Nighttime Must-Read: Simon Wren-Lewis: Default Panic and Other Tall Stories

…How do they know this? Because people ‘close to the market’ keep telling them so. What can I do to show that this is wrong? The most obvious point is that interest rates on UK or US government debt have been falling since 2008, but the response I sometimes get is that rates have only stayed low because of austerity policies. So how about… the UK general election of 2010…. If there was any default premium implicit in yields on UK government debt, it should have fallen between 5th May and 13th May, either because Labour were defeated, or because the LibDems capitulated on the deficit…. As you can see, rates were higher on 13th May compared to 5th May… no noticeable decline in rates because fiscal consolidation was going to be greater….

The more sophisticated defence of austerity… is that there exists a ‘tipping point’ somewhere…. As we do not know where that tipping point is, it is best to stay well away from it…. The problem with this argument is that having your own central bank makes a key difference…. Markets could… begin to suspect default even when there is absolutely no intention within government to let this happen…. But… [with] Quantitative Easing… the cost of servicing government debt does not rise, because additional money is created…. There is no vicious circle. There is plenty of time for the government to take whatever action it wishes to take to reassure the markets…. Having your own central bank… undertaking Quantitative Easing… crucially changes the dynamics… [no] vicious circle…