Governments in Britain, particularly this one, like to listen to what the markets and executives shout. However the markets do have subtleties that need to be carefully listened to.
The Coalition Government is following its programme of austerity because the markets ‘demand’ action.
While action nees to happen in order to reduce the structural deficit, though the rate of reduction is hotly disputed among politicians, economists and the public, the subtleties of the markets are being, to a greater extent, ignored.
The subtleties of the markets are the interest rates of long-term government bonds, currently at 3 per cent. The markets are, not demanding but, encouraging stimulus. Not through Quantitative Easing, in short the printing of more money, which will see an increase in inflation and little impact on the economic investment needed.
The interest rates on the bonds will make it easier to borrow for investment, particularly infrastructure, with little government risk. When the markets have decided that the level of government investment has been met the interest rates of the bonds will start increasing to normal levels of around 4 per cent.
While the markets scream and shout the quieter, more subtle, elements of the markets must be paid particualr care and attention. Only then can one judge where the markets actually want the government to take the economy.