More Calls of Alarm About Eurozone Austerity

Tonight brings an odd pairing: Lord Skidelksy, the highly respected biographer of Keynes, and Ambrose Evans-Pritchard, who is generally of the Austrian persuasion, both continuing, as each has, to object to the extreme measures in the process of being implemented in the eurozone.

Now before you say that they are both Brits, and therefore suspect on this topic, consider: Evans-Pritchard’s column was triggered by a letter signed by 100 Italian economists objecting to the eurozone fiscal program, and our own Swedish Lex, who commented via e-mail:

I wrote to you a couple of months back saying that the country to watch is Italy (a lot more than the other Club Meds). If support in Italy for the euro disappears, then France would be unable to explain to its citizens why it should defend the euro hardship when Italian industry and workers were moving towards preparing for a post euro and neo lira era. No France = no euro. That process may be beginning now although I am not an expert on Italy. The Italian political leadership is, as usual, rather dysfunctional so Sarkozy and Merkel do not exactly have an Italian rock of statesmanship and rationality to lean on in these difficult times.

When will it dawn on Germany that it risks being confronted with a string of European countries that will be competing for the same exports but with hugely discounted new national currencies (compared to the new platinum D-Mark)?

Yves here. Swedish Lex’s comments are admittedly speculation, but we are dealing with a volatile setting.

Lord Skidelsky, writing in the Financial Times, reminds readers that policymakers risk aping the mistakes of the early 1930s:

The implicit premise of the coming retrenchment is that market economies are always at, or rapidly return to, full employment. It follows that a stimulus, whether fiscal or monetary, cannot improve on the existing situation. All that increased government spending does is to withdraw money from the private sector; all that printing money does is to cause inflation…

But this story alone does not explain the conversion to austerity. Politicians clamouring for cuts in public spending do not cite Chicago University economists. They talk about the need to restore “confidence in the markets”. The argument here is that deficits do positive harm by destroying business confidence. This collapse of confidence may come in several forms – fear of higher taxes, fear of default, fear of inflation. Deficits thus delay the natural (and rapid) recovery of the economy. If markets have come to the view that deficits are harmful, they must be appeased, even if they are wrong. What market participants believe to be the case becomes the case, not because their beliefs are true, but because they act on their beliefs, true or false…

The parallel with what happened in 1931 is irresistible. In February of that year, Philip Snowden, the Labour government’s chancellor of the exchequer, set up the May Committee to recommend cuts in public spending. The committee projected a budget deficit of £120m, later raised to £170m, the latter figure amounting to about 5 per cent of gross domestic product, and proposed raising taxes and reducing spending to “balance the budget”. The international financial crisis caused by the collapse of the Austrian Credit-Anstalt bank in July 1931 brought huge pressure on the government to act on the May Report. In a notable display of patriotic fervour, the financial and political establishment united to demand cuts in unemployment benefits to “save the pound”….

….the effect of the outbreak of public frugality in 1931 was curiously roundabout. Cuts in salaries produced a “mutiny” of naval ratings at Invergordon, suggesting that the empire was crumbling. This was enough to force Britain off the gold standard. A combination of sterling depreciation and lower interest rates revived exports and started a housing boom. But there was never a complete recovery until the war. Such evidence for the success of the cuts is the stuff of castles in the sky.

We are about to embark on a momentous experiment to discover which of the two stories about the economy is true. If, in fact, fiscal consolidation proves to be the royal road to recovery and fast growth then we might as well bury Keynes once and for all. If however, the financial markets and their political fuglemen turn out to be as “super-asinine” as Keynes thought they were, then the challenge that financial power poses to good government has to be squarely faced.

Now to today’s offering from Ambrose Evans-Pritchard. Note he argues that failing to ease up on the austerity timetable will lead to eurozone rupture:

The rebellion against the 1930s fiscal and monetary policies of the Euro-complex is gathering pace.

Il Sole has published a letter by 100 Italian economists warning that the austerity strategy imposed by Brussels/Frankfurt risks tipping Europe into a self-feeding downward spiral. Far from holding the eurozone together, it will cause weaker countries to be catapulted out of EMU….

My rough translation:

“The grave economic global crisis, and its links to the eurozone crisis, will not be resolved by cutting salaries, pensions, the welfare state, education, research …….. More likely, the `politics of sacrifice’ in Italy and in Europe runs the risk of accentuating the crisis in the end, causing a faster rise in unemployment, of insolvencies and company failures, and could at a certain point compel some countries to leave monetary union.

“The fundamental point to understand is that the current instability of monetary union is not just the result of accounting fraud and over-spending. In reality, it stems from a profound interweaving of the global economic crisis and imbalances within the eurozone …..

It blames the crisis on the “deflationary economic policies” of the richer states. “Especially Germany, geared for a long time to holding down salaries in relation to productivity, and to the penetration of foreign markets, gaining European market share for German companies…

They say the policy has led to growing surpluses in Germany, offset by growing debts in Southern Europe. The adjustment mechanism has not only failed. Matters have got worse, and worse.

