Image by Salvatore Vuono
“Europe fights back against austerity” was how The Daily Telegraph headlined its weekend election coverage. “Anti-austerity movements are gathering pace across Europe following political earthquakes in France and Greece. A total of 12 European governments have now been dismissed in three years.”
As the European welfare state is officially in its death-throes none of us should be surprised if political strife gets cranked up to eleven. I firmly expect that we will see much more of this in the future. While I can understand the anger of the electorate and sympathize with the sense of desperation and foreboding, I can, however, not consider the electoral choices of the weekend particularly enlightened, and I do not think that they reflect a coherent, let alone intelligent strategy as the Daily Telegraph headline seems to imply. If those who ‘won’ the election deliver on their promises, economic disintegration will only accelerate. What is being offered in terms of ‘solutions’ is a dangerous assortment of economic poisons, more suitable to describe the European disease than provide a recipe for stronger growth.
Recovery through early retirement and infrastructure spending? – C’mon. Nobody can take that seriously.
But it seems that just because this heap of economic stupidity can neatly be swept under the wide tent of ‘anti-austerity’, the commentariat seems somehow willing to believe in the wisdom of the crowds and look for some deeper insights here.
I guess the reason for this is that the economic ideologies that are now being strenuously interpreted into the election results rhyme with the economic prejudices of most commentators. They, too, believe that state bankruptcy is best to be ignored or not to be taken too seriously so that we can spend our way out of this mess. For a long time media pundits have treated us to the perceived wisdom that economic growth can only come from the actions of the government. Only devaluation through euro-exit, inflation through more money printing and more government deficit-spending, preferably by the still credit-worthy Germans and then fiscally-transferred to the maxed-out Greeks, can revive the economy because only this can lift aggregate demand, the magic cure-all of economic problems.
What is lost on these commentators is that the European mess is nothing but the inevitable result of government-stipulated aggregate demand. Easy money funded the Spanish and Irish real estate booms and bankrupted their banks and by extension their governments. Easy money allowed Greece’s political class to go on a borrowing binge that has now bankrupted the country and lured large parts of the population into zero-productivity, soon-to-be-eliminated public sector jobs.
Do you still want the state to ‘stimulate’ the economy? – Be careful what you wish for.
The real culprit of high youth unemployment in Spain and Italy is not ‘austerity’, which hasn’t even started there, but a bizarrely overregulated and sclerotic labour market in which it is almost impossible for firms of a certain size to fire people. The incentives are thus stacked massively against hiring. Yet, in France one of Hollande’s election promises is not to deregulate the labour market. If I were unemployed in France I would not be counting my chances of getting a job over the next five years.
In France the state runs more than half the economy, yet Hollande promises not to privatize state-run industry. Where is the wisdom in that?
Yet, the statists and socialists are delighted. Paul Krugman, who never saw a debt crisis you could not borrow and spend your way out of, rejoices at such display of economic genius. We are all Keynesians now! Listening to Krugman you would think Greek and French voters were not using the ballot to cling desperately to some remnants of the welfare state but were in fact positively advertising the wisdom of government stimulus and the mystical ‘multiplier’.
Some of the commentators tried to argue that what happened over the weekend was also some kind of anti-establishment vote, a verdict against centralisation and the dominance of the deservedly despised bureaucratic elite in Brussels.
Nice try but I think that that is rubbish.
This was not an anti-establishment vote at all. It was not a vote for change but a desperate vote for the status quo. Of course, the old elite deserved the sack but they were largely booted out not because people got tired of the old policies but because the leadership now finally admitted that they could no longer deliver on the old promises.
The established parties lost because they could not continue upholding the false promise that had kept them in office for years or decades, the promise to make the “European model” work. They had to admit that the European welfare state was now bankrupt. Kicking the can down the road is increasingly not an option as the end of the road is now in sight.
And the election winners were those who had the chutzpah to maintain that drastic belt-tightening and painful reform were not required but that the people just had to ‘stick it to the man’, who is Angela Merkel and sits in Berlin. The tactic is straightforward. Shoot the messenger!
In France that meant voting for a charisma-free Socialist bureaucrat who will revive France with higher taxes, early retirement and a Hoover dam funded by Eurobonds and the ECB. In Greece, the big winner was an ex-Communist firebrand who admires Hugo Chavez, and who has raged against austerity measures and structural reform.
I guess we now know what the electorate is against. “Say no to cuts!” But what is it for? Over in Ireland, the deputy leader of Sinn Fein, Mary Lou MacDonald, had the answer: “A No vote (to the ‘Austerity Treaty’) in Ireland will strengthen those arguing for jobs and growth.”
Well, who could not love a politician who promises jobs and growth? But the relationship between politics and jobs and growth is a tenuous one. Politicians are not savers who fund the creation of a capital stock through saving, and they are not entrepreneurs who put that capital to productive use. Politicians are people who spend other people’s money. In Ireland the budget deficit runs at 13 percent of GDP per annum, which according to Krugman’s logic must be a fantastic recipe for jobs and growth. Let’s just sit back and watch how that economic miracle is going to unfold.
My guess is that many people in Europe still know, or at least instinctively sense, that the promises of jobs and growth through state spending and money printing are hollow. They know that the state is bust and cannot keep spending money it doesn’t have. The policy options are much more limited than the campaign rhetoric indicates. On trend, fiscal consolidation and structural reform will continue, and Germany’s negotiating position will remain strong.
Yet, on the margin this was an indication that Europe, and in particular France, remain in many areas unreformable, and that the pressure on the ECB to sustain the unsustainable with sizable money injections will, if anything, intensify.
