Andrew Neil tweeted yesterday that low gilt yields were a sign that “at least the credit markets still have confidence in the country” to which I replied that they were, to the contrary, a sign that markets expect low economic growth, partly thanks to Brexit. This was a cue for a mini pile-on by Neil’s Brexiter followers claiming that low yields are indeed a sign of improved creditworthiness.
You shouldn’t need me to tell you this is pish. The government’s creditworthiness has never been in question, except perhaps in the fevered imaginings of a few hysterical austerians. And nor could it have been. A government that can print its own money can always repay its debts: this is why comparisons between the UK and Greece are idiotic. The only question concerns the value of the money that gilt-holders will get. There’s no credit risk, therefore, only inflation risk*.
My chart shows that gilt yields are lower relative to their US and German equivalents than they were before the referendum. It would surely be silly to infer from this that the UK government’s creditworthiness has improved relative to Germany’s or the US’s. It’s more plausible that markets believe our growth prospects have worsened – though I’m not sure Brexit is wholly responsible for this.
Other indicators of markets’ “confidence in the country” tell a different story from what Neil would have us believe. Sterling’s trade-weighted index is lower than it was pre-referendum. And even ignoring currency effects, the All-share index has slightly under-performed the rest of the world: since just before the 2016 referendum the All-share has risen 17% in sterling terms whilst MSCI’s world index is up 21% in dollar terms. All this is more consistent with a deterioration of our relative growth prospects than with increased “confidence in the country.”
In truth, no Brexiter claimed during the referendum campaign that Brexit would improve the government’s creditworthiness. And nor should they have. What Neil and his fanboys are doing is the equivalent of shooting at a wall and then painting a target around the bullet-holes and claiming to have hit a bulls-eye.
This poses the question: why do some Brexiters fell the need to argue the unarguable? They have instead two different claims they could make. They could argue that stock and bond markets are wrong to take so gloomy a view of the UK’s growth prospects. Or they could argue – more tenably I believe - that less prosperity is a price worth paying for sovereignty and freedom.
I’d be sceptical even of the latter argument. But it’s not manifestly absurd, which is far more than can be said for the claim that Brexit has improved the government’s creditworthiness.
Which poses the question: why do some Brexiters feel the make to make such silly claims?
It’s become fashionable to say it’s because they are blinded by ideology.
I disagree. We all have ideologies. Yes, even you centrists. But we are not all blinded by it. In fact, in some ways ideology can make us wiser. It can motivate us to study a problem: many of us became economists, for example, because we hated the unemployment and poverty we saw in our youth. And it can sometimes actually improve our vision. My Marxism has made me a less bad economist than I’d otherwise be because it means I have no dog in a lot of fights about economics.
Instead, I suspect that what we have here is not so much the result of ideology as of fanaticism. Fanatics want to believe that all evidence supports their side and that there are no trade-offs. And the wish is father to the belief.
But it’s the fanatics we hear from. They’re the ones on Twitter and who get into the BBC and newspapers whilst the more level-headed – almost by definition - don’t make the effort to do so; there are Brexiters who agree with all I've said above. There is, therefore, a form of adverse selection in favour of bad ideas. As Edmund Burke said:
Because half a dozen grasshoppers under a fern make the field ring with their importunate chink, whilst thousands of great cattle, reposed beneath the shadow of the British oak, chew the cud and are silent, pray do not imagine that those who make the noise are the only inhabitants of the field.
* In truth, this has increased recently: the ten-year breakeven inflation rate is now 3.3 percentage points, compared to 2.6 percentage points in the six months before the Brexit referendum though I’m not sure how much Brexit is to blame for this.