Funny politics. Since the UK isn’t in the eurozone, they actually aren’t restricted the same way the Greeks are. Fiscal shortfalls in the UK (and the US) do not necessarily need to be closed by cutting spending or increasing tax revenues. They can also be filled by borrowing or printing money. Of course, printing money may make borrowing more difficult. Furthermore, inflation comes with its own problems. For the most part, though, it’s an issue of pain now vs. pain later. It’s often politically expedient to have pain later, even if the pain comes back with interest. That this news is being spread means that there is a push to face pain now.

Obviously, not everyone is happy with this decision. Marshall Auerback has a rant on the subject that is being reprinted in several places (The World Gets Fiscal Austerity Fever, As The UK Unnecessarily Commits Economic Suicide).

Given the market’s recent, uh, appreciation for sovereign debt problems, the UK might be smart to avoid running the printing presses. Gilts are not viewed quite as fondly as Treasuries. It is possible that printing money could lead to a rejection of British sovereign debt by the market. If that were to happen, the pain in the UK would be far greater than the pain presented by any austerity measures.

It is still too early to guess what the outcome will be. It’s entirely possible that this whole thing is just a setup to shift blame to the opposition party for the decision to resort to the printing presses. “We were out of money! They left us with no choice but to print money or cut services!” Of course, this might be a false dichotomy. The UK may still have borrowing capability. Perhaps they’re just trying to get a feel for public support, deciding how deep to cut.

I am curious which path Britain chooses. If they choose to borrow their way out of this, they can serve as a bit of a canary in the coal mine for the US. We’ll have a good idea how far contagion has spread if we see problems growing there.