Friday, June 25, 2010

Who will be Paying the Bills?

My last two posts have prompted a lively debate on the blog, and it is interesting to see how the debate parallels that which is taking place around the world. The G20 and G8 summits appear to be seeing the same divisions, with Obama on one side encouraging continuance of massive deficit spending, and the Canadian and many Europeans (e.g. Merkel, Cameron, Borroso) saying that the deficit spending has gone far enough (or perhaps already too far). This is from the Guardian:

Signs of deep rifts at the G8 and G20 summits in Toronto over how quickly governments should cut deficits added to financial market jitters today, with the Americans warning of the dangers of a double dip recession if all countries started to rein back spending at once.

The leading European economies, especially Germany, are putting a new emphasis on cutting back government spending, and there is a possibility that a G20 communique, due to be released on Sunday , will set out an indicative timetable of how far and fast countries should retrench spending.

David Cameron, making his first appearance at a world summit and packing in a frantic round of bilaterals to start building personal relations, was praised by the summits' host for his deficit slashing budget earlier this week.

The Canadian prime minister, Steve Harper, said that he welcomed Cameron's responsible and difficult decisions, saying the British prime minister's budget "had raised the very fiscal consolidation agenda that we are trying to steer the G20 towards".

Canada wants the G20 to endorse the idea that national deficits should be halved by 2013.

I highlight this, as the gap between the US approach to deficit spending and that of (for example) Germany can not be wider. There is a major fracture in the perspectives on economics between different countries.

The problem is that, there is no opportunity for either side to ever prove itself right, except through enacting their different approaches. However, in one respect, the Obama camp will be proven correct. That is, if there is a major move towards cutting of expenditure, a recession will almost certainly be the outcome. This will then give them an opportunity to say 'I told you so' and blame the problem on the cuts.

What we will never actually see, is what happens next if countries continue to rack up huge deficits, and the dangers that might flow from this enactment of policy. It will allow history to be rewritten to say that, had the spending continued, then the world would economy would have recovered, and all would have been well.

Set against this, I would point to the following article, which points to the underlying change in the world economy, a change which I have continually highlighted on this blog as inevitable, and the real driver behind the economic crisis:

Ten years ago, the world’s richest countries accounted for a significant majority of the globe’s economic activity. But the pendulum is swinging in the other direction, according to the Organization for Economic Cooperation and Development.

A new O.E.C.D. report finds that rich countries and poor countries now each contribute about an equal share of the global economy. And by 2030, developing countries will account for 57 percent of world G.D.P.


This has been at the heart of the thesis of this blog. The world has changed; the distribution of wealth in the world is changing, and it means that the developed world is no longer in the position where it might assume eternal wealth. We are now at the stage where month by month, we can see the reality of the change, and the attempts by many developed countries to turn back the reality failing. My argument, since before even starting to write this blog, has been that, for over a decade, we have misconstrued apparent economic growth for real economic growth. This is the view of the Economist:

Throughout the 1980s and 1990s a rise in debt levels accompanied what economists called the “great moderation”, when growth was steady and unemployment and inflation remained low. No longer did Western banks have to raise rates to halt consumer booms. By the early 2000s a vast international scheme of vendor financing had been created. China and the oil exporters amassed current-account surpluses and then lent the money back to the developed world so it could keep buying their goods.

Those who cautioned against rising debt levels were dismissed as doom-mongers; after all, asset prices were rising even faster, so balance-sheets looked healthy. And with the economy buoyant, debtors could afford to meet their interest payments without defaulting. In short, it paid to borrow and it paid to lend.

I was one of the doom-mongers when I first started writing about the economy. I was seen as (at best) a part of a mad fringe, but today we see the Economist saying exactly what I was saying long ago. However, even now, the problem remains that growth in debt is still mistaken for economic growth, and I despair of the mainstream ever 'getting' the distinction.

At this stage, it is worth offering a perspective on the scale and depth of the existing levels of debt in the developed world. The Economist has a special feature on indebtedness and produced the following chart which ranks countries by debt sustainability (sorry about the size):


I strongly recommend taking a look at the interactive debt chart at the Economist here (sorry, can not be reproduced here). They follow their chart with this commentary:

THE headlines are all about sovereign debt at the moment. But that is only part of the problem. Debt has risen across the economy, from consumers on credit cards, though industrial companies borrowing for expansion and financial companies using debt to buy risky assets.

The interactive graphic above [in the Economist article] shows the overall debt levels for a wide range of countries, based on data supplied by the McKinsey Global Institute. In theory there is no maximum level for debt relative to GDP, but Ireland and Iceland (not on this map) found the limit in practice when they hit eight-to-ten times GDP.

The massive debt accumulation does not tell the whole story. What we can see is that the debt is simply being used for consumption. It is not creating growth, but is leading to diminishing returns in growth - in other words, the real growth is taking place outside of the developed world, and the developed world is just living off that real growth. The chart below from the Economist tells the story:



What this chart shows is the reality that has long been the subject of this blog, including in a recent post on post-Keynesianism. The money that is being borrowed and thrown into developed world economies is not producing a return. I made a comparison with China, where the government spending can make a return. It is very clear from the chart that borrowing more is not the answer (I know that the post-Keynesians will claim that their kind of borrowing and spending will be different....but see my post for why it will not).