In the meantime, the debasement of paper money continues.
49 Responses to Europe’s voters say ‘No’ to economic reality
Leave a Reply
Schlichter Book
Schlichter Videos
Recent Comments
{ How's that prediction turn out for ya? } – May 17, 4:53 PM
{ It is simple. Everyone should be free to choose as money whatever they want. No... } – May 11, 2:11 PM
{ 'John Richardson:- You missed out the third of Eisenhower’s warnings, the one most relevant to... } – May 10, 5:56 PM
[...] Europe’s voters say ‘No’ to economic reality [...]
Thanks again. Isn’t it good news for people like us that want this charade finished sooner rather than later though?
I enjoy reading your analysis and agree with parts of it (not all though!).
However it seems to me that you are ignoring the facts a bit here. Spain’s youth unemployment rate was 18% in 2008. It has virtually tripled in 4 years. Is this because the market has become more sclerotic in those 4 years, or is there some other factor at play as well? I agree they need to be more deregulated, definitely. But its not the only reason for the increase surely?! That is why I tend to agree with Krugman’s analysis (sorry I know you will disagree). I am not even a socialist but do believe that there are occasions when state spending is required. It should not have reached the stage where it is now, and should have been in surplus in the good times, but I do think it is needed in addition to structural reform).
Surely State spending wss what caused the problem? The State gets its spending money from the private sector, whether by taxation or by printing it, so why do you think that further spending will not simply further reduce the capacity of the private sector to grow? The secret to “austerity” is that it should apply exclusively to the State, which should shrink fast until it can live within its taxation income and allow the private sector to grow and accommodate more employment.
Remember employment is a cost of production, not a gift that the State can bestow, without destroying the competitiveness of the private sector.
Krugman is wrong.
You are the primary example of the ideoligical drive behind the austerity measurements. Firstly, please spare us the patronising comments in respect of people’s voting exercise. Secondly, although I agree with your economic theories in relation to crisis created by fiat money and lack of savings, the financial institutions are the main culprits of this and the european right wing governments have protected and encouraged this financial oligarchy. Public debt is considerably lower than the private debt these financial institutions protected by right wing governments have accrued and yet Merkel proposes the entire debt bill to be paid by the law abiding citizens rather than the criminal financial sector. This is what austerity measures intend to do but why not a financial and fiscal re-structure so that the oligarchy starts paying part of their own debt bill to start with? It’s the right wing parties who want to preserve the status quo of the 1% of the population rather than everyone’s welfare estate. Austerity measures have created more unemployment and are killing the consumerism which are the basis of economic activity. Merkel’s agenda of reducing deficit is suicidal and would lead onto a deeper crisis that would soon revert back onto the German market so she should be happy that France and Greece will counterbalance it.
I do not understand your point Leyre. I do not believe that Detlev or Austrian economics could be in any way a primary example of the drive behind austerity or anything else European governments are advocating, in this piecemeal fashion. No politician seems to be advocating the comprehensive changes, or rather the revolution that is required in conventional economics and politics. They are just trying to patch up the current system to maintain the status quo and the electorate seems content with this for now.
The madness of spending money governments simply do not have is one critical ingredient in the recipe for turning things around. And yes that is advocated here and elsewhere. But there is so much more to be done to reverse government power and interference in the economy that it is unfair and wrong to ignore those and imply that Detlev supports current government policies.
Much of the financial sector must pay the price of their own stupidity and recklessness. Detlev is not advocating that the general populations be taxed into oblivion to pay for their governments running up these enormous debts. At the same time, we all have to recognize that government austerity must come as the role of the state declines (and disappears one hopes) to make room for the people to create the economy as only they can.
You seem to be saying that Detlev supports one side of the political spectrum more than the other. I do not agree with that assessment at all. The problem is not “heads or tails” – the problem is with the whole coin – the state is the problem.
Electing politicians who advocate more of the same – what got us into this mess – cannot be surprising, but is disappointing. It confirms that most people do not yet understand how we got here and what will genuinely be needed to get us back on a productive track.
The tipping point of enlightenment is coming, but no one can say when and how much more pain will occur before it does.
Oops – no ability to edit.
ENDING the madness of governments spending money they do not have…
Quote: “Austerity measures have created more unemployment and are killing the consumerism which are the basis of economic activity.”
What austerity? I live in Ireland which is one of those countries where austerity has apparently so abysmally failed. Here are some facts from the Department of Finance in Ireland.
2007, the last year that there was no deficit, total government spending was EUR40,889,646
2008: EUR44,692,803
2009: EUR45,248,110
2010: EUR47,021,054
2011: EUR48,024,974
Austerity hasn’t worked because Ireland has done the exact opposite! I challenge anyone to find a country that has actually decreased spending and is in as much trouble as Ireland or Greece.
In Ireland’s case, what is killing the economy is is precisely what Detlev tralks about a lot: corpse banks that are not allowed to fail, drastically increased taxation, a minimum wage of EUR8.65, massive government debt, etc.
>> This was not an anti-establishment vote at all. It was not a vote for change but a desperate vote for the status quo.
Spot on!
>> In the meantime, the debasement of paper money continues.
Spot on!
Thank you for a great analysis of the recent European elections
/Grosen Friis
[...] Detlev Schlichter sums up the weekend’s elections perfectly: [...]
More astute commentary Detlev.
I am reminded of the Simpson’s movie in this. There is a disaster coming and the movie shows a bar and a church next door to one another. Abruptly the church empties and all of the church goers run into the bar, while the drinking patrons empty the bar and head into the church.
