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Crescenzi: The U.K. and Reverse Ricardian-Equivalence

The notion of a reverse Ricardian-equivalence is in play again today following news that U.K.’s economy grew at a 0.8 percent pace in the third quarter, double the consensus forecast (a Ricardian-equivalence occurs when households and businesses alter their behavior in the present expecting that national indebtedness will in the future result in future confiscation of their income).

A similar concept can be applied to Germany and other nations within Europe that have posted better-than-expected economic results.

Growth in the U.K. in the third quarter was fairly broad, with gains appearing in many sectors of the economy. Construction spending, which increased at a 16 percent pace, led the charge. Government spending, which will become a drag on growth next year, increased at a 2.4% pace.

While there is no doubting the direct negative effects of austerity on nations, in a era where indebtedness is seen as a sign of bad health, efforts to clean up balance sheets have their rewards, from investors, who are more willing to invest in nations charting a more healthy course, and from citizens, who in the face of fiscal consolidation worry less about future confiscation of their income.

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    Tony Crescenzi
    Tony Crescenzi

    Tony Crescenzi is Senior VP, Strategist, Portfolio Manager Pimco. Crescenzi makes regular appearances on financial television stations such as CNBC and Bloomberg, and is frequently quoted across the news media. He is also the author of "Investing from the Top Down," "The Strategic Bond Investor," and co-author of the 1200-page book "The Money Market."