George Osborne joins the Jehovah Witnesses

George Osborne has become ridiculous. Everything he does is to avoid imminent market collapse. He’s now telling the BBC that he can’t change his fiscal policy as it would cause financial turmoil. Let’s just take a look back at what he’s said previously, and whether there is any veracity of these claims of imminent Armageddon.
Osborne’s argument before the general election was that a run on the bond market would cause the cost of government debt to escalate, throwing the economy into the downward spiral of borrowing beyond means to make repayments. This argument was not correct.
Firstly, government bonds, or gilts, are not variable interest rate. The market decides the interest rate at the time of purchase, but for the issuer, that rate never changes. If the bonds are traded on, then the rate is affected by the price the bond sells for, but that doesn’t matter to the issuer.
In other words, interest paid by the government doesn’t change on debt that has been issued. New debt, however, may command a higher return. If the market lost confidence in the ability of the UK to service her debts, then the Bank of England may find that when they issue new bonds, it would be more expensive, but the existing debt only pays the issued rate, so there is no spiral on the existing debt.
So Osborne’s argument was always fundamentally flawed, but it’s also interesting to note that the market had little inclination to demand a higher return on new issues of gilts anyway. This well written piece by Chris Dillow, the editor of Investor’s Chronicle, was in April 2010.
The gilt market looks like Monty Python’s Black Knight: no amount of blows can quell its bullishness. So far this year we’ve seen: the end of the Bank of England’s £200bn price support scheme; rising inflation; the increasing prospect of a hung parliament; a refusal of any of the main parties to specify where spending cuts will fall; and a reminder from Greece that European governments can suffer terrible debt crises. And the gilt market’s reaction to all this? “Tis but a scratch.” Yields on 10-year gilts are now exactly where they were at the start of the year – just over 4 per cent.
A month or so later, Osborne relied on his “market turmoil” tactic to scaremonger again, in the days following the election. The Tories were so nervous about closing the deal with the Lib Dems that George insisted that the talks should be finalised before the end of the weekend as he feared the market reaction on Monday morning if they failed. Again, the imminent collapse of the financial system. Again Armageddon.
The cabinet secretary Gus O’Donnell has since appeared on a television documentary about these talks, repeating this fear as if it was a rational argument, such is the power of Osborne’s persuasion. But George was beginning to sound ridiculous. Why would the markets value Cameron and Clegg’s talks more than the institution of the British state and the ability of the Bank of England to honour its obligations? And why would the markets be so concerned about a single day or two when they are concerned with the pensions of whole of the British population? Did George Osborne have no idea of how markets work, or did he just have a peculiar talent in scaremongering?
So today we have a new promise of “financial turmoil” as George tells the BBC that a change in fiscal policy following the disastrous GDP figures would once again be catastrophic. He’d sacrifice happily mass unemployment and destroy the dreams and aspirations of millions of British people, for his unfounded fear of market turmoil.
He’s becoming a comedy character. Can you imagine him at home, arguing with his wife over the remote control? “If you don’t switch to Coronation Street, right now, the markets will go into meltdown tomorrow.”
It seems to me that George has followed the wrong vocation. He went into politics because he is such a great communicator that he has the ability to persuade people that his visions of doom should be taken seriously. But he was wrong to take his undoubted persuasion into the serious business of politics when there are other careers in which his arcane talents could be put to far better use.
Picture the moment, in a few months time. Ken Clarke has taken over No11, and Cameron has closed the door on Osborne’s career. George is at home miserable. He’s in the kitchen, looking into the fridge and thinking, “If I don’t have a cheese sandwich right now, the markets will collapse.” Then he hears his doorbell ring. He goes to answer it and finds a bunch of Jehovah Witnesses. “The end of the world is nigh. We have come to save you.” they cry.
For the peculiar talents of George Osborne, as one door closes, another one opens.

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