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February 03, 2010



I'm not comfortable leaping to the defence of a Conservative shadow chancellor, but after your string of posts, I will! At least recognize Mr Osborne is giving some thought to the economic mess we are in.

I fully accept your argument about currency risk and inflation and their potential impact on gilt yields. The 1970s showed what can happen if you lose control of inflation. But I would give Mr Osborne a bit of credit for alluding to three other historical lessons. Two of these were in the UK and followed economic crises (Thatcher-Howe fiscal squeeze in 1981, Major-Clarke squeeze in 1992-93). You might say policymakers were 'lucky' in both cases, but they show how a fiscal squeeze, looser monetary policy and a lower exchange rate can rebalance an economy quite effectively. The third example is the Clinton-Greenspan pact of the early 1990s, where - allegedly - Mr G promised looser monetary policy if Mr C tightened fiscal policy.

Of course, economic conditions are somewhat different right now, which is why I suspect the Tories are backtracking on some of the promised spending cuts, at least initially. But, as far as I know, the current government has offered no convincing explanation of how we get out of this mess. And the electorate is in denial about just how much their living standards are going to get hit in coming years.

Luis Enrique

umm, but "if what really matters is the cost of government borrowing", we're talking about the real cost not the nominal cost, aren't we? So even if inflation causes nominal yields to rise, is it right to say it's increasing the cost of servicing debts?

not sure about exchange rates .... if investors are expecting depreciation they'll want higher yields, but once depreciation has happened, what then? What I mean is, how large is the overall increase in the cost of borrowing, over time? If we'd depreciated, might investors be even more willing to lend, with exports up and imports down? just thinking aloud


FWIW there is a very close relationship (until last few weeks) over past year or os for the 10 yr gilt yield and the euro/sterling exchange rate - its the lower the gilt yield the weaker sterling, and vice-versa (the exchange rate has been inversed). See


Why would this be? Flight-to-safety hurts sterling but benefits gilts? The lower sterling goes the more likely it is to go higher, so benefits gilts?


Terribly important politically, no? The government that presides over the UK (or US) losing its AAA rating will be a poor discredited thing, not long for the world.

David Smith, viewsflow.com

Guido Fawkes

Are you saying the Tories are inviting "Labour's Sterling Crisis" headlines?



More like desperately, cocaineically hopping about flapping their arms and shouting "sterling crisis!" while more quietly saying their own policy is "monetary activism".

Meanwhile, can we all stop caring about sovereign CDS prices? Does anyone believe that a) any of the people writing sovereign CDS would be able to pay out in a UK default scenario, b) that any of the people buying it would be able to collect, c) that a eurozone sovereign crisis wouldn't be resolved on terms designed to avoid a formal event of default, e) that the buyers aren't either buying it because it's dirt cheap and it lets them tick a box, or else just 'cos it's going up, and f) that the sellers aren't just playing Capital Decimation Partners?


It seems to me if anyone really believed sovereign CDSs would be useful in event of a default the Treasury could simply stick one onto each gilt it issues.

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