To Save The British Economy, David Cameron Will Have To Do The Hardest Thing For Any Politician To Do: [I]t is a good time to take stock of the situation in the UK, which has not only been downgraded, it's also on the verge of a triple dip recession. When David Cameron came to power he won praise for pursuing an austerity agenda (unlike Obama) but it's flopped….
I would like to thank the British government for conducting a massive social experiment, which will be used in decades to come as a proof that a tight fiscal/loose monetary policy mix does not work in an environment of a liquidity trap. We sort of knew that from the theory anyway but now we have plenty of data to base that on.
This idea that Britain has conducted a huge social experiment is not spoken loudly, since it's insensitive, but it's one that economists have talked about. People like that Britain has blown its recovery, because it shows that the theory behind austerity is bunk….
[H]e goes on to argue that the only hope now is that Britain take a "stop loss" on its austerity agenda, and spend more.
I do believe that Britain has finally cornered itself into a situation where there is overwhelming evidence that Mr Osborne should really start spending. He should also assume that Mr Carney will not let that spending lead to appreciation of Real Effective Exchange Rate (a bit more on that mechanism in one of my previous posts entitled “Be careful what you target or am I in the right church?“). That is to say that the Bank of England will keep nominal and real rates very low. In my opinion this is the only rational way of the situation that we’re currently in. Then again, I am assuming the impossible here, i.e. that the politicians know what the stop-loss is….
In the wake of a debt downgrade, David Cameron must spend more money. This is incredibly difficult, since prima facie, it would fly in the face of the downgrade. And more importantly, it would basically require him (and his finance minister George Osborne) to admit that they were totally wrong since the crisis. That's the really hard part. Perhaps even impossible. But that's what it will take.