So Clegg’s a liar AND an idiot
So Nick Clegg has been lying about what advice he received, or didn’t, from Mervyn King about how to deal with public finances.
Back in June he defended his party’s volte-face on cuts in an interview:
“Our view has shifted,” accepts Clegg. “To be fair to us, it shifted because the world around us changed.” He claims as his alibi “the complete belly-up implosion in Greece”, which made it imperative to demonstrate to the markets that the coalition would make an early start on deficit reduction. Another influence was “a long conversation a day or two after the government was formed” with Mervyn King, the governor of the Bank of England. “He couldn’t have been more emphatic. He said: ‘If you don’t do this, then because of the deterioration of market conditions it will be even more painful to do it later.’?”
But it’s not just Mervyn King who, it is now revealed, wouldn’t say what Clegg was so desperate for him to say that the Coalition’s fixers begged King to call Clegg on a Saturday morning.
Those very same markets he made such great play of understanding didn’t agree with him either.
Fiscal tightening, while conservative in intent, leads to lower and lower growth in the short run. Tougher sovereign budgets produce government worker layoffs, pay cuts, reduced pension benefits and a drag on consumption and the ability of the private sector to accept an attempted hand-off from fiscal authorities. Recession becomes the fait accompli, and the deficit/GDP ratio moves ever higher because of skyrocketing risk premiums and a plunging GDP denominator. In many cases therefore, it may not be possible for a country to escape a debt crisis by reducing deficits!………For sovereigns with debt in their own fiat currency, there is not the operational constraint that you and I face. After all, they can go to the backyard and just pick some bills off their money tree – something we can’t do unless we want to go to jail.
Remember, many countries like the U.S. or the U.K. can just print money to meet creditor demands. After all, the only financial obligation of government in a fiat currency system is the payment of more fiat money. This is a confidence game then. Creditors will only accept more fiat money from the debtor if they believe that the money represents good relative future value (i.e. when debt repayment occurs and where value is relative to other currencies or real assets at that time).So while there is no operational constraint on government because of the electronic printing presses, there is an effective constraint in the form of debt and currency revulsion and price instability (large measures of deflation or inflation). On countries like Greece or Portugal in the Eurozone, the operational constraint is a lot more real than it is on the U.K. because of currency union.