Thread by @GeorgeSelgin

Thread: With all due respect to Jo, @Frances_Coppola, and @SteveBakerHW's other critics, and at the risk of being told I also don't understand public finances, I think Steve is right to be concerned.

Steve is hardly alone. In March, Fitch Ratings, noting that the UK's deficit, already at post-1960 record relative to GDP, will "increase to well over 120% of GDP over the next few years," cut its UK credit rating to -AA, a rating it recently re-affirmed. theguardian.com/business/2020/…

Just recently Moody's also downgraded UK debt, to AA3, ft.com/content/117349… Of course, these are hardly "doomsday" ratings; and no one thinks that the UK is about to default. It's even possible that the folks at Moody's and Fitch also don't know their public finances.

Nevertheless, there is reason for concern. The reason isn't that the UK might default, or even that it will have difficulty borrowing in the future. It's that the likelihood of either higher real interest rates or unwanted inflation in the future is increasing.

Note that "in the future." At present, there is no serious risk of either outcome. It's the combination of a protracted recovery, heavy post-COVID crisis borrowing and spending, compounded by reduced post-Brexit output, that has raised concerns, and not just among deficit hawks.

Modern Monetary Theorists rightly insist that a sovereign currency-issuing nation need never default or"run out of money." But they also recognize--though not on every occasion when they ought to!--that there is such a thing as a "real resource constraint."

Today that constraint isn't binding. Nor has it been binding for some time. But once recovery occurs, the projected, continued heavy government borrowing is likely to result _either_ in unwanted inflation _or_ higher interest rates that will contain inflation, though...

...only by limiting private investment as well as consumer borrowing. In short, while the government will almost certainly go on paying its bills, it won't do so without the public feeling the pinch.

Reasonable people can of course disagree concerning whether this prospect should "alarm" Britons. Some may also claim that, alarming or not, the prospect, if real, is a price worth paying for present emergency efforts.

Nevertheless the suggestion that there's no reason at all to worry over the state of UK public finances is, IMHO,no less suggestive of an inadequate understanding of those finances than Steve's opposite view.