Unsuprisingly standard and poor

Moritz Kraemer, chief sovereign ratings officer of everyone’s favourite credit rating agency Standard & Poor’s (one of the ones that helped cause the financial crash by not rating things properly) released an opinion piece titled ‘Brexit threatens UK’s top credit rating.’

The EU referendum is a hot topic and both sides have proven themselves to be incapable of saying something that might actually help voters make an informed decision, at least in the mainstream media. Instead there is a lot of fearmongering and Mr Kraemer, not to be left out, has a pop at it too.

He mentions a lot of stuff but it was mainly these two comments that caught my eye:

“Leaving the EU, our credit agency believes, would be a negative for the U.K.’s sovereign credit rating.”

and:

“Consequently, a vote for “Leave” would likely lead Standard & Poor’s to lower the U.K.’s AAA rating… the U.K. would lose its place in the increasingly exclusive club of AAA-rated sovereigns.”

To borrow a little context from Wikipedia, a credit rating is ‘an evaluation of the credit worthiness of a debtor, predicting the debtor’s ability to pay back the debt‘.

Following this through, Kraemer believes that the UK leaving the EU would hinder the Government’s ability to pay back it’s debt, though he goes no further than stating the potential for ‘significant adverse financial and economic impact’ and ‘risks to effective, transparent and predictable policymaking’ as explanations for why.

This would be applicable if the UK borrowed money in a foreign currency, something that is at the root of the ongoing turmoil in Greece. The difference between Greece and the UK however is that the UK Government is the monopoly issuer of the currency it has borrowed in.

A simple way to describe this would be a parent who wanted to make sure their kids did their chores.

In order for their children to recieve their pocket money, they must to earn a certain amount of paper tokens. They can only earn these tokens by doing chores, as mandated by their parents.

Is it ever possible for the parents to run out of tokens they owe to their children?

Of course not. So long as the children’s parents are prepared to produce the tokens and hand them to their children, they will be able to fulfil their obligations to provide their children with tokens.

So it is the same for the UK Government. The Bank of England (an ‘independent’ subsidiary of the UK Government, but a subsidiary nonetheless) has an infinite capacity to create new money like other Central Banks, which we saw in action when they created £375 million of new money for quantitative easing.

Provided the Government’s debts are denominated in its own currency, it faces no financial constraints in being able to service them. The choice to default on the debt is a political one, not an economic one. The same is true of similar countries with their own Central Bank such as the US, Japan and Australia, among others.

This does not mean that there will not be economic effects from a Brexit vote. But let’s make our decision on facts. Not statements designed to scare and misinform.

 

2016 – Left foot forward?

As the world slowly completes its recovery from the financial battering that was 2008, we see winners like the UK and US, and losers such as Greece, victims of a dogmatic pursual of policy that defies logic, at the cost of ordinary people.

The social costs of austerity are becoming  apparent here too, and public opinion may start to turn as  enthusiasm for spending cuts falters lining the Chancellor’s road to a surplus with political obstacles, more so when the global economy appears to be a repeat of the previous decade as household debt exceeds pre-crash levels. As it stands however, Osborne is on track, with his journey certainly been aided by a splintered opposition more prone to fight amongst itself and shoot itself in the foot rather than attack the failures of the current government.

It’s not all doom and gloom though,  new Labour leader Jeremy Corbyn emerged relatively unscathed from his trial by media-stoked fire as he was catapulted from obscurity to opposition leader. Next year promises to be an interesting period in UK politics, as he continues to defy the expectations of the political class, and in doing so providing an alternative to Westminster orthodoxy and austerity.

Across the world we see similar events to Corbyn’s meteoric rise and an increase in anti-austerity movements. In Canada, the Liberal Party of Canada led by Justin Trudeau took power, on a mandate of increased deficit spending. Closer to home we had the rise of Syriza (now broken), and now Podemos in Spain. Whether this momentum can be converted into a political vehicle to bring about change will be a question for 2016, as a failure to find answers to global issues such as economic inequality, migration and terrorism (all of which in my opinion are linked to some degree) will allow right-wing populists such as Donald Trump and Marine Le Pen to gain traction and use fear of the ‘other’ to promote narratives that divide people.

Judging by the unpredictable nature of 2015, 2016 is likely to surprise to carry just as many surprises. For most of us, all we can do is grab a seat, watch, and hope the world doesn’t end in flames.

mj popcorn