No one knows what to do, but they know they have to try something different. Thanks Detlev for continuing to show the real alternative before the false and equivalent alternatives that our politicians always like to parade before us. We continue to be duped, but not for long.
As Pete Townshend and the Who sang – “Meet the new boss – same as the old boss”. And the song? Won’t Get Fooled Again – Thanks Detlev for helping us not get fooled anymore!
[...] payments to Greece unless the Greek government sticks to the terms of March’s bailout agreement.Detlev Schlichter sums up the weekend’s elections perfectly:”This was not an anti-establishment vote at all. It [...]
Detlef. I just spent 40 minutes writing you the most realistic solution you could ever get (I am nearly 86 and have been self-employed since age 36, no salary all these years –I had to find a way to serve others to their satisfaction and then get paid after the fact!) THAT is a reality that only a few out here (and about none in government) have ever lived! Anyway, I hit one key with a finger on my left hand and it wiped out the wholedamn message just as I was finishing it –must have been either Cap Locks or Shift or Ctrl –that’s a shame, I am not going to redo it. Basicallly it states that Government is a COST (that the private sector has to cover in it’s producing products/servfices)(we even pay government workers income taxes for them, since the entire wage comes from private sector taxes!). I also said that the only way you make more jobs (our President hasn’t even a clue!) is for all 140,000,000 of us in the civilian job market (includes 18,000,000 in government) each and all (exceptions, small private companies with 20 employees or fewer) at the stroke of midnight, at some set date ahead here, take 15% pay cuts, all at the same time (put a floor under that at say $30,000) –that way, relativity stays in place, and we immediately can also cut PRICES, accordingly (as the largest single COST (labor) goes down). THAT makes us immediately more competitive in the world’s marketplaces, so we can sell more volume but at a lower Price –and that increasing DEMAND for our products/services then forces us to add JOBS to field the increasing higher DEMAND for our stuff vs competitors stuff! We are simply too selfish, too ignorant, and too spoiled to understand that kind of realistic thinking. (I also discussed our Founding Fathers and their Constitution and the fact that we got to that Constitution by getting rid of a GOVERNMENT so that the private citizens could be free to create real wealth, unhampered by government demands FROM the working members of the group! And so on. It was a damn good letter, sorry…..3:55pm, Pac time, Thursday, May 10th, 2012
G
OVERM
A quick tip! Never type comments directly into a web form, such as you find here and on most blog sites. Simply type your comments in a utility such as TextEdit on a Mac or NotePad, I think, on a PC; then save it in a directory of your choice and copy the piece to the form, simple, and you get to keep your comment, who knows what may happen to it, once out of your control. Useful for recalling what you said if ever challenged in the future, you never know!
Especially with the likely paper money collapse we are all anticipating in the future?
The only problem with that Alan is that if incomes were forced down by 15%, a huge portion of the population would lose their homes….probably in the order of 35%+. I would hardly consider that a brilliant undertaking. In fact, I’d label it foolish.
Krugman is an absolutely necessary lubricant to this entire process, giving everyone an “expert” to whom to defer. They’re having all these G-N (N = any small integer) conferences and meetings, convincing themselves they know what they’re doing, trying to make sure that they don’t upset the increasingly rickety apple cart. But things are getting less and less stable, less able to be controlled. Look at the EU. Look at France! It’s almost time for Musical Chairs…
Perfect title Detlev. Tsipras wants to stay within the EMU, but does not want austerity. Perhaps Tsipras has a faulty calculator? I want to stay out of debt and drive a Ferrari but it is sadly impossible for me. The vote for Hollande is being framed as ‘anti austerity’ even though French spending and French debt have increased every year for the past 10. The bottom line is that when it comes to the US, Europe, and Japan the only real buyers of bonds are the central banks and we know how this movie ends.
Another nice analysis.
Debasement of paper continues so long as we have people who equate consumerism (with borrowed money) to economic activity, who hate saving and who are under the illusion that Govt. is omnipotent and hence can solve all their problems. Unfortunately such people are in majority.
Thanks to “Paper Money Collapse” and blogs on LvMI website, I, an economic-illiterate, am able to understand things a bit clear.
Leyre,
Your statement that “Austerity measures … are killing the consumerism which are the basis of economic activity. ” implies that consumerism is the basis of economic activity/prosperity. This is one of the main fallacies that has driven the world’s economies into the current crises. While it is true that desire/need spurs and precedes production, it is production that makes the satisfaction of these desires and needs possible. Consumerism is only possible with production and production is only possible through savings and investment. The governments of the world, through regulations and credit creation, have undermined savings and investment to the point that misallocations of capital are systemic and so far extended that a massive (and painful) correction is inevitable. Although the private industries that have colluded with and prospered from this government manipulation of the market are not blameless, they are still not the primary problem. The primary problem is the idea that the government can tinker with the market without harming it (and all of us with it). The manipulation of the interest rate, through printing and credit creation, distorts the information that society relies on to coordinate saving and investment and, thereby, produce the goods that make consumerism possible in the first place.
This kind of wishful thinking on the part of the electorate was seen in the last edition of Question Time on the BBC. The general consensus amongst the audience was that we need more government spending and that cuts are bad. One lady even asked whether councils should focus on “cutting spending” or “focusing on prosperity and growth” as if the two were mutually exclusive, at which point I wanted to hurl my shoes at the television.
With public sector debt in the UK, including bail outs etc, now above £2.3 trillion pounds, in my opinion there is no way we can avoid a sovereign debt crisis in the next few years, and as Detlev points out, that will inevitably lead to a collapse of the currency as it is printed into worthlessness to fund the government.
