Reactionary Keynesianism

The full economic impact of BREXIT has been laid out in the chancellors autumn statement. In total BREXIT is forecast to cost the UK £122 billion over the next 5 years in slower growth and lower tax receipts. Naturally one would assume that in the face of such awful news sterling would have collapsed on the international markets. Surprisingly Sterling was up against the euro on the day. The City is welcoming Hammond’s new spending plans with £25 billion going on new infrastructure projects. Part of the reason is that while £25 billion is half of what was hoped for it should mean that growth is not as weak as was feared. At the same time the government has eased austerity and quietly binned the target of a balanced budget by the end of the current parliament.

Yields on sovereign debt climbed slightly yet mainly due to the expectation of new issues of government debt to pay for the fiscal stimulus. Nevertheless, like with sterling one would expect that news of a £122 billion hole in public finances would lead to a collapse in government debt prices. Not so. Similarly if we look across the atlantic to the US the prospect of $1 trillion in new infrastructure spending (making American great again) sent markets surging.

Central banks around the world have long complained that monetary policy alone could not be expected to keep economies growing. With interest rates at 0, wages stagnant, productivity rates falling something had to give. In many ways the lack of fiscal spending can be attributed as part of the reason we have seen populist movements gain in strength. Political pressure has been the barrier to the type of direct spending we are now starting see, the irony being that those now in power were the most aggressive in opposing it.

What is even more interesting is that the common assumption that the markets are primarily concerned about debt levels is gradually being shown to be a fallacy.