“This is the deeper reason why market traders are betting on a collapse of the eurozone. They can see that as the crisis drags on this will cause tax revenues to fall, making it ever harder to repay debts, whether public or private. Some countries will progressively be pushed out of the eurozone, others will decide to break away to free themselves from a deflationary spiral… It is the risk of widespread defaults and the reconversion of debts into national currencies that is really motivating bets by speculators….

Just to be clear, I do not share their Krugmanite view that huge fiscal deficits are benign. In my view, it is imperative that the whole western world reduces debt in a orderly fashion over 10 to 15 years. Pacing is crucial. Too fast can be self-defeating. Too slow is not an option.

My objection with the EU’s mix of policies is that extreme fiscal austerity is being imposed on a string of countries without offsetting monetary stimulus. (Yes, I know, some will say that I am mixing apples and oranges).

Ireland, Spain, and Portugal have already tipped into outright deflation. Ireland’s nominal GDP has contracted 18.6pc since the peak. They are falling deeper into an Irving Fisher debt-deflation trap.

This is reactionary folly…

As for Germany, frankly it is hard to know what to say. It is astonishing that Chancellor Merkel should unveil an €80bn package of fiscal retrenchment without consulting with the rest of Europe. This has raised the bar for everybody else, forcing them into yet further contractionary policies to keep up…

EMU has become an infernal machine. This will not be the last letter by angry economists.

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  1. a

    Sure fiscal “austerity” (less big deficits) will make things worse. Duh. But so will bigger deficits, when they cause capital markets to shut out a country from borrowing, a la Greece. And when that happens, things will be even worse than the bad situation which would have been caused by fiscal “austerity”.

    There’s no road to paradise from the place we are starting. So saying that fiscal austerity doesn’t lead to paradise is not very informative. Claiming “doing x leads to paradise” would be, but nobody seems to be making that claim for any x.

    1. LS

      Exactly! Keynesians are having a hard time grasping that there are only these two nettles to grasp….

      1. Marshall Auerback

        Basic Macroeconomics 101 tells us that at any point in time, full capacity output is determined by the employment level consistent with all workers being able to work their desired hours times labour productivity (how much each unit of working hour produces). That is what we think of when we talk about aggregate supply. It is the maximum that the economy can produce given the current technology and desires of the available workforce.

        On the other side of the equation, total spending (which buys this output) is compromised on private, public and external components. So household consumption and private investment plus government spending plus net exports constitute what we call aggregate demand.

        If aggregate demand happens to be sufficient to absorb all the output that the fully employed economy produces then we are in a desirable state. Households will be able to save as much as they desire and all available workers will be able to find a job (subject to some moving between jobs and being unemployed for short periods of time only).

        So from that state, imagine a fall in private investment. If nothing else happens, then aggregate demand will fall short of the full employment output level.The normal inventory-cycle view of what happens next goes like this. Output and employment are functions of aggregate spending. Firms form expectations of future aggregate demand and produce accordingly. They are uncertain about the actual demand that will be realised as the output emerges from the production process.

        The first signal firms get that demand is falling is in the unintended build-up of inventories. That signals to firms that they were overly optimistic about the level of demand in that particular period.

        Once this realisation becomes consolidated, that is, firms generally realise they have over-produced, output starts to fall. Firms layoff workers and the loss of income starts to multiply as those workers reduce their spending elsewhere.

        At that point, the economy is heading for a recession.

        Short of a dramatic rise in net exports, the only other way to avoid these spiralling employment losses is for an expanding public deficit.

        The question of “how high can public debt go before it is unsustainable” is the wrong way to look at the question. If the public deficit does rise to offset the fall in private spending then aggregate demand can continue to support the high levels of output. Households will continue to reach their desired saving levels and employment will not fall.

        What the deficit hawks are encouraging governments to do, however, is exactly the opposite. At a time when private spending is either flat or falling and in both cases inadequate to support economic growth, they want governments to also withdraw its net spending position. It is clear that this worsens the situation because it drives the output gap up – that is, the difference between potential or full employment output and actual output, the latter being determined by the state of aggregate demand.

    2. Francois T

      There’s no road to paradise from the place we are starting.

      No, but there are guaranteed roads to hell from the place we are starting. Implementing large deficits reductions now is one of them.

      Lord knows I am not a fan of Bernanke and Geithner, but they have it right here. A credible austerity plan must be put in place in all the Western World…over the medium term. But now? The economy is way too fragile to get our fannies all in a twitching mode to start freaking out about deficits.

      Strange that so many policy makers and experts (who should know better) can’t seem to grasp the timing factor at play here.

      Who knows? Maybe that is the plan. Austerity for the little people, while those with means will pick up whatever is valuable and prosper even more.

      1. NOTaREALmerican

        Re: but they have it right here. A credible austerity plan must be put in place in all the Western World

        Who exactly will make the “credible plan”? Let’s make a list of all the player in the game:

        1) The “leaders” are the scum that got us to this point now?
        2) The nobility own the “leaders”.
        3) The peasants believe anything.

