Monday, March 1, 2010

Scott v. Currency Markets on Government Debt

In today's Financial Times (here), London School of Economics Professor Andrew Scott adds his two cents to the ongoing debate among economists about whether deficit and debt levels in the US and UK require immediate attention. He argues, using historical data for support, that both the US and UK can handle fairly high debt levels without much problem, and that it would be a mistake to set specific, near-term debt-reduction targets and timetables given the possibility of further economic shocks as economies begin to climb out of recession.

However, Scott's views are contrary to a report in today's Daily Telegraph (here), suggesting that the pound is falling in response to prospects of a "hung" Parliament (without a majority party) after the coming election, which would hamper the next government's ability to cut Britain's record budget deficit. In other words, the currency markets seem to be demanding near-term action to stem budget deficits.

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