What I don’t understand is that, given the public seemed fairly ready to accept serious cuts of state spending back in 2010, why the government has opted for such a minor reduction (around 3.5% by 2015) twinned with massively increased borrowing and QE, and thereby sealed our doom? Cowardice? Stupidity? Ignorance? All of the above?
Once again, thanks for another great article Detlev.
[...] Publisher’s Note: Detlev Schlichter is the author of Paper Money Collapse. [...]
[...] This article was previously published at Paper Money Collapse. [...]
Leyre:
“Austerity measures have created more unemployment and are killing the consumerism which are the basis of economic activity.”
No. The basis of economic activity is production to satisfy consumer demand. To talk of consumer demand as being necessary to stimulate production is to get it exactly the wrong way around.
David
Hi Detlev
Let’s say you are the new prime minister of Greece. You have emergency powers due to the extraordinary economic situation – you can implement any policy you like. What do you do to improve things?
I await your reply eagerly.
Lex
The first answer that comes to mind is this one: Abdicate, grow a beard, assume a new name, go into hiding. — But seriously, before I try to give an answer let me make a couple of things clear. We libertarians have been saying for years (pretty much decades in my case) that the welfare state is unsustainable, and I have become convinced that an elastic monetary system is equally unsustainable, hence my book. After 40 years of both we are now reaping what others have sown. The system has checkmated itself and Greece is pretty much, well, …in trouble. This is a very unpleasant situation but it is precisely the inevitable outcome of decades of misguided monetary, economic and social policy. The interventionists, inflationists, and welfare statists created this mess, so I feel a bit uncomfortable – being an anti-state, gold-money libertarian – to now assume responsibility, even hypothetically, for this monster that others, steeped in a very different ideology, created. Furthermore, the expectations of the population as to what the state and the politicians can and should to do for them in terms of jobs, growth and general prosperity are now so bizarrely unrealistic that any serious attempt at ‘reform’ must fail.
In a similar context – albeit unrelated to Greece – David Stockman was recently asked: What do the politicians have to do next? — His answer: They are going to have to eat 30 years worth of lies and by the time they are done eating, there will be a lot of mayhem.
That pretty much sums it up. — There is no painless exit available. We will have to go through a lot of pain, and that holds doubly true for Greece, although I think, realistically, the others are not that far behind. And if people have any sense they will be hopping mad with the political class.
So after this important disclaimer, here are some thoughts:
I think Greece should have defaulted fully and completely on its debt. The managed default that the country had under the auspices of the EU and the IMF meant that its privately held debt was reduced (but probably not by enough) but none of the debt held by ‘official’ bodies. In return, Greece was promised new money from the EU and the IMF under conditions of meeting ‘austerity’ requirements. Sadly, by the end of this, Greece will have hardly reduced its overall debt load but will have mainly replaced debt held privately with debt held officially. No wonder the Greeks feel like eternal debt slaves. — I think it would have been preferable to declare complete state bankruptcy and default on ALL debt. That would have reduced the debt load more but also cut off the country from official sources of new money and from the private debt market (most certainly). But under these conditions the country would have had to drastically cut state spending. There would have been no alternative to radically rolling back the state. At first, the shock to GDP statistics and to the national psyche would probably have been worse but I don’t think it would have festered that long. Cuts in state spending would have been the result of the state having no money, not the result of bureaucratic diktat from Brussels. Shrinking the state and selling all sorts of state assets and services would have been a drastic change for Greeks but ultimately a giant opportunity.
Privatization should not be done through selling state assets but by handing them back to the taxpayers, maybe through a voucher or share system. State assets are usually funded via taxation. Taking resources from the taxpayer and later selling these resources back to the taxpayer only means the public pays twice for the same thing. Under property rights considerations it would be best to give these state-confiscated resources back to those who originally had to fund them. Supposedly, not many people in Greece pay taxes, so the list shouldn’t be that long. These measures would cut the debt load, aggressively shrink the state and force Greek society to live again within it means (I don’t think that would make me a popular Prime Minister – from all I heard, it is a national sport in Greece to live high on the hog off the state. But I am a big believer in incentives and in private use of scarce resources, so that is what I would focus on: privatize everything, shrink the state, eliminate dependence on cheap money and debt).
I don’t think it is advisable at this stage for Greece to leave the euro and introduce a new drachma. The markets would immediately suspect that the new currency was issued specifically for the purpose of debasement. But devaluation punishes your domestic savers and hinders capital formation. It could also accelerate capital flight (what little capital is left). As always, a prosperous society is based on hard money, free markets and savings that allow the build-up of a productive capital stock. Of course, I would never advocate the launch of a new paper currency!
Neither am I saying that the euro is a hard currency. Maybe at some stage Greece should consider introducing a gold standard, as I suggested here:
http://papermoneycollapse.com/DSnew/2011/06/greece-should-return-to-a-gold-standard/
But in general mu advise for policymakers is this:
http://papermoneycollapse.com/DSnew/2012/04/the-separation-of-money-and-state/
Thank you for your thoughts. I agree that the international bailout was foolish – little more than a transfer of debt from bank balance sheets to taxpayers. An early full debt writedown would have been better, as you say. However, do you really think it would have been possible for Greece to survive in the Euro cut off from all funding? The pressure to print money would have been very strong; after all, it would be more politically acceptable to pay liabilities with worthless paper drachma rather than not pay them at all, despite the very real risk of hyperinflation. There would be mass bankruptcies and the economy would be in shock.