        So, who makes this “credible plan”?

        Extra credit: Who would benefit?
        More extra credit: Are the peasants really players if they don’t matter to players #1 & #2?

        This “not now, later” song is getting kinda old. There IS no later.

      2. eric anderson

        I believe a “credible austerity plan” is like Bigfoot. Rarely seen, and even then questionable that it is genuine.

        What assumptions will be built into the plan? That the economy will be hunky-dory five yrs down the road and we can then scale back the 10% of GDP deficit spending? But what if five years from now the economy is still limping like a dog that’s just been “fixed.”

        If the plan is “austerity tomorrow,” I can assure you tomorrow will never come. Politicians are like that.

        Give me sobriety. Tomorrow, after I finish the bender I’m on. Give me peace. After I finish beating the crap out of my enemy.

        I actually agree with the underlying logic of a gradual and delayed reduction in stimulus spending. However, we simply have no men of character who will implement the sound plan, therefore the plan is worthless. We may as well take the pain now.

  2. a

    “If support in Italy for the euro disappears, then France would be unable to explain to its citizens why it should defend the euro hardship when Italian industry and workers were moving towards preparing for a post euro and neo lira era. No France = no euro.”

    France would easily be able to explain to its citizens why. It did so already once, in the attacks on the French france in the mid 1990s. The French defended the franc as if they were defending Paris. And Italy wasn’t even supposed to be joining the euro at that point.

    About the only point that Swedish Lex has right, is “No France = no euro.” That will only happen, though, if the French-German axis falls apart. The French are loath to let that happen (although nothing can be excluded when it comes to the hyperactive Sarkozy), because they know that it is in their interest to have Germany their friend and not a strategic competitor.

  3. attempter

    The basic Big Lie here is that growth can be restored at all. We already know that all the “growth” of recent years was fictive, as it vaporized immediately as soon as the bubble burst. Anyone who still talks about returning to “growth” is simply repeating a brazen falsehood in plain sight.

    Then there’s this more specialized lie:

    All that increased government spending does is to withdraw money from the private sector; all that printing money does is to cause inflation…

    Again, we’ve known since the 19th century that concentrated wealth is never productively invested. Once production exceeds possible demand, there’s nothing for this excess wealth to do but blow bubbles. On the contrary, the only way to restore economic rationality is to restore that maldistributed wealth to the hands of those who produced it and will actually spend it on real economic goods.

    Since finance capitalism constantly drives itself into the crisis bottleneck, the only real (but always only temporary) solution is Keynesian.

    That was while capitalist economies still had the subsidies of cheap oil and there always being a Third World frontier not yet “coordinated” (Gleichschaltung) into the capitalist system, where primitive accumulation could be repeated at necessary intervals, in order to overcome the inherent stagnation of mature economies.

    That’s what globalization was all about, the final frontier for one last massive plunder expedition at the end of the oil age.

    But now that’s all over, there’s no longer a new plunder frontier over the horizon, all sectors are mature, and we’re at Peak Oil.

    There won’t and can’t be any more shifting of the costs to the outside. Now the gangsters can only terminally cannibalize the inside. Western domestic corporatism was the first level of this assault, and the Bailout is the accelerated and intensified version. And now that the Bailout’s running out of room, direct looting of public property (duly negotiated and pre-paid by the people) like entitlements is the next step. “Austerity”.

    The process is neo-feudalization, and the logical end is the restoration of serfdom. That’s all any of this is about.

    The justifications are all manifest lies, and have already been disproved even according to their own premise. How have “the markets” responded to Ireland’s self-impalement? Is that “confidence” restored yet?

    The fact is that the markets have confidence in nothing but their own ability to use lies, terrorism, and eventually fascist force to carry out their robberies.

    The answer today is the same as it was in fall of 2008. Smash the rackets. Whatever they say needs to be done is the exact opposite of what needs to be done. Let Wall Street perish, help it perish, ensure that it perish, while using all available public resources to help Main Street in its necessary transition to a restored real economy, post-financialization, post-exponential debt, post-oil.

  4. michel

    There is general confusion, which Yves unfortunately shares, about the concept of ‘austerity’. There is also logical confusion, on the one hand Yves keeps asserting various economic identities are tautologies and true by definition, on the other hand she wants to draw prescriptive conclusions about behavior in the real world from them. You cannot have it both ways.

    The confusion about austerity is this. It is not austerity to stop wasting money on employing armies of civil servants to do either nothing, or things which actively damage economic productivity. It is not austerity to cancel benefit systems which should never have existed in the first place, and which give huge numbers of people strong incentives not to work. not to get educated, not to move in search of jobs, and to just turn having babies into a form of state job.

    This is just common sense, and if this is what they are doing, its an excellent thing.

    The problem with all this talk about the dangers of austerity is that it assumes all state spending is sensible and helpful. Most is the reverse. Something similar happened during the great depression, when state activity to alleviate it, actually made it worse, may have caused a recession to turn to depression.

