Fool me once, shame on you, fool me twice shame on…..
Fraser Nelson tells us of how bad the national debt situation is. Much of which is spot on. But the one little issue:
The same thinking seemed to govern the national debt. All countries had borrowed, but most had done so locking in low rates for ten or more years, come what may. They paid a bit more for the certainty but did so anyway: if inflation came back, they’d be protected. But Britain was gambling on that never happening. About a quarter of our national debt was linked to inflation, so if rates rose taxpayers would be hugely on the hook. No major country had even half as much exposure. It was a bomb, primed to explode under British public finances.
Yes, but why?
Because Britain did - effectively, even if not legally - default on its earlier debt burden by inflating it away. Therefore significant numbers of people considering lending money to the British government would only do so if protected from that form of theft in the future.
It’s wholly true that we like markets very much more than most other people. But even we’re not going to try and claim that markets are perfect. However, we’ll also insist that markets are not stupid. Disposessing savers through inflation is something that future savers will react to. Which is why so much British debt is linked to the inflation rate. So they cannot do that again.
Tim Worstall