Darling may try to contain fiscal deficit

At last, we see the green shoots of sanity pushing through the barren soil of Westminster. Bloomberg reports that Darling might be ready to contain the explosive growth of the UK fiscal deficit. He told reporters at the G20 conference that the government had already plowed "a lot" of money into the economy.

You could say that Alistair; a deficit in excess of 8 percent of GDP does represent a lot of expenditure that has to be covered, sooner or later, by the taxpayer.

Interestingly, Darling's comments come hot on the heels of a recent speech by Kate Barker, a member of the Monetary Policy Committee. She recognized that once the Bank of England's unprecedented monetary expansion starts to feed into the economy, there might be a need to rapidly increase interest rates. "Of course, I recognise that at some point this stimulus may need to be unwound, possibly rapidly, to avoid an overshooting of inflation."

Taken together, it sounds like the Treasury and the Bank of England are waking up to the fact that they might have over-reacted to economic slowdown. They got carried away with red hot language of crisis. They overdid it with the monetary and fiscal stimulus, creating a massive problem of unwinding the historically unprecedented deficit and zero interest rate policy.

The UK economy may end up experiencing a strange paradox. The large deficit and rate cuts were supposed to prevent a recession. However, bringing the deficit under control and re-establishing normal levels of interest rates will require a much tighter policy stance that will actually generate a recession.

We will have a recession later caused by the attempt to prevent a recession today.