    The prescription of Yves and others for Europe, to continue this pointless and counter productive spending, and to go into debt to do it, thus increasing already high debt levels to genuinely unsustainable levels, that is just plain craziness. In the end, this way bankrutpcy lies. As Greece is finding out, and as Spain will too.

    The underlying problem here is, if a country bankrupts itself, it is then bankrupt. All this talk about avoiding austerity is just hot air. The question is, how to deal with the debt, and what to do later.

    What Yves needs to do to make her argument is take a particular case, say the UK. Now just tell us, what percent of GDP she recommends as the current budget deficit. And how high does she want total debt to go, as a percent of GDP. Do that, and we can have a sensible discussion about it. The answer is not going to be what Yves and others want it to be, by the way.

    1. Debra

      Michel, I’m betting that you live in France. I do too.
      WE are living in a country that is applying austerity, not in any RATIONAL manner, but austerity FOR austerity. Because… “more of a good thing is always better”. Right ? Logical, hein ? By the way, this reasoning is very… logical in its own way.
      YOU (if you live in France…) should know that the “more profit/more productivity” (abstract concepts) has been linked in our leaders’ minds with fewer and fewer workers (flesh and blood people). Which means fewer and fewer doctors and nurses in our hospitals to keep “the machine” running. Fewer teachers to teach our kids. (NOT fewer administrators by the way… fewer people who are REALLY WORKING at what the MISSION of our institutions is). Fewer jobs EVERYWHERE. In the private sector. In the public sector. Taking fewer and fewer salaried people and squeezing all those lemons dry, and discarding them afterwards. Very predatory. But… GREAT productivity, and IT ALL LOOKS SO GOOD ON PAPER, right ?
      I had a little discussion with the charcutier at our local supermarket.
      The management has been using strong arm tactics to try to hire a butcher at cut rate fees. And they are not finding anybody to do their SLAVE labor.
      And as a result of NOT HIRING A FLESH AND BLOOD PERSON (to SAVE MONEY, austerity, patati patata..) they are LOSING BUSINESS in their charcuterie section…. Less business and not hiring leads to.. LESS business. Oops… looks like Keynes could be right, there…
      For those of you who know your New Testatment think… the parable of the talents. Jesus was an EXCELLENT economist (and psychologist).
      Taking that one talent and burying it in the ground, well… that takes your economy down.
      Too bad our leaders are so ignorant of their Bible, now, isn’t it ??
      (That’s not the only thing they’re ignorant of, by the way…)

      1. Matt Franko

        Is it not about Christ equating the taking of interest as ‘reaping where you have not sowed’ (ie theft)? this is typically how I have looked at that parable, but Im going to think more about your interpretation (damaging the economy)…

      2. Francois T

        The parable of talents applied to economics?


        Food for thought here.

        Excellent post BTW! :-D

    2. Eric

      Thanks, Michel. A good fraction of the resistance put up by the deficit hawks in the USA to more stimulus isn’t that a deficit is automatically bad, but rather that the proposed additional spending (and a good deal of the current spending) is for things that seem wrongheaded. We are lectured that “the multipliers” for tax cuts make them less useful than increased spending, but many would rather see $50B in tax cuts where you run the “risk” that $5B will just go to savings or debt reduction than $50B in spending that establishes the basis for another $500B in the next 5 years. Authorize $20B for high-speed rail and when that is spent someone is sure to point out that we need to spend another $400B (or more) to actually get a network, at which point the argument will be it needs to be tax dollars because no private capital can be found to do this.

    3. NOTaREALmerican

      A sensible discussion? With who? What all the intellectual bloggers are (conveniently) ignoring (deception IS the strongest force, don’t forget) is that the governments – the “democratic” institutions – do not work for the interests of the peasantry.

      Therefore, the system cannot change direction until there is a power shift. This can only happen when “the leaders” (the kabuki-generating peasant-manipulating slime) FEAR the peasants. The peasants are – right now – fat and happy (dumb, of course, is a given).

      The nobility controls the financial and political system of all countries. It always does (this is normal). So can we please stop this nonsense “talk” of “policy”. Please, nobody – that matters – cares about “talk” about what benefits the peasantry.

    4. eric anderson

      @ michel “There is general confusion, which Yves unfortunately shares, about the concept of ‘austerity’. There is also logical confusion, on the one hand Yves keeps asserting various economic identities are tautologies and true by definition, on the other hand she wants to draw prescriptive conclusions about behavior in the real world from them. You cannot have it both ways.”

      Ummm, you noticed that too, huh? I’ll wait for Yves to explain this apparent cognitive dissonance.

      And to second Michel, yes, what is a manageable level of total debt to GDP? Is there any level of deficit that is too much? What level is that?

      1. michel

        There is an answer to the total deficit as percent of GDP question. It is 90%. When you get to that level, history shows, your growth rate slows to a crawl, and your chances of default rise. This is probably the important parameter.

        The way to think about this is not in terms of the general concept of government spending, austerity and so on. Instead look at particular programs, and ask why anyone would want to spend this much money on them.

