Tag: austerity

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BOE’s Monetary Gamble Nears Its Endgame – WSJ.com

So where once investors worried that it [the Bank of England] had got policy plain wrong, there’s now a chance they’ll start to fear that the bank has got things all too right, after all, and that the U.K. really does need policy settings appropriate for an economic ice age……

And a government focused on austerity measures is in no position to offer fiscal support even if it wanted to, and, according to the treasury’s pronouncements, it doesn’t. It’s sticking with the deficit-cutting plan A, come what may.

So this is clearly an economy with huge problems anywhere you might care to look. Its remaining cardinal virtue, perhaps, is that it isn’t in the euro zone, so the bloc’s more pressing concerns have shielded it from harsher scrutiny. It can’t rely on that shield for all time.

via BOE’s Monetary Gamble Nears Its Endgame – WSJ.com.

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With focus on Europe, lack of U.S. debt progress slips under radar | Economy | News | Financial Post

Following a month where markets have locked on to developments in Europe, the lack of progress from the so-called U.S. Super Committee on debt has flown under the radar, an analyst warned Thursday.

Douglas Borthwick, managing director at Faros Trading, LLC, said in his latest report that U.S. debt troubles will likely take centre stage once again in the coming months.

“We argue that while Europe is dealing with their fiscal issues, we have yet to hear from the ‘Super Committee’ set up by the U.S. congress to find ways to decrease spending in the longer term,” he said.

via With focus on Europe, lack of U.S. debt progress slips under radar | Economy | News | Financial Post.

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Europe’s Punishment Union – Ambrose Evans-Pritchard

As Sir John Major wrote this morning in the FT, this does not solve EMU’s fundamental problem, which is the 30pc gap in competitiveness between North and South, and Germany’s colossal intra-EMU trade surplus at the expense of Club Med deficit states.

It is therefore unlikely to succeed. It means that Italy, Spain, Portugal, et al must close the gap with Germany by austerity alone, risking a Fisherite debt deflation spiral. As I have written many times, this is a destructive and intellectually incoherent policy, akin to the 1930s Gold Standard. It risks conjuring the very demons that Mrs Merkel warns against.

Sir John is less categorical, but the message is the same. Europe will have to evolve into a fiscal union to make the system work….

via Europe’s Punishment Union – Telegraph Blogs.

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America’s Economic Stalemate – Martin Feldstein – Project Syndicate

The two parties’ hardline stances anticipate the upcoming congressional and presidential elections in November 2012. The Republicans, in effect, face the voters with a sign that says, “We won’t raise your taxes, but the Democrats will.” The Democrats’ sign, by contrast, says, “We won’t reduce your pension or health benefits, but the Republicans will.”

Neither side wants any ambiguity in their message before the election, thus ruling out the possibility of any immediate changes in tax expenditures or future Social Security pensions. But, for the same reason, I am optimistic that the stalemate will end after the election. At that point, both Republicans and Democrats will be able to accept reforms that they must reject now.

via America’s Economic Stalemate – Martin Feldstein – Project Syndicate.

The country’s economic policy is being run according to the election timetable. Compare that to the Swiss democratic system from a few days ago. Makes you wonder, doesn’t it?

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Stimulus spending, austerity and public debt: James Galbraith

Prof. James Galbraith on fiscal stimulus and public debt:

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Agree:

  • Fiscal stimulus should not be a short-term program that will run out. The term should be 10 to 20 years so that business can make long-term plans.
  • Stimulus spending should focus on investment that creates assets — to be offset against the accompanying liabilities.

Disagree:

  • Austerity cuts are foolhardy. ~ Austerity cuts should free up money for investment in infrastructure projects.

Strongly disagree:

  • “There is no long-term debt problem here. We’re clearly in a sustainable situation otherwise the markets would not give the US government the (low) rates they are.” ~ Keep telling yourself that!
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IMF stress tests China/Australia bust – macrobusiness.com.au

I don’t wish to be too alarming. These are stress tests and scenarios not yet reality. But, there is logic in the thought that we currently face the possibility of the final two scenarios happening simultaneously. That is, a Western recession triggered by European and US austerity (not to mention financial tumult) and a Chinese real estate pop.

via IMF stress tests China/Australia bust – macrobusiness.com.au | macrobusiness.com.au.

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What we need and what we actually get may be vastly different

This is in response to a question raised by Thomas Franklin:

Hi Colin,

….. My question is not just about the bond market although it is part of it but a reflection of the bigger picture globally with what is unfolding. With many governments facing rising debt levels and the Feds policy of financial stimulus, surely this is just delaying the inevitable of “Global Financial Meltdown” The USA and the dollar is a sinking ship, with the Fed losing the battle of bailing the ship out. So what do you think will replace the system we currently have?

Hi Thomas,
What we need and what we actually get may be vastly different.
Firstly, what we need:

  • A consensus Swiss-style democracy instead of the winner-takes-all system we have at present, where incumbent politicians run up fiscal debt in order to boost their chances of re-election.
  • Restrict the Fed to a single mandate, to protect the currency, rather than targeting inflation to help the politicians.
  • Restrict capital flows between countries, like China/Japan’s purchase of >$2 trillion of US Treasurys, used to manipulate exchange rates and create a massive advantage for their export industries.
  • Austerity to cut unnecessary spending and public works programs to improve national infrastructure and create employment — but the programs must deliver real returns on investment so they can later be sold off to repay debt.
  • Europe needs a eurobond system, with central borrowing and restrictions on individual member deficits.

What we will probably get is:

  • More of the same: government controlled by special interests and dominated by fear of the next election.
  • The Fed going nuclear and buying more Treasurys — creating inflation to bail out the banks and save Treasury from default.
  • Inflation as a soft form of default to give bondholders (read China/Japan) a haircut and deter them from buying more Treasurys.
  • More profligate spending and ill-chosen, bridge-to-nowhere infrastructure projects.
  • A breakup of the Euro?

Hope that doesn’t sound to optimistic 🙂

Regards, Colin

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Portugal Braces for Austerity Battle – WSJ.com

Portugal has little choice but to take tough steps. The country sought international help in April after failing to convince investors it was doing enough to shore up its shaky finances. In exchange for a €78 billion, three-year loan, Lisbon promised the European Union and the International Monetary Fund that it would slash its deficit and make structural changes to spur growth in key sectors.

The problem is these efforts are expected to prolong the economic slump at least two years and drive up unemployment, already at 12%.

via Portugal Braces for Austerity Battle – WSJ.com.

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