Handing state assets to taxpayers is a creative idea. Under this proposal, I assume you envisage wealthy investors, both Greek and foreign, stepping in to buy holdings of formerly government-owned assets. The other possibility is for them to become co-operatives, businesses owned by their customers.
Finally: no, you would not be a popular Prime Minister at all, given that 15% of the Greek electorate voted for either Hitler or Stalin (neonazi Golden Dawn + Communist Party). That alone summarises the sad state of affairs.
Dear Detlev,
Your analysis is insightful as usual.
Indeed, in a idle moment, I recently composed a Limerick in keeping with it.
–France and Greece had the temerity
–To reject grand plans of austerity.
–Cutbacks? No, Never!
–It’s spending that clever!
–Let’s leave all those bills to posterity!
But there may be an added dimension. At least some votes for non-incumbent parties may come from voters who deny, not the inevitability of some financial reckoning, but the necessity of facing that reckoning on terms dictated (at least partly and in the short-term) by bureaucrats who seek to postpone it.
Which inspired the following addendum:
–On the other hand, no one could crave
–Being made an eternal debt-slave
–To Masters in Brussels,
–Who flex fiscal muscles,
–To tax them all into the grave.
At all events:
–So let us now all come to grips
–With impending apocalypse.
–With credit unbacked
–The system has cracked:
–The croupier’s run out of chips.
There is one good thing about all this. No, I’m serious. The only way to end the system is if it ends itself, and preferably by explosion and not slow decay. Slow decay would mean that we are looking at decades of nonsense and economic destruction, and I would prefer this was over before I retire.
A sudden shock, however, might actually awaken a few of those who have brains left and realize that either the middle-class stands up for its right not to be mauled by government (and communist terrorists) or it won’t exist in a few years.
The sooner the entire financial system goes into bankrupcy proceedings, the better. To hell with it all. I’ll hide out in the country-side until they are done with the worst part of the coming crisis.
Why are those countries that are pursuing austerity the ones that have the fastest increases in unemployment? People are simply ignoring facts. It’s not because their economies have suddenly become more regulated. Look at the regression lines between austerity and gdp growth, which are in the public domain.
Yes I agree too much borrowing caused the problem (both private and public). However the question is what is the best solution given where we are, regardless of how we got here.
So Jamie, what is your suggestion on how best to proceed given where we are?
And when do we stop to analyze how we got here? Or is that a meaningless and simply historic exercise?
I obviously have opinions on these that would closely mirror Detlev’s, but I really would like to know your alternative. It would seem our choices are, very broadly, more government or less government. Do you have a third suggestion? If I could preempt the suggestion for better government, because that always seems to lead to more, of the same, government.
I believe our choice is very stark, but I invite a reply from you.
What austerity? I live in Ireland which is one of those countries where austerity has apparently so abysmally failed. Here are some facts from the Department of Finance in Ireland.
2007, the last year that there was no deficit, total government spending was EUR40,889,646
2008: EUR44,692,803
2009: EUR45,248,110
2010: EUR47,021,054
2011: EUR48,024,974
Austerity hasn’t worked because Ireland has done the exact opposite! I challenge anyone to find a country that has actually decreased spending and is in as much trouble as Ireland or Greece.
Thats my whole point though – attempting austerity has led to negative growth which has led to lower tax revenues and more state spending on unemployment benefits etc, which has led to no improvement in the overall deficit (also related to the whole issue of debt deflation where it becomes harder and harder to pay off debt if the economy and price levels are falling). Thats why the timing and strength of so called austerity is important.
According to that logic a rising deficit is a sign that the government is not spending enough. The deficit would be smaller if the government spent more and thus ‘stimulated’ the economy more. More spending = lower deficits. This is standing economic logic on its head. – When the government hires a person that would otherwise be unemployed and receive unemployment benefits, the government incurs costs equal to the gross wages it now has to pay the worker minus the income tax that the worker pays back to the state. This policy would come out overall cheaper for the state only if this amount was less than what the government previously paid in unemployment benefits. Thus, this policy would only reduce the deficit if the after-tax wage that the worker now takes home was less then he previously received in unemployment benefits. But in that case, why would anybody take that job? — Curing the deficit with more spending does not make sense. These are Keynesian fantasies.
Hi Detlev,
I think you misrepresent my position slightly there, although perhaps I have misrepresented myself by not being clear. I just meant that a rising deficit is not of itself a sign that the govt is not trying to cut spending (which is what Christian is implying I think). If the govt is receiving less tax revenue as a result of lower GDP, which is actually the case in Ireland over the past 4 years, then even significant reductions in spending can still be consistent with an increased deficit. I think nobody can dispute that can happen.
Where people will differ is 1) what caused 4 years of no growth in Ireland – I would say its a mixture of private and public sector deleveraging (or attempted deleveraging anyway!), both of which have been caused by a variety of other factors; and 2) what should happen going forward. These are where we do differ. 3 years ago I would have said austerity is the way forward. However the facts, as I interpret them, have changed my mind somewhat. My position has some nuance to it I hope – I am not saying spend spend spend – I just think the timing and severity of spending cuts should be different to your prescription. I still consider myself a free market libertarian but do think there are rare occasions when govt spending needs boosting, such as now. Hope that clarifies although I know you strongly disagree!
I could go into more detail as to why I disagree with some of your logic about the costs of the govt employing people v unemployment benefits, but I don’t think my thoughts would be covering new ground and I don’t want to bore your readers more than I surely already have done.