        Look at the UK announcements today, of the stuff they are going to cancel. Ask yourself what on earth any government was thinking of, to be doing 90% of them. OK, a new hospital may make sense, but funding a Stonehenge visitor center? Guaranteeing a loan to a steel company? The convoluted additions to the already over complex system of welfar payments? WTF is this stuff? Is Yves really arguing that this stuff is vital and contributes to growth, and that not doing it is going to cause a crisis?

        Its nuts, it was this attitude to useless and unneccessary projects and spending that has got us here in the first place.

      2. VJ Kumar


        I find some MMT proponents’ unwillingness to elaborate on vital issues quite frustrating.

        I tried to obtain an answer as to how exactly government deficit/aka private sector “net saving” is going to be implemented for general societal good. I asked twice on this blog and several times elsewhere on other MMT/chartalist sites but my questions were ignored.

        Here’s what I wrote in response to Mr. Auerback’s recent posting here:

        I commented on the identity triviality earlier.

        For simplicity. let’s pretend there is no foreign trade imbalance (say, we live in Germany). I assume you understand that the private “net saving” means nothing more but holding government paper in the form of currency or T-Bonds, and that the government needs to print such paper in order to satisfy potential demand, therefore running a deficit as expressed in quantity of the printed paper.

        If you do, then

        a) Why holding the government paper is more beneficial than investing in the private sector assuming S-I >0 ? Do you agree or disagree that buying say S&P 500 index shares may (or may not) be a more reasonable investment strategy thus decreasing the need for government IOUs and as a consequence running a smaller deficit ? As I commented elsewhere, holding government paper is in essence trusting the government with investment choices rather than making such choices on your own which again may be good or bad depending on your investment skills.

        b) How exactly do you propose to transfer freshly printed money into the pockets of the worthy (having S-I <=0) rather than into the WS denizens saving accounts as was and is being done with the ongoing quantitative easing ?


        There has been no answer yet.

  5. Debra

    Sometimes what people don’t say is tons more important than what they DO say…
    This morning I listened to one of our excellent national radio editorialists talking about the historical “rewrite” of De Gaulle’s June 18, 1940 call to rally around him in London for the Resistance….
    She also included an excerpt from a Nazi philosopher’s quote about taking the country out of the hands of the financiers, and back into THE PEOPLE’S control.
    If you bother to open up “Mein Kampf”, you will discover, alongside of the paranoiac persecution complex of Adolf, some pretty savvy economic and political analysis of the contemporary situation. (Being a paranoiac doesn’t make one “stupid”, nor necessarily more irrational than MOST John Q. Publics walking around on our streets. And it certainly is NO justification for disqualifying the totality of a person’s intellectual production. That would be too… convenient.)
    Very anti stock market, you know.
    Very… anti corporation…
    Very populist.
    Sound familiar ??
    Putting your society into a situation where you have to choose between… saving “money” and saving… men, work, and occupations is not a good thing, I think we will all agree.
    The problem is how much we DESPERATELY want to believe in our money as idea and way of life. How afraid we are of rocking that boat. And of anything that resembles the F, for failure word.
    And when large numbers of people feel that they are getting the short end of the stick, well…
    The rest is history, isn’t it ?
    History doesn’t always repeat itself.
    But it DOES tend to repeat itself (with important variations) until the lessons are learned.
    For individuals. For societies too.
    I believe.
    Our leaders are playing with dynamite…
    And while they have had the leisure of controlling the populations with the idol of money (through debt) for quite some time now, eventually people will come up with the idea that.. “it’s only money”.
    This is the result of breaking the social contract. Logical… Consensus over the illusion breaks down. True anarchy arises.
    Over on the other side of the Atlantic, some of you may sit in the comfy chair and dissect this dispassionately and omit the horrendous consequences of our collective denial. But we are all in this together, whether we like, or believe it or not. Nationalism does not change the ideological interconnectedness of Western civilization.
    The situation makes me very nervous.. and sad. And angry.

    1. Tom Crowl

      Once again, you are ‘on the money’! (forgive the pun)

      When you look at any civilization (in fact, any individual or group) what you are seeing is quite literally the product of countless large and small interacting decisions (decision = an idea + an action).

      I choose to call this ‘social energy’. A civilization is the result of ‘net social energy’: the net of multiple decision ‘vectors’ going in any number of different directions.

      In this light we come to see some inherent problems with the technology of money… problems which repeat through history.

      While its a very necessary technology… its dominance over the allocation of this social energy, along with its pathological concentration (largely due to its creation-bias and network effects over time) inevitably leads to intolerable social inequity. (Revolution and/or collapse)

      The technology of money urgently needs to be addressed.

      P.S. Keynes, it seems to me, is on to the right idea essentially. However so long as central banking and the financial sector in general remains such a cancerous drain on society (as attempter says… they’re just ‘blowing bubbles’)… trying to re-invigorate social energy by pumping more energy into that particular already obese tumor is seriously stupid!

      Evolution requires tools.
      Revolution only requires inertia.
      (So far inertia is way ahead.)

