Friday, May 7, 2010

The UK election disaster

The election results are bad news for the UK, its bonds (gilts), and its currency. The LiDems emerge as the kingmaker, and their demand is proportional representation, which would be a constitutional disaster for the UK. 

Although the two party system has its drawbacks, such as the perpetual need for intraparty consensus and thus maddening vagueness. But if you look at countries that have proportional representation, you will see no party with a majority and the need to form awkward coalitions with greens, fascists, vegans and religious extremists. 

The UK is looking at the biggest fiscal challenge since 1945. Because (like New York) the UK lives off of the securities industry, government revenue is collapsing and the fiscal deficit is an out-of-control 13% of GDP. 

This no time to change the UK constitution in a way that will lead to legislative chaos. This could lead to a loss of confidence in gilts and sterling. 

(But maybe good news for the US; as investors flee Europe, the US will enjoy strong capital inflows and declining Treasury yields.)

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