The end is nigh?

As an old Scandi government bond trader my heart beats a little faster today as Danish 10 years are trading through bunds by about 25 bp’s – Swedish 10 years, having traded through Germany for a little while are now a whopping 60 bp’s through bunds. Norway is lagging and still offers a pick-up, but that can’t last long. Even gilts traded through bunds yesterday – at the time of writing they are neck and neck with bunds.

This brings me to why? Things are certainly not brilliant in the UK or Denmark (and in Denmark’s case the currency is effectively linked to the Euro) so why now? Well, as the solutions being put forward to sort the current crisis out once and for all (i.e. something that lasts more than a week) involve one of two things: 1) ECB prints, or 2) Fiscal union of some sort, or 3) both!

I can already hear George Osborne (or David Cameron) crow about it being the result of the UK government’s fiscal plan and the savings (locally known as cuts) they have introduced, that gilt yields are so low. 

But as Martin Wolf writes in the FT today the public and the private sector cannot reduce spending and reduce their balance sheets at the same time without the risk of the economy collapsing – something the Chancellor either doesn’t know, or doesn’t want to admit to. Instead there is a lot of rhetoric about reducing the balance on the nation’s credit card trying to compare the nation’s budget to a household budget – this might help get the point across with the electorate, but it is out of the George W Bush school of communication and indeed completely inaccurate as the nation’s economy is completely different from the household budget.

And while I belong to one of the ‘anyones’ who could have told the PM that the accelerated austerity measures were a risk to the economy (indeed I did so on the Today program on radio 4 in August last year) while my erstwhile opponent Andrew Lilico was going on about the economy would be expanding 1%+ Q/Q at this time and RPI would be close to double digits – I guess in economics there are always more than one view and nobody knows in advance who will turn out to be right.

Instead of harping on about the basics of how the public and private sector work together in a modern economy of a certain size I suggest you read Martin Wolf’s excellent piece here: Link to Martin Wolf

I do caveat the above with the size of the economy, because the UK cannot be compared to a Baltic state or to what Denmark did in the late 80’ies and Finland and Sweden did in the early 90’ies. Small open economies have the luxury of running a two speed economy where you can have a domestic recession and all the growth comes form the export sectors – the UK is not in a position to do this at the best of times and most definitely not in one now, with the Eurozone bordering on a recession which could turn into a depression. The US and the rest of the world may be in a marginally better position, but I stress marginally. In the words of George W: “This sucker could go down”.