      How Would Hunter-gatherers Run the World? (Psst… They DO!)

      Credit Creation and the Building of Sustainable Economic Ecologies

      Personal Democracy: Disruption as an Enlightenment Essential


      The Individually-controlled / Commons-dedicated Account is a vital seed structure for the liberation of credit creation via a Commons-owned structure… not to mention its potentials for the public finance of elections, citizen networked lobbying, grassroots development and co-ordination.

      (P.P.S. I agree with the recent post which touched on significant problems in the non-profit sector but that’s a whole other can of worms.)

  6. charles

    Yesterday it was made known that the EU was asking Spain an
    additional slashing of 20 billion euros for 2011,re the height of the budget cuts in Germany.
    In their different style, W.Münchau lashed out last week on Germany stating angrily that growth is not foreseen in the
    German scheme, calling for a rescheduling of the move given the fact that German ‘recovery’is frail, while M.Wolf in his piece on the dangers of the timing of this set of ‘fiscal adustment’ made this remark in relation to EU’s growth( the ECB has slashed its forecasts for 2010 and 2011): ‘The message the EU sends to the rest of the world is that it does not care about growth. But sustainable debt reduction is extremely difficult in the absence of growth.’

    1. CuiJinFu

      Charles’ gets at the root of the problem. Developed economies can no longer maintain growth without increasing debt, but that is a sure road to eventual bankruptcy. Cutting debt via “austerity” measures will stop economic growth, which will likely also lead to eventual bankruptcy.

      This is a classic debt trap…there is no good solution that will avoid economic pain. The game is over and now our only option is to choose how it ends. Deficit reduction is an unpopular option because it involves choosing to hurt yourself, but it at least holds out the hope of maintaining control over your own fate. Instead, politicians and economists will most likely continue to deficit spend until external market forces take away their options (see Greece and Spain).

      On a side note, I find it amusing that there’s such disdain in this world for fiscal responsibility that we can label the measures being discussed in Europe as “austerity”. Not a single country is even considering measures that would eliminate their deficits and warrant that label.

      1. NOTaREALmerican

        Re: I find it amusing that there’s such disdain in this world for fiscal responsibility that we can label the measures being discussed in Europe as “austerity”.

        Yes, I find this amusing too. Apparently, the only thing the left (socialists, liberals, progressives, whatever) and the right (conservatives, fascists, tee-bags, whatever) can agree on is that growth, funded by infinite debt, is the only solution. They only disagree on what is “good” growth. Oh, and they also agree that their own political Parties are the best people to direct the growth.

        Different clowns, same circus.

  7. koshembos

    Not claiming deep understanding of the market and financial works, it seem that we have parallels to the austerity/no austerity in other facets of life. To get fit, the overweight person cannot rely on a drastic diet since she/he needs energy and stamina. A balanced diet is called for. When studying for exams students divide into two, crudely speaking, camps. The midnight oil burners and the balanced learners who go to the movies to relax the night before. The latter tend to do better. For year militaries tended to train in harsh conditions and on drinking water in tight supply. The last 30-40 years wisdom has prevailed and soldiers are given more rest and endless supply of liquids. The results are much fitter, calmer and stronger soldiers.

    Austerity seems to contradict nature and as Krugman makes plenty clear, does do good to the economy either.

  8. michel

    “Austerity seems to contradict nature and as Krugman makes plenty clear, does do good to the economy either.”

    This is words, not thoughts. If you come on a man burning euro notes in the street and tell him to stop, he cannot turn around to you and say he is not going to, that would be austerity, and it contradicts nature.

    As to France, generally the state sector in France is not terribly wasteful. It is in the UK, Spain and Greece. In the UK it is straightforwardly out of control.

  9. Dan Duncan

    It’s one thing to employ the naturalistic fallacy (ie “because something exists in nature, it’s correct”), but it’s another to be fallacious in the use of the fallacy.

    But…if we are going to go there and employ tedious, inappropriate analogies, let’s get a few things straight:

    Austerity does not contradict nature. In nature, the paths of over-abundance (ie gluttony) and the need “to cut back” never intersect. It’s not austerity that’s “unnatural” per se, it’s the underlying condition warranting the need for austerity that is unnatural.

    In nature, lions, tigers, whales, chimps, ants and eagles don’t need to go on a diet.

    And as for these godawful weight loss analogies…

    What planet are you living on!?

    We aren’t talking about a person who needs to lose 5-7 lbs.

    No, no, no….

    We’re talking about “Half-Ton Uncle” Fat. We’re talking about Jerry Springer Freak Show Fat. We’re talking about a crane and “piano box coffin” Fat. We’re talking about kind of Fat that only comes from the spawn of Jabba the Hut and Precious. Yes, we’re even talking about “Mayonnaise on Aspirin” Fat.

    “Oh, but a lighter diet that involves some sort of caloric restriction would be counter-productive. This type of austerity just is not natural.”

    Yeah, and a 1500lb human being (“Half-Ton Uncle” just gained 500 lbs while I wrote this)…

    Well, this is perfectly natural.

