Debtenomics

Well, you could hardly say it was a surprise that UK has come out with a disastrous budget today. What did catch people's attention is the amount of new gilt issuance - an incredible £175bln.

In spite of some politically rewarding token tax measures on the rich, a glance at the so-called "red-book" behind the speech shows that forecasts remain insanely at odds with reality. 3.5% growth within 2 years? Absolute fantasy.

The surprising thing is that sterling hasn't dropped even further, or the gilt/stock market for that matter. Perhaps everyone is looking away?

You can bank on meddling

It might seem a bit ungrateful to question the behaviour of the UK government in these difficult times, yet the situation in Olde England is increasingly surreal. Having rescued banks with that flexible friend (i.e. the taxpayer), the Chancellor then decides to read them the riot act for not passing on the benefits of the last interest rate cut.

I think there's a broader issue here, in that people overestimate the actual power of this policy tool. By all means cut the rate, but banks are still hoarding cash, and interbank rates remain stubbornly out of whack. Think of it this way -if rumours are swirling around that your counterparty might be heading for the wall, would you lend money to them under any circumstances?

The fundamental issue with the interbanking system is trust, not the absolute level of interest rates. Until policymakers wake up to this truth, I'm afraid there will be many more angry and pointless exchanges on this issue.