Is the US or UK on the road to recovery?
Posted on 21 October 2010 with 5 comments from readers
Two older developed nations have chosen two diametrically opposite approaches to fixing their economies after the Great Recession. The UK is axing 19 per cent of its public expenditure while the US is still committed to spending its way out of trouble.
Yesterday’s statement by the UK finance minister George Osborne left no doubt about the path the UK has chosen. US officials mock it as an experiment and one that they are glad not to be trying.
Spending not saving
For the US is still set on the path of the previous UK government: borrowing enormously to pump up public spending to make up for the failure of the private sector in key areas like housing, mortgage debt and auto manufacturing. There has already been one huge round of nationalizations as the US moves towards a socialist, command economy.
More public ownership is bound to follow as not surprisingly an expansion of the public sector will not actually resusitate the private sector. Indeed, it will drain away resources from the private sector in higher taxes and public sector borrowing. And those banks with toxic assets will eventually die or be bailed out by the government. But their shareholders will lose everything.
The UK is taking the orthodox approach. The risk is overdoing the parsimony and getting into a 1930’s vortex of decline. However, stepping aside from the neo-Keynesian madness of the Americans is probably a wise policy choice. The later 30s were not so bad in the UK (until war came).
Fool’s paradise
Has anybody ever managed to borrow themselves to greater economic success? In order to do so you always have to have a ‘greater fool’ to sell out to. And who is going to be a ‘greater fool’ than America? It has the largest economy in the world and the biggest balance sheet. There is no fool with more money to blow.
Can the Chinese be relied upon? Hardly, they have been selling US treasuries as fast as they can without crashing the bond market over the past year. China will want to use its dollars to buy US assets at firesale prices when the real crash comes.
So what of the UK? Well, tackling the huge deficits now will set the country up for a better recovery later. The UK has finally gone European in its economic management and has turned its back on spendthrift America.
Pain for gain
This is going to be extremely painful. But things that are good for your economic health are not always easy. This will indeed be an interesting experiment but the US is the country heading for the bigger fall if it carries on printing money and it shows no sign of calling it a day.
Increasingly the only future for the UK is with Europe, and only a profoundly euro-skeptic party like the British conservatives could take the country down this route without understanding it. But then the UK has no other option now with the US on a suicide trip.
And if it all goes wrong for Britain then joining the euro with a heavily devalued pound might still be a final escape hatch, although the European Union has its own debt issues to face.
5 Comments posted by readers:
UK is part of US strategy & will be going QE2 as indicated by BoE. They can not persue a”separate plan” , as Zerohedge mentioned the biggest Tbill were bought by UK in recent auction, so it has left China & Japan.
Europe with its “austerity plans” para pharasing Max Keiser people will be on streets when they see banks are given trillions & trillions & Joe public are asked to extend their retirement age, take a paycut & get poorer so that bankster can have better lives. It won’t work by the looks of it, apart from in UK where people tends to take everything lying down as they’ve been so pessified & are only worried about football or xfactor.
Lets see how things changes in next 2/3 months which are said to be turning point.
I think the US is now manipulating their currency by allowing it depreciate to try and increase their exports hoping that they can compete with Asia after. I pretty much think that they are now wising up and learning that the reason Asia enjoys good growth numbers is because they have good export numbers. DOW 12000 and then 14000 could be in the works now.
> They can not persue a”separate plan” , as Zerohedge mentioned the biggest Tbill were bought by UK
Difficult to know what’s true, but many commentators on http://www.zerohedge.com/article/foreign-holdings-us-treasuries-surge-driven-record-uk-purchases seem to think that it’s Middle East oil money buying US Treasuries through the UK.
Ed Note: Could be true, Mideast buyers tend to buy at market tops.
The US is doomed with the team of dummies at the Fed printing it’s way to disaster! They don’t have the first clue how to improve economic conditions because if they had to compete and operate in the private sector, they’d starve!
They will create some “dummies rallies” in the stock market and their “extend & pretend” QE2 will please Wall Street because a nice bundle of them fresh greenbacks will flow in their direction. But, ultimately, the US is doomed…. In 10, 20 or 30 years the era of US economic dominance will be a distant memory. The UK have at least elected the Re-hab party who have started prescribing the painful medicine needed after 18 years of the worst government the UK have ever had to tolerate. The whiners, layabouts and hand-out recepients will make some noise and wreck some property but at least conditions will slowly improve for meaningful private sector investment.
Ed Note: Well John Major’s early 90s recession was the previous worst episode – should never have been PM.
At least John Major was an elected Prime Minister, unlike the deluded clown that we’ve kicked back to where he came from. Let’s hope he stays north of the border and stops meddling with politics – clearly the worst Prime Minister Britain has ever had! Similar to Alan Greenspan, Brown will remain largely blameless for the economic mess on both sides of the Atlantic, but history will show their attempts to control the economies & markets were massively flawed. If Britain is to recover we should never see his like again!