Friday, 3 September 2010

Krugman and the Wolf.

Its interesting to see a high brow rehash of Krugman's appaulingly weak argument in the FT today by Martin Wolf.

Essentially the argument is that because long term bond yields are low, we should not worry about government debt. Economically and logically it makes no sense. A proponent of this view would logically conclude that only now should Greece begin fiscal consolidation, rather than years ago. The whole point that fiscal conservatives are trying to make is that trying to cut a deficit when long term yields have exploded is almost impossible, needless to say, cutting government spending when private firms are finding it difficult to borrow makes even less sense that the gloomy scenario Wolf and Krugman paint.

It is intellectual dishonesty in its most repulsive form, and unsurprisingly partisan support of Balls by Wolf. Even if one were to swallow Krugman's prescription that fiscal responsibility should only be practiced when one is forced to do so by the market, the notion that bond yields are signalling a lack of concern isn't clear cut at all, especially in the UK given the government's commitment to cut the budget deficit over the term of the parliament.

If as the Raven believes, bond markets are signalling a lower growth, lower inflation future, then it makes it even more imperitive that governments show fiscal responsibility as their ability to shrink debts in the future through a growth in their tax base is diminishing.

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