  10. S

    It is painful to read the sophmoric arguments about how the two most bankrupt countries in the world should go on spending becasue (1) someone needs to consumer (the identy thing of course); (2) debt doesn’t matter becasue of course you can always pervert the currency. Perhaps a better story to focus on aside from the worthlessness of Keynesian dogma to which everyone has been tortured enough) is why the Chinese have now opened all trading partners to Yuan settle. As for the 100 “Economists” letter, would you expect anything different. Gruiop think is as rampant in academia as it is on Wall Street. Look no further than a market rally on a Spanish bond auction that was put to market at sub 2x and will be immediatly offloaded to the ECB. But it was a “success” becasue of those inventive programs like printing money. Brilliant.

  11. Jamisia

    S, did you mean ‘sophomoric’ or ‘moronic’? You can argue with a sophomore.

    One can interpret the infamous identity as saying that growth can come from government spending, household/business spending and exports. It’s obvious that, when both the government sector and the sector are deleveraging & exports not compensating, the deficit will remain more or less as it is.

    My guess is that discrepancies in the Eurozone will grow. What fueled growth in Britain? What in Greece and Spain? It will not do to lump them together. Britain is sovereign, Greece and Spain are not. Britain doesn’t have debt in a currency it doesn’t controls (as far as I know), but that is the problem for Greece and Spain.

    Last but not least, I find it morally repugnant to hold the experiment at all.

  12. attempter

    It’s also strange how all the same flacks who are so quick to cite alleged “contracts” and “property rights” where it comes to the rackets suddenly don’t care about the property and contracts of pensioners.

    But the fact is that the people as a whole paid and continue to pay into Social Security and Medicare, and any group of workers with a pension negotiated and contracted that pension fair and square.

    These are assets, these are accounts receivable, these are contracts, these are property rights.

    And for a government to unilaterally declare “austerity” measures is to break the contract, to steal property.

    It’s to abrogate the very concept of “property” as a civil society concept and replace it with the state of nature. Especially when the stolen (“saved”) money is immediately handed over to bank rackets, weapons rackets, insurance rackets, and the rest of the gangs.

    The people better wise up and deal with all this as the street mugging it is.

    As for weight loss metaphors, it’s very simple. Whatever weight problem you may or may not have, if you also have a giant leech gouging itself into your jugular, you better burn off the leech first.

    THEN we can see if we’re also overweight, and what to do about it.

    1. Eric

      This is a bit goofy. Government entitlement programs are not contracts. They are acts of legislation that can be modified or eliminated by subsequent acts. While a given law is in force, the arrangement between the beneficiary and government may feel like a contractual relationship, but it fundamentally is not in the sense that the beneficiary’s consent is not needed to alter – or even terminate – the relationship. Additionally, to describe constitutional actions of democratically elected governments as unilateral is pretty meaningless. The citizens have vested certain types of authority to elected representatives. You can certainly disagree with actions those representatives might take in the exercise of that authority, but, if constitutional, to describe those actions as unilateral doesn’t make sense.

      1. attempter

        Yup, it’s just like I said. By the prevailing practice “contracts” just go one way, to bestow licence on the elites and bondage on the peasants. They’re only for the benefit of criminals and have no legitimacy because they’re only ever meant to be enforced on the non-rich while leaving the powerful with complete latitude to make and break as they wish.

        Thus for example we see how strategic defaults, long standard practice among corporations and the rich, are suddenly an “issue” because the people are learning to use the contract in the same way.

        The government absolutely does have a contract here, a dual one. It’s constitutional as well as specific.

        Specifically, this money was involuntarily extracted from we the people’s paychecks over decades, always explicitly being called our money being saved for us and to be returned to us. It’s our legal, contractual entitlement. Social Security is an account payable for the government, and an account receivable for the people. As Dean Baker has said, those who want to “adjust” Social Security are proposing that the government engage in a partial default.

        (Compare this fact to the extreme logic the powerful and their flunkies apply, always screaming bloody murder the second the government does anything to compromise their alleged “rights”, to “property” for example. Suddenly the government is alleged to have infinite social-contractual responsibilities to “compensate” for every “taking”.

        But the same criminals who make that argument will turn around and say the direct robbery of entitled funds is somehow not a breach of contract, not a crime at all.)

        The only way a legitimate government could legitimately negotiate such cuts would be if it first had purged all criminals, all parasites, all corporate welfare and other welfare for the rich from the system. Only when all the dead weight was gone could an entity legitimately propose to renege on a valid deal.

        The “austerity” assaults everywhere simply prove how all governments have abdicated sovereignty in favor of becoming the hired thugs of corporate gangs. As I said, and opinions like yours prove, “contracts” are a scam by now, just like the hijacked “law”. We know there’s no longer any rule of law. The Bailout proves that, Bush and Obama war crimes and Obama’s covering for Bush war crimes proves that, legalized bribery and extortion in the congress and the “supreme” court proves that, the relentless assault on the written Constitution proves that.

