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In a speech to the Demos think-tank in London yesterday David Cameron suggested that the UK will have to go begging to the IMF because of Gordon Brown‘s borrowing. “If we continue on Labour’s path of fiscal irresponsibility, at some point – and it could be very soon – the money will simply run out.”

Gordon Brown countered on BBC Radio 4′s Today programme this morning that the current crisis was “totally different” to anything seen before, because it was not driven by high inflation and wages.

So, who to believe?

As I said in my previous post at the beginning of the week, the danger is in the ballooning government debt and the eventual risk that the UK can not raise adequate additional funds in the bond market as international markets loose faith in sterling.

The UK may have a much lower national debt as a % of GDP than many other countries, however, the figures exclude the liabilities relating to the government bank guarantees and the fact that the government has effectively stated that it will not let any of the banks go bust. Their liabilities are therefore effectively the government’s liabilities. Much of UK bank debt is international. The falling pound therefore exacerbate the situation.

Gordon Brown says that the situation is very different to 1976 – we are not facing a scenario where high inflation and rising wages cripple the economy. Does that mean everything is OK then?

There is more than one way to run out of money. Having a banking crisis at a time when government finances are already stretched, committing to bail out the banks and losing the confidence of the international financial community is surely another way of ending up at the door of the IMF.

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After reading Anatole Kaletsky‘s piece in the Times newspaper today I felt I needed to pick up some of my old economics books and do some revision. I have to admit, even after a second reading I am not sure I fully grasp the mechanics of implementing what he was suggesting.

I will try to summarise his article. He believes there is every chance that the current package of government aid will not be enough to stimulate the economy. He therefore suggests that the government borrow more, but do so at zero cost from the Bank of England. Apparently, Britain’s proportion of cash circulating in the economy as a percentage of all deposits is the lowest in Europe, leaving the economy and banks dangerously exposed to a liquidity crisis. He therefore suggests that the banks are made to deposit 10% of their monetary liabilities with the Bank of England. The catch is that they will be paid zero interest on these deposits (an effective windfall tax) which would enable the Bank of England to lend the money to the government at zero cost increasing the government’s war chest to kick start the economy.

Sounds like a good idea. I think.

Anyway, it got me thinking about economics and our/the electorates understanding of government policy. Implementing economic policy and managing the economy is such a large part of how we evaluate the performance of political parties, yet our understanding of the subject matter is, on average, very limited. When it comes to election time will we be able to judge for ourselves how Gordon has steered us through the crunch? Is he the saviour of the Western world or has he squandered billions of tax payers money?

How can our democracy operate effectively when we can not evaluate the performance of our politicians? Should economics become a compulsory subject along with English and Maths?