Hi Jamie, I am slightly confused as to how you can say that Ireland has attempted austerity when the Ireland of today is spending 20% more that the pre-crisis Ireland. I should clarify that the numbers I posted are in thousands (add 000) and represent total government spending NOT the deficit.
The biggest problem in the case of Ireland is that up to 5 years ago 25% of GNP and tax revenue came directly from real estate and construction activity. That has dropped way below 10% which is the reason for the massive deficit. It is however not a justification to increase spending from EUR40bn to EUR48bn and then calling it austerity.
Hi Christian,
I apologise for misreading your initial comment, my mistake.
However I just looked at the Irish govt website and saw different figures to yours for annual total spending (combination of current and capital). I saw negative 4% for 2010 and negative 5% for 2011. The absolute amounts were a bit higher than yours (eg 60,522,141 for 2010), so possibly yours is a subset of the total (I have no idea, just guessing)?. Link here:http://per.gov.ie/expenditure-trends/
Hi Jamie,
I really have no idea how those figures were put together in the link you posted, but they look very wrong. The numbers I have posted were taken from the official annual expenditure reports taken from the Department of Finance:
http://finance.gov.ie/viewdoc.asp?DocID=-1&CatID=5&UserLang=EN&m=19
Now, spending has gone down since the peak in 2010, but you cannot argue that spending has been cut when you first increase it. It’s like an obese person putting on another 30kg, then going on a diet and saying that losing weight hasn’t brought health benefits.
Hi John,
For what its worth, my policy response would be:
- For the Eurozone, preferably disband it completely so that the southern euro countries are not forever impoverished, which would allow them to be able to print their own currency (and therefore be able to pay their debts come what may, even if they do have inflation in the short term) and have suitable FX rates and interest rates. My second choice, to avert disaster in the short term although not a long term fix, would be for the ECB to be a US style lender of last resort to the PIIGS, although I can’t see the Germans going for that as there would be a permanent ongoing transfer from north to south. Yes both of these responses would result in a lot of money printing and possibly a bit of inflation (but look at the US and Japan where inflation has been pretty low). Allow debt levels to go down slowly as the economies revert to more normal levels. PLUS SUPPLY SIDE REFORMS AS WELL THOUGH.
- For the rest of us (UK, US, Japan etc), carry on roughly as we are, muddling through, with private sector debt levels dropping to more suitable levels, and allowing government debt levels to increase as the private sector deleverages. Once the private sector has stopped deleveraging (maybe 2013 or 2014), then slowly tighten government spending. Worst that can happen is a bit of inflation/currency weakening. I don’t see hyperinflation happening.
In general I don’t see a bit of govt debt as a bad thing – after all it allows the private sector somewhere to put their savings which is pretty risk free. The more money there is needing to be saved by the private sector, the more need there is for govt debt.
I apologise somewhat for coming on here and disagreeing with the general view, but hope a bit of debate/contrary opinion is welcome.
Hi Jamie,
We are all here to learn and discuss – thanks for your thoughtful reply. I really wish we could do what you suggest. I would love to see the pain for all those innocent people out there to be minimized. I just don’t see how this can occur with more government spending, which is essentially what I am hearing from you.
I agree that the supply side must be enhanced. For me this means massive government deregulation. The productive class must be set free from the corner vendor to large corporations not milking the system now – the ones who can make it on their own without government subsidy or franchise.
I see two dangers in what you propose.
One – it works and everyone goes back to doing what they have been doing for the last century and particularly in the last few decades. These crises are coming thicker and faster with only the illusion of repairing them. This could be the big unwinding or it could come in the future, but worse than if it came now with more debt, more market distortions and a weaker productive class. If your suggestion works, politicians the world over will pat themselves on the back, perhaps another Nobel prize for Krugman and the party continues, until it can’t.
Or two – your solution doesn’t work and we have more debt and more market distortions and we look back on today as the good old days. If only we had stopped eating mounds of pasta and smoking 2 packs a day when we were in our forties…
I can see why Detlev did not embrace the opportunity to vicariously lead Greece in a thought experiment. With all due respect, I don’t believe that tinkering is going to fix this and that is all that politicians and most thought leaders are proposing.
I believe we require a radical restructuring of the state and the economy. I believe there is no other option, but I welcome your thoughts. I have only recently come to share the views expressed by Detlev – rational discussion and exploration is the only way to arrive at knowledge.
Cheers!
Jamie, no reason to apologize. I am happy to hear dissenting voices, and believe me when I say that I try to stay as open-minded as I can. But in my view you are incredibly naive in your assessment of the problem. “For the rest of us (UK, US, Japan etc), carry on roughly as we are, muddling through,…”; “Worst that can happen is a bit of inflation/currency weakening.”; “In general I don’t see a bit of govt debt as a bad thing…”….Really? Is that it? Where do you see “a bit of government debt”? The US has been running deficits to the order of 8-10 percent of GDP every year for 4 years, with no end in sight. Where do you cut it? Nobody has been willing to cut defense or Medicaid or Medicare or Social Security. You think that will be easier in 2013 or 2014? Spending is out of control. You can try to hike taxes – and kill what is left of the economy. All this government spending is not being done to compensate for private sector deleveraging. Large parts of the economy are now dependent on government hand-outs. These people expect this to continue, forever. Equally, big deficit spending and Fed-money printing are being conducted to sustain the mirage that we are “in a recovery”. They thought 4 years ago that this would not last and that they could phase out this type of “emergency policy” soon. I don’t see why all of this is going to be magically different in 2013. Remember that the persistent artificial cheapening of credit sabotages the deleveraging process and introduces new imbalances. This policy sustains the crisis.
