Fools Rule The World And US Has No Monopoly On Fools

This post comments on David Cameron's boast that the low cost of borrowing in the UK is proof that his program of fiscal austerity is working. The implication is that investors are willing to purchase UK debt because they have confidence in the directions taken by his government. In other words, the "confidence fairy" is at work in the UK.

One can't blame a politician for putting a positive slant on economic data. After all, the unemployment data and GDP growth data are not supportive of his austerity plan. The public may find low interest rates encouraging, but they may not understand that the low interest rates have a more complex meaning. Investors will purchase government debt under two conditions: They trust that it will be paid back, and they don't anticipate inflation. The good news is that investors trust the UK will make good on its debt. The bad news is that investors do not fear inflation because prices are not likely to rise when unemployment is high and GDP growth is low as it is in the UK. This also explains why interest rates are low for US debt. The major difference in the market for government debt in the UK and the US, versus the market for Greek debt, is that investors do not believe that the Greek economy can generate sufficient tax revenue to service its debt.