The confidence fairy

Some interesting comment following the announcement of the UK’s GDP figure of +0.5% earlier today:

Well, the economy is not growing. It has been totally stagnant since the end of September. As the ONS chief economist has just told me, the 0.5% growth number announced today for the first quarter, would be zero, were it not for the snow. If you take away the snow, you have an economy on a perfectly flat plateau.
Faisal Islam, Channel 4 News

What does this tell us? On fiscal policy, the message is that we should listen to economists, not credit rating agencies. Most mainstream economists argued that the impact of the government’s fiscal consolidation on confidence and consumer demand would be negative; so it has proved… the argument that fiscal overkill was necessary to appease the credit rating agencies has again been disproved by market reaction – or the lack of it – to the Standard & Poor’s outlook warning last week in America, where US Treasury yields hardly budged.
Jonathan Portes, FT 

In short, there is no confidence fairy; and S&P can call invisible bond vigilantes from the vasty deep, but they won’t actually come when called… Econ 101, buttressed if you like by fancier New Keynesian models, says that contractionary fiscal policy is, well, contractionary. Yet much of the world of movers and shakers bought into the exotic notion that expectational effects — the confidence fairy — would make contractionary policy expansionary.
Paul Krugman, NY Times 

I have never understood why Cameron and Osborne are in such thrall to the credit ratings agencies – I have to assume, for the sake of my sanity, that the people in charge of this country aren’t complete morons – when the agencies screwed up so badly over the credit crunch that even a child could surely see that their judgement is questionable, at best. But it’s on the say-so of these apparent Lords Of All They Survey that the race to cut the deficit was begun. And would you look at that? The UK economy is heading down the tubes.

I predict another long, broke, summer of being out of work…

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One response to “The confidence fairy

  1. BrockleyKate April 27, 2011 at 11:11 pm

    In my sector, the credit rating agencies are about 12-18 months behind the times. They’re reactive, not proactive. They’re paid by the people they rate to rate them. Anyone who can’t see the problem with that clearly doesn’t have GCSE Business Studies …

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