What happens after a “bit of government debt” is this: a bit more government debt the following year. And then even more. Look at Japan, and I don’t believe the West can keep this game going until debt levels have reached 225% of GDP. — Greece couldn’t.
A “bit of inflation and a bit of government debt” is not the worst that can happen. ‘Greece’ should have taught us what happens when the markets say, “no mas”, when the markets pull the plug. The debt trajectories of most countries are unsustainable. They are all heading towards their very own ‘Greek’ moment. One morning we will wake up and markets will start selling UK gilts, or US Treasuries, or German Bunds. Or Japanese government bonds. What then?
Read this interview with David Stockman. David Stockman was the director of the Office of Management and Budget under Ronald Reagan and a founder of the Blackstone Group. This guy has been at the frontline of politics and Wall Street for decades. He can give you an idea of what is not only the worst that happen but what is very likely to happen:
http://lewrockwell.com/stockman/stockman11.1.html
Hi Detlev,
Thanks for your detailed response. Obviously we have a difference of opinion on the sustainability of government borrowing in general. In general I agree the current situation is not a good one but I do believe eventually there will be an improvement once the private sector is in better shape (whenever that is and there are caveats about whether and when that will happen).
But I would like to make one important point that I think your analysis above does not take into account. You are trying to compare the situation in Greece to what may happen in the UK or US. I think that it is not possible to compare the two. The US and UK can never get into the same situation as Greece because they are currency issuers and can print money to pay debt (they don’t even have to borrow at all if they don’t want to). Greece does not have the option to print money. This is why noone is willing to lend them anything now (obviously lots of other causes as to how they got in this place to start with – lack of productivity, poor labour laws, tax rules etc).
Jamie, I do take that into account. Every week the US government has to borrow an additional $20-25 billion! If the market does no longer lend that money voluntarily, that money will have to be printed, as you said. If the US Fed, which presently has a balance sheet of about $3 trillion, has to print $1 to 1.5 trillion dollars every year to keep the government going, what would that mean for the dollar? And what would the remaining private holders of Treasuries do if they saw that that was what the Fed was doing? –Right, they would sell Treasuries and ditch the dollar. Who would buy all those Treasuries that come onto the market? – There is only one answer: the Fed as the buyer of last resort. So now the Fed is printing $25 billion a week to keep the US government in business and also provide an unlimited backstop to $15 trillion of already outstanding government debt. All along the dollar is now in free fall. – Jamie, being able to print money is not a positive here. Once you have too much debt and cannot control your spending it will be tempting to print money but this is usually the beginning of the end. Weimar Germany could print its own money. So could Argentina in 2002. That’s what I am saying. Paper Money Collapse.
Hello Jamie,
I don’t want to pile on. This is important stuff and there is no party line. I am here to try to understand better what is going on with the world and the economy.
Detlev speaks very well to the economic implications of the current worldwide situation. He also discusses the politics behind a lot of this – the breadth of these topics is huge and we are only scratching the surface.
I will make one further point. When this came to a head in 2008, I once said to my brother, who is in the financial services sector, that very simply, money is broken. I wish I had realized the full implications of this then – it took Detlev’s book to make me start to realize what this meant to us.
I am only now starting to understand money and credit – it is a very complex topic. But there is one profound aspect of money that is too easy to ignore and it relates to its most important function. Money is information, or rather it conveys information.
Should I build a theme park or condominiums? Should I go back to school to become a lawyer? Should I borrow lots of money now and buy a big house, or should I wait and save more before I consider the purchase? Should I go out to eat or should I stay home. These decisions can be simple or they can be complex and money gives us vital information on the social web and the costs and benefits of actions.
Money is never the only guide to action, but it plays a vital and irreplaceable role. Currently, money is being so distorted and damaged that it is no longer a trusted guide to action. So much of our current technology is dedicated to collecting, testing, distributing and storing information – that is why our lives are so much better now than they were in the past – it is information or knowledge that is the source of our very lives. Money is a vital part of that flow of information and governments with the help of bankers and many big businesses, are killing it with extreme prejudice.
The poorer you are, the more vital is the information from money. Our ruling classes care nothing for the common human – they are confident that they will make out all right, because the elite almost always do.
There are many paths that lead to this rabbit hole of realizing that so much of what we thought we could trust is simply wrong. We are led by fools and knaves for their own benefit. I was reluctant to face these facts, but I have now embraced them. I have a profound trust in most humans and their intelligence, but there are very bad ideas out there – and people who follow them.
Jamie, keep poking around the rabbit hole here and elsewhere.
“Nobody has been willing to cut defense or Medicaid or Medicare or Social Security.” I’m sure you don’t need to be told why there are no cuts in defense spending that will make a difference. Cutting Social Security will not solve the problem by a long shot. Now cutting defense spending will make a sizable dent. But hands off Social Security. There are people out there who would die in a ditch if you cut them off today. I suppose you would also find universal health care also nonsense – this would be illogical and counterproductive, bad business. You don’t want a lot of unhealthy people in a society since in the long run it puts more strain on the system. A sickly population is not good for the economy.
“Maybe at some stage Greece should consider introducing a gold standard”
I read your piece on Greece and the gold standard and all the comments however I don’t understand where you think Greece would get the gold with which to back its currency. Or, is this just detail?
