What we do share with the United States is a big fiscal deficit of more than three per cent of GDP. This is much more serious. For the government is the biggest participant in markets. Governments have large financing needs, both in terms of taxation and borrowing. They therefore set the tone. And a panic over the government's ability to finance itself can pretty soon erupt into a generalised loss of confidence.Unfortunately, no participants in the General Election are talking about the excessive size of the UK state, although:
Mr Volcker (former Chairman of the Fed) says: "America cannot go on spending more than it earns for ever. I don't know whether the change will come with a bang or with a whimper, whether sooner or later. But as things stand, it is more likely than not that it will be financial crises rather than policy foresight that will force change."
Behind the scenes, many Conservatives are angry at the timidity of the party's approach to economic reform, which they believe has neutered the election strategy. They are right about that.I just don't understand the Conservative election strategy unless they really do want ZaNu-Labour to be in power when the crunch comes. As George Trefgarne puts it:
The Tories may lose this election, but, if the Volcker view is correct, a fiscal crisis will propel them into office next time.