Listen to the Markets!

Martin Wolf thinks governments should listen to the markets and spend:

Martin Wolf (FT):

"[L]isten to the markets. They are saying: borrow and spend, please... US 10-year Treasuries yielded 1.98% on Monday, their lowest for 60 years... fiscal deficits help the private sector deleverage. Fiscal deficits are helpful... in a balance-sheet contraction.

One objection... is that people will fear higher future taxes and save more... But there is a good answer: use cheap funds now to raise future wealth and improve the fiscal position in the long run.  It is inconceivable that creditworthy governments would be unable to earn a return above [1.98% for ten years]... by investing in physical and human assets.

Another noteworthy objection... is that growth slows sharply once public debt exceeds 90% of GDP. Yet that is a statistical relationship, not an iron law. In 1815, UK public debt was 260% of GDP. What followed? The industrial revolution.

It is becoming ever clearer that the developed world is making Japan's mistake of premature retrenchment during a balance-sheet depression, but on a more dangerous scale... In a world of excess saving, the last thing we need is for creditworthy governments to slash their borrowings. Markets are loudly saying exactly this. So listen."