Double-Dip Recession In Britain Watch: Why Duncan Black Is Wrong

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 |  Includes: FXB
by: Brad DeLong

Duncan Black writes:

Eschaton: Fools Run The World: I certainly get why Labour was chucked out, but their successors are idiots.

The Prime Minister told the Commons: "I accept we have got to do more to get our economy moving, to get jobs for our people, but we mustn't abandon the plan that has given us record low interest rates."

Record low interest rates are not a policy goal. They are a (potential) tool for improving the economy. If they are not enough, then you should use other tools. Like giving people free money.

Right now record-low interest rates are not a tool for improving the economy. They are a consequence of the fact that the British economy is 100% scr---d and about to become 150% scr---d. The risk that other investments in Britain will go south as the double-dip hits is sufficiently large that investors are terrified and willing to buy British Treasury debt at absurd and outlandish prices. Cameron's statement is the equivalent of:

We have to do more to get the economy moving, to get jobs for our people, but we mustn't do anything to reduce the fear and terror of a double-dip that currently grips our investor class.

Higher market interest rates right now would be a very positive sign.

See? When people get happier about the future--when they think stocks are worth more because they expect demand to be higher and thus corporate profits higher in the future--the interest rate on long Treasury bonds goes up because the investor class is less scared. When people get panicked about the future, he interest rate on long Treasury bonds goes down because the investor class is more scared.