        And of course the fact that gutting social spending is being pushed only for the purpose of freeing up more taxpayer money to be stolen by the rackets proves it.

        All of this is unconstitutional. The people’s constitution, prior even to the written Constitution, is another word for sovereignty, which resides always in the people, while Constitutions and governments append from it.

        By definition a government is legitimate only so long as it is the executor, the magistrate, of the general will and the public good. Only where it nurtures and enforces sovereignty.

        Where it abdicates on all of this, where it even surrenders sovereign territory to a stateless corporate gang and lets that gang deputize the very instruments of violence, as the Obama government has done with BP, a government becomes a rogue.

        It has unilaterally severed, not the equivalent of some frivolous drunken bet, the way you would have it, but the most fundamental contract of all.

        So this is indeed a dual breach, on the specific technical level and on the most profound human level.

        In the Bailout America regime we no longer have a legitimate government, but a kleptocracy.

  13. PDC

    Ambrose Evans-Pritchard cherry-picks in the long letter published on “Il Sole 24 Ore” what most suits his personal taste. But the real content goes far deeper then that.
    Since I think it’s interesting (someone would say even scary) I provide a translation of a broader part. Of course, you’ll forgive my English…

    The fundamental point that has to be understood, is that the current instability of the monetary union is not just the result of accounting fraud and easy spending. In reality, it is the result of a profound interweaving of the global economic crisis and some imbalances within the eurozone, imbalances which in turn stem from the unsustainable liberism of EU treaty and from the tight economic policies of those members which have a strong foreign trade surplus.

    The global crisis which exploded in 2007-2008 is still ongoing. Since its structural causes have not been removed, we were never able to exit it. As it has been recognized by several commentators, this crisis has one of its main causes in the global widening gap between increasing work productivity and stagnant or declining purchasing power of the working class. For a long time, this gap has been compensated by an incredible growth of the value of speculative finance and of private debt, the latter stemming from the US and stimulating the global demand.

    Now, there are some who rely on a rebirth of global growth based on a new expansion of US financial sector. That is, letting a new, enormous burden of inexigible private debt to weight on public accounts, they hope to transmit a sufficient impulse to the financial sector to re-establish the related accumulation-of-wealth mechanism.
    We think that, on such a basis, a credible global recovery is out of question, or at least doomed not to last.
    At the same time, we doubt very much that, without a radical reform of international monetary system, China is going to pull the global demand, renouncing to its trade surplus and to the accumulation of foreign exchange reserves.
    What we are facing is a global economic system without a primary demand source, a “sponge” to soak the production.

    The frenzy of financial markets is based on several real contradictions [of Eurozone]. Nonetheless, it is also true that speculators’ expectations are feeding mistrust, and as such they tend to be self-fulfilling prophecies […] according to a scheme that has nothing to do with the so-called fundamentals of orthodox economic theory, and the assumed efficiency of its simplistic version.

    […] It must be stressed that the stubbornness with which depressive policies are pursued, is not just a matter of misplaced faith in economic models whose logic coherence and empirical usefulness is much in doubt even among the academic community. Love for “austerity” is mainly the expression of consolidated interests. There are those that foresee in the current crisis a good opportunity to dismantle the welfare, to break into fragments the labor forces, to restructure and centralize European capital.
    Europe must follow an autonomous path of development of its workforces, wellbeing, environment protection, social equity. To that purpose […] we need to gain time. That’s why we propose to force a sudden stop to speculation. […] BCE will have to buy bonds under attack without any “sterilization”. Short term transaction must be adequately taxed, capital movements strictly monitored.
    History teaches that, to beat deflation, salaries’ drop has to be halted through strengthening of nation-wide contracts, enforcing minimum wages, restrictions to free dismissing, unionization of workers. Especially in the present situation, allowing free market forces to rule the process of work creation and destruction is analytically unsound, and politically irresponsible.
    Tax burden must be shifted from work to capital gains, from wages to wealth, from current tax payers to tax evaders, from poor to rich areas of EU.
    UE budget must be significantly increased, and federal bonds issued.
    To defy dumping and “recession export” strategies of extra-Eurozone countries, a conditional opening of markets, capitals and goods must be put in place. A full opening will be allowed only in presence of compatible policies on wages and work conditions, and shared developing policies.

  14. Matt

    Why is it so hard for people to understand that the “Krugmanite” view is not that deficits don’t matter? If AEP would actually read Krugman on a regular basis, he would know that Krugman says the deficit should be addressed after the economy is growing at a steady clip.

    1. Tom Hickey

      Right, Matt, and the deficit will automatically be addressed by the automatic stabilization process turning from counter-cyclical to pro=cyclical, thereby increasing tax receipts as income increases and decreasing safety net expenditure. Look at what happened after WWII, when the US ran up a huge deficit. It was followed by the most prosperous decades in recent history for the middle class.

  15. Vibrating Alarm Watch

    This is really interesting take on the concept. I never thought of it that way. I came across this site recently which I think it will be a great use of new ideas and informations.

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