It is not a detail in the short term but it is a detail in the long term. — Gold is money. How do you increase your money balances? By selling things or by reducing your money spending on things. And this is how states obtain gold, always have. As a British chancellor of the exchequer said some time ago, we will always have sufficient gold as long we are not running out of things to sell, or something to that effect. Okay, you may say, but Greece is broke, completely bankrupt, no currency reserves (is that true?) and no assets to sell (all the state assets should not be sold but handed back to the taxpayer anyway, as I suggested). So that would indeed limit its ability to launch a gold standard – at least an official, government-implemented gold standard – right way. But please remember that in the quote you used I said “at some stage”. If Greece stays in the euro and enacts the drastic reforms I suggested – massive privatization of assets, shrinking of the state, complete freedom to set prices, including wages – it could prove its commitment to “hard” money, or at least the willingness to avoid the cheap ‘fix’ of currency devaluation that impoverishes its savers. Capital flight would stop and the country would soon attract foreign capital. The lower domestic prices – and the now properly adjusted RELATIVE prices that reflect real economic preferences and scarcities and that are all-important to a functioning economy – would attract investment. Capital inflows, income from investment and tourism, all of this would allow Greece to accumulate foreign exchange reserves over time, and rather than maintain these in foreign paper monies and have them managed by the ECB in Frankfurt, Greece could begin to convert them into gold. Many so-called emerging market central banks, often in countries that had their own domestic disasters not so long ago, have in recent years begun to sell paper reserves and invest in gold.
The bottom-line is this: if you want to have hard money, you can have hard money. If you want to move to a gold standard, you can move to a gold standard. For hundreds of years countries have organized their financial affairs that way. Why should this no longer be feasible? It is a question of politics and ideology, not of economics. The economic reality remains that a stable, functioning market economy and a free and prosperous society require hard, apolitical money. That means ultimately gold, in my view.
Also, please do not forget that I am somewhat skeptical as to a potential resurrection of a state-managed gold standard. I think that once the present fiat money experiment ends in disaster – as it surely will – there could be a chance for a privately-run system based on gold. A market-solution, not another political fix. That can, of course, be done even whne the state is bust. Maybe even better when the state is bust. — Greece lost approximately a third of its deposit base. Most of that money was shipped to banks in Germany, the Netherlands and Finland. Some of that money certainly flowed into gold, probably in Swiss private banks or under Greece mattresses. But imagine all this flight capital had been channeled into Greek gold-based banks with gold-covered accounts. Just an idea. The assets would not only have been outside the Greek fiat banking system, they would even have been outside the euro, and even outside the global paper money ponzi scheme. If I were a Greek saver, I know that that is where I wanted to be! That would already have been a great nucleus for a parallel gold-based system. In fact, Greece would already have a better ratio of domestic gold versus paper deposits than the US, presently the world’s largest gold owner.
All of this is idle speculation, of course. None of these countries will go back to gold voluntarily any time soon. Ultimately, it will happen. I am convinced about that. But we will go through a mighty crisis first.
Hi Detlev,
I recently bought and read your book. Wanted to start reading it again straight after finishing it but postponed that to go through your old blogs, great stuff. Posted on here before, around Christmas and as before I’m new to all this economy stuff but have a fair grasp after reading the book. Things appear to be on meltdown now across Europe and I was wondering what happens when (not should) things reach the end. I get that the paper money becomes useless but what about mortgages held by banks. Do people’s mortgages get wiped out and they now have a house without any further payments necessary. Won’t affect me as I don’t have a mortgage but have heard from some you will be mortgage free while others say some other bank will just get the mortgage and you’ll just pay it back to them. Would like to read up on Weimar Germany or Argentina to get some idea of what ‘traditionally’ follows in the wake of monetary collapse. Maybe written by someone that lived through it. Any in particular worth reading? I’m still trying to convince the Missus about gold and silver but she’s not budging for now. Hope it’s not too late.
Thanks again and keep up the good work. I really enjoy reading your articles.
John, thanks for the nice comments on the book, and apologies for the slow response. Inflation, hyperinflation and currency collapse usually benefit those who bought ‘real’ assets with borrowed money. The debt gets inflated away or wiped out while they get to keep the real asset. That is the historical ‘rule’ and it is difficult to argue against it. However, I would be careful. Every crisis is different and a lot of things can happen. Nothing goes according to script in a crisis. Personally, I want to maintain flexibility and I do not like having massive debts, or any debt at all for that matter. What if there is some draconian ‘currency reform’ by which bank deposits get reduced and government debt annulled but real estate loans get ‘transferred’ to the new currency? Or consider this: As we move deeper into the crisis the state is running out of money and is going to tax private real estate investment more. Real estate is low-hanging fruit to the taxman. Eat the rich will be the new policy everywhere; and the standard of what ‘rich’ means will be lowered. — As I always say – and I can’t say this often enough – I don’t want to give personal investment advice. I want to explain what is going on and what I think is likely to happen. Readers have to draw their own conclusion. There is something to be said for buying real estate and wait for the inflation. But there are also risks to that strategy.
A good book on Weimar Germany is Adam Ferguson’s When Money Dies, from 1975 which had a massive renaissance in recent years:
http://www.amazon.com/When-Money-Dies-Devaluation-Hyperinflation/dp/1586489941/ref=sr_1_1?s=books&ie=UTF8&qid=1337694028&sr=1-1
I can also recommend this book, it is truly eye opening as to how dire the lives were for people that had to live through it.
Two of the most memorable things I took away from the book were:
1) foreigners struggling to get even the most basic things with a $1 bill because it bought so much that an average coffee shop couldn’t possibly have that much change on hand.
2) foreign students buying up real estate with their monthly allowances, which gives an idea of how badly real estate protects against inflation.