In countries such as Germany and Italy the centre parties tend to the parties of fiscal discipline and responsibility. Many people expect the Liberal Democrats to fulfil the same function in Britain. They will not do that. If there is a hung parliament the pound and gilts will sink

Spring conferences are not usually that important in British party politics.  It’s usually only for a weekend and is about a tenth of the size of the main conference.  Only the most hard core activist tends to be there.  If spring conferences are not notable, then Liberal Democrat spring conferences are even less so.  The perennial third party of British politics (and it has been in this position for ninety years) Liberals have not sat in a cabinet since the second world war.  They are the dust bin of protest politics, or at least that’s how the other parties see them.

So an off season even for a permanently off season party would not seem to be an important event for the bond market or the price of sterling.  And that’s why the market has so far missed its significance, but it is significant.

This is the closest election that Britain has seen since the 1970s.  Although Labour has made a colossal mess of the economy, the Conservatives are hardly convincing.  They have drastically softened on who they will cut the deficit, and the electorate in the end prefer the idea of any deficit cutting pain hitting other people.  Although no one sees how Labour can distribute the pain away from them, at least the Labour Party is saying what the electorate want to hear.

And this is where the Liberal Democrats come in.  This close election is going to mean that there is a strong chance of a hung parliament.  So with a hung parliament the king makers are the Liberal Democrats and that’s why what they had to say is very important.

Essentially, they said that there will be no support for a fast deficit reduction plan.  For all purposes the Liberal Democrats will block any meaningful deficit reduction plan.  Unless the Tories win a convincing majority, this is going to have the effect of sending gild yields rising as massive amounts of debt need to be created.  This will also send sterling down as sterling debt instruments expand without limit.

The Liberal Democrats are yet another reason to short the pound.