August 25, 2019

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Some strengths to cope with adversity

Some strengths to cope with adversity

Cope with Adversity

Cope with Adversity

continued from previous article > The truth about cutting out waste

My next point is important, although rarely voiced…

It suits commentators, politicians and speculators to scare the wits out of people with apocalyptic visions of what will happen if their particular views aren’t acted on. I am convinced that although Britain’s fundamental problem of public-sector profligacy is serious, the immediate risks of a fiscal crisis are greatly exaggerated.

The strengths of Britain’s position are ignored by scaremongers. For example, its foreign trade deficit is low – the IMF forecasts it for this year at only 1.7 per cent of national output, compared to 8.9 per cent for Greece. Unlike the US, the UK does not need a massive continuing inflow of foreign capital to pay for excessive imports. And its national debt, although soaring, is doing so from a relatively low level.

If the speculators and nervous investors do “go to war” against the UK’s weak new administration because of its perceived failure to address the deficit/debt problem in a convincing way, the government will have some powerful defensive weapons in its arsenal:

► Because the national currency is under the control of the government and its agency, the central bank, it can be used as a powerful tool to stimulate growth and to provide some protection against ill winds from abroad.

Greece could not take the strain on its currency because it does not control that currency (the euro). Britain can do so, and has already done so. Its economy would be in an even worse state were it not for the 25 per cent fall in sterling’s trade-weighted exchange rate since its peak in 2007.

► Because its government debt is denominated in sterling, there can never be any risk of default as the authorities can “print” pounds to finance it, if needs be. That is also different from the situation in the European monetary union, where the use of the euro greatly limits the freedom of action of individual governments.

► One of the few things that Britain has got spectacularly right in recent decades is the way its Treasury has financed the state through issue of long-dated bonds. The average duration of outstanding gilts is 14 years, compared to around five for the bonds of all other major nations.

Each year the UK only has to refinance a relatively small amount of maturing bonds, whereas other governments have a huge refinancing job every year which limits their freedom of action in other policy areas, such as control over interest rates.

Ironically, all this will make it easier for the politicians to delay tackling deficit/debt and other serious long-term fundamental problems.

They are likely to do so. Expect the government to make a lot of noise about how tough are its plans to tackle the fiscal deficit, while introducing seriously inadequate measures to do so.

CopyRight – OnTarget by Martin Spring

final article in the series that started with – Painful End to Britain Spending Spree

followed by – The truth about cutting out waste


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