Bloomberg, on Losing End of Austerity Debate, Continues Fight

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Tuesday, 31 January 2012 10:54

Imagine George Foreman got up off the floor after being counted out in his fight with Muhammad Ali and started taking wild swings at the champ. This is what Mark Whitehouse, a member of Bloomberg View editorial board, effectively did in a column yesterday.

In response to a Paul Krugman column pointing out that the UK's austerity package has led to a virtual recession, making the current downturn worse for the UK than the Great Depression, Whitehouse calls attention to the decline in the price of credit default swaps on UK debt relative to euro zone countries. He touts the fact that lower interest rate on UK debt will make it easier for the country to get its deficits down to a manageable level.

The missing elephant from Whitehouse's story is that the price of credit default swaps on everyone's debt has fallen relative to the euro zone countries. The relative decline in interest rates on UK debt doesn't speak to the wise policies of the UK government, but rather the foolishness of the European Central Bank, which has done its best to convince markets that it will not act as a lender of last resort and will actually let euro zone countries default on their debt. 

The key issue here is having a central bank that will act as a lender of last resort. This is the reason that not only the United States, but Canada, Sweden, Denmark and even fiscally prudent Japan all enjoy lower interest rates than the UK.

[Thanks to Jim Naureckas for calling this one to my attention.]