Despite the government claims that austerity is the barrier against a downgrade, I fully expect the UK to be downgraded next year…

And sure enough, yesterday exactly that happened as Moody’s downgraded the UK from AAA to Aa1. There’s been a lot in the press about it today but what does this downgrade actually mean? Is it even important? The answer to that is both yes and no.

Let’s start with the ratings agencies themselves. Ratings agencies have consistently proven themselves to be among the least reliable sources of useful information. They played a major part in causing the financial crisis by  handing out AAA credit ratings to the dodgy packages of sub-prime mortgages that the banks were selling and then failed to spot the banks themselves were credit risks until it was too late. While it’s perfectly reasonable to want an opinion on whether or not the UK is a credit risk (it isn’t), no one with any sense is going to listen to these people. Their opinions are not important anymore.

So if that’s the case, the downgrade shouldn’t matter, right? Well not quite. For that reason it doesn’t matter but for another reason it really does.

For the past three years David Cameron and George Osborne have used the UK’s AAA credit rating to justify austerity. Maintaining this rating, we’ve been told time after time, is crucially important. Why couldn’t we postpone spending cuts until the economy had recovered? We’d lose our AAA credit rating! Why couldn’t the government follow what basic economics suggests and provide a fiscal stimulus to create an economic recovery? We’d lose our AAA credit rating!

And we were all told what would happen if we did lose that rating. No one would want to lend to the government any more. Interest rates would soar and we’d be the next Greece. Well if that does happen on Monday then perhaps there was something to what George has been saying but I don’t think it will. What I think will happen is this:


Our borrowing rates will not soar because, firstly no one cares what the ratings agencies think and secondly the reason that rates are low is that the outlook for the UK economy is weak. This news is hardly going to change that – borrowing rates will more likely go down than up. And when the UK economy doesn’t implode on Monday morning, people are going to wonder what the fuss of keeping the AAA credit rating was all about in the first place. They’ll emerge from their bomb-shelters and say, “Was this really what we have spent the last three years living in fear of?”

The government has kept the threat of losing the AAA credit rating hanging over the UK public like the sword of Damocles and this was no accident. By convincing us that disaster would strike if we were to lose it they have been able to push through the economic policy they wanted to use anyway. But shortly that game will be up and then it will be clear for all to see that chasing credit ratings at the expense of jobs and growth wasn’t just a strategy that dismally failed, it was a strategy that had no justification all along.



Nursey: Oh, that’s another good idea. You’re so clever today, you better be careful your foot doesn’t fall off.

Queen Elizabeth: Does that happen when  you have lots of brilliant ideas? Your foot falls off?

Nursey: It certainly does. My brother had this brilliant idea of cutting his toenails with a scythe and his foot fell off.

(From Blackadder II)

One suspects from this conversation that Nursey’s brother was a bit thick but there could be an alternative. It could be that he was a politician who had realised that his initial plan was terrible but thought it better to go ahead with than be seen to change his mind.

Yesterday Michael Gove scrapped his policy to replace GSCEs with the English Baccalaureate. “U-Turn!” cried the media. “U-Turn!” cried The Opposition. I didn’t. I saw it and thought, “A politician has admitted they got something wrong and scrapped a bad idea. I wish they’d do that more often.”

I have lots of ideas at work. Some of them turn out to be good but not all of them. Quite often I’ve overestimated the benefits that an idea would bring or underestimated the amount of work it would entail. When that’s the case I will try to adapt the idea based on my new information or I might even scrap it altogether. This is just the way things work in all walks of life outside politics.

For example, Adrian Newey is widely considered to be the greatest Formula 1 engineer of his generation. If Newey puts a new bit on one of his cars he expects it to make the car faster. If it doesn’t and it turns out that it makes the car slower he will take it off or change its shape. He won’t leave it as it is and then put lots of effort into a campaign that pretends it is making the car faster. (I’m fairly sure he wouldn’t have won nine constructer’s titles that way.)

Although that sounds obvious, we seem to have some in-built expectation that politicians must get everything right from the outset and never adapt or abandon their ideas. If they do they are “Weak” and they are “Flip-Floppers” and they are “U-Turners”. I have no love for politicians but treating them in this was leads to a very big problem because it continually makes them refuse to adapt or abandon bad ideas. Essentially we put them in a situation where the consequences of scrapping a bad idea is usually worse than just continuing with it and pretending it’s good.

Take the economy for example. I have (as you might have noticed) been fairly vocal about the government’s austerity policy. I believe that since taking power they have been pursuing the exact opposite of what was required. The initial policy though, while flawed, was not the main problem. The main problem was that for almost three years the government has refused to adapt that policy in light of a continual stream of damning evidence that has shown, time after time, that it just isn’t working.

But last week I wrote of my optimism:

One of these days, and probably sooner than you think, those people who stuck by the government when they said austerity would mean growth are going to run out of patience…when this happens the government will have no choice but to do something sensible instead.

Seems it might be sooner than I thought as well. Although the Gove story took centre stage yesterday there was another apparent change of plan as the government announced it was to borrow £2.3bn and invest it in improvement of our flood defences. This really is good news. Improving flood defences is something we need to do anyway and there is no better time to do it when there are lots of unemployed people waiting for work and when we can borrow that £2.3bn at extremely low rates.

This is exactly the kind of thing the government should be doing. Ok, this policy on its own is far too small to solve the overall problem but it does suggest that the government might have finally admitted to themselves that they need to spend in order to create growth.

Over the coming weeks and months I hope to see more policies like this and if they do materialise let’s all promise that we won’t shout, “U-Turn!” If we do that, we risk the government immediately fleeing back to austerity and back to the pretence that their initial policy is working.

And if that happens we’re going to spend the next two years as we’ve spent the last three – cutting spending, cutting the economy and cutting our toenails with a scythe.