December 17, 2012
A Washington Post article on the state of the United Kingdom’s economy, after it followed the path of austerity advocated by deficit hawks, implied that consumer spending there has been depressed. This is not true.
While the saving rate has risen from the lows hit at the peak of the UK’s highest bubble, at 5.3 percent it is still well below the levels that the UK saw before the wealth created by its stock and housing bubbles began to drive consumption in the late 1990s. As is the case with the United States, the UK is likely to suffer from inadequate demand until its trade gets closer to balance.
This means that, rather than fearing foreign investors fleeing the British pound, the government should be encouraging such flight. A lower valued pound is the only way that the UK’s trade deficit can move substantially closer to balance. Without more balanced trade the economy will need large government budget deficits to sustain full employment.
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