However, it is quite possible for the US, for example, to continue to borrow from the new wealth creating countries and the oil states and appear to continue to be relatively prosperous. However, underneath such apparent prosperity is the reality that there are now the emerging economies that are being coming increasingly competitive, and taking a greater share of global wealth. Countries like China and India commenced with low end, low added value goods, but are rapidly rising up the value chain, and are starting to compete in the higher added value segments. The emerging economies will increasingly be meeting the developed world in the market for higher added value goods and services, and the developing world will win market share.

This leads to the question of whether there will be a miracle of a return to the pre-crisis 'normality'. Can the developed world return to past levels of wealth, at the same time as new and aggressive entrants are entering into more segments of the world market. The Obama solution is built on the believe that, at some point in the future, growth in the economies of the developed world will return, and this will then allow for the existing economic structures to be maintained, and at the same time producing enough growth to repay debts accumulated now. After all, this has been what has taken place following previous recessions.

This view ignores the changes that are taking place in the apportionment of wealth, and also ignores internal factors that will further diminish potential for wealth creation, as well as the problem of structural entitlement programmes that will push up costs and diminish the ability to pay down debt. The first problem is one I have already discussed, the second and third are resultant from the basic demographic problem of ageing populations. In order for developed countries to simply stand still, there would need to be a significant productivity miracle, which will allow a shrinking workforce to support a growing population of retired people. The problem is that the developed world is not standing still, but is falling backwards.

If government borrowing and spending is removed from the equation, it is apparent that the economies of most developed countries are facing reversals in wealth as a result of the competition from the emerging economies. I think I might now be in a position where, when discussing the economic growth in the pre-crisis decade, few would propose that there was an underlying increase in the wealth, but rather an illusion of wealth created by debt. Since the crisis commenced, governments have replaced this debt with government debt, and this can only be sustained for so long. What this creates is a moment in time where existing economic structures might be retained, but no more than that.

In order for the changes in both the internal and external environments to be accommodated in the medium to long term, something must change. On the one hand, in response to the internal changes, there is the choice of using ever greater taxation to pay for the costs of a growing pool of retired people from a diminishing workforce. This would place a significant burden on the upcoming generation, whose potential for a 'good' lifestyle would be diminished through significantly higher taxation. Alternatively, the structure of the economy might be reformed through the reduction in entitlement programmes, or through allocation of funding now to support future entitlement programmes. At present, however, the assumption is that 'growth' will allow these entitlement programmes to proceed without any action now, or negative consequences on the upcoming generation.

Furthermore, when considering these future increases in costs from a shrinking tax base, they will also need to service the debts that are being accumulated in the present. As such, in addition to having to service the cost of a growing retired population, the shrunken tax base must also apportion more of their income in order to service debt. As such, there seems to be a huge assumption that either the upcoming generation are going to be hugely more productive than the previous generation and / or they will be willing to see much higher tax levels than the previous generation.

Furthermore, developing economies such as China are also major lenders into many of the developed economies, meaning that, as they continue to develop, they will have access to future resources and output of the developed world as they continue their growth, possibly allowing for an accelerated rate of growth. The upcoming generation must therefore achieve all of this as the emerging economies continue to grow their share of the economy, and move ever further up the value chain in competition with developed economies. I am now not alone in this point of view, and again from the Economist:

But in parts of the rich world such optimism may now be misplaced. With ageing populations and shrinking workforces, their economies may grow more slowly than they have done in the past. They may have borrowed from the future, using debt to enjoy a standard of living that is unsustainable. Greece provides a stark example. Standard & Poor’s, a rating agency, estimates that its GDP will not regain its 2008 level until 2017.

Rising government debt is a Ponzi scheme that requires an ever-growing population to assume the burden—unless some deus ex machina, such as a technological breakthrough, can boost growth. As Roland Nash, head of research at Renaissance Capital, an investment bank, puts it: “Can the West, with its regulated industry, uncompetitive labour and large government, afford its borrowing-funded living standards and increasingly expensive public sectors?”

Some of the commentators on the blog might note the use of the expression Ponzi scheme, as there has been a debate in the comments section of the blog on just this subject. The point is that there is no way in the world that the current economic structure of the developed world can be maintained. I have asked, and asked and asked where the real growth might come from to support developed world economies. It now seems that even the mainstream is coming to this question, and it is about time.

As such, when we look at the current debate, we can see two simple divisions. On the one side, there are a series of assumptions that there will be a growth miracle that will outstrip the results of demographic change in a world of increasing competition. On the other side is an assumption that something must be done now to accommodate the changes in the world. The consequence of the former, barring a miracle in productivity, is that the upcoming generation are going to be saddled with huge burdens, even assuming that the borrowing might be sustained into the near future.

On the other hand, the consequences of cutting now is to commence a process of realigning the economy to the actual wealth creating potential of the economy, and starting to face the problems that are rapidly accumulating. At its most basic, it is accepting that there needs to be a restructuring now, rather than imposing a huge (and probably in reality an unsustainable) burden on the future. I believe that, in the past, I commented on another Economist article that pointed out that, in the future, there will be a conflict of interest between the generations. The current debate about continuing of spending versus cutting now is in reality exactly this debate.

I have always realised that, if governments cut now, the consequence will be shrinking economies. I have never seen any way out, except to take this 'pain' sooner or later. However, I have always argued that sooner is better than later, as the accumulation of debt can only compound the existing problems. No doubt, if governments manage to really cut now (and that is still uncertain), then we will later see retrospective history claiming that the cuts were responsible for future problems that will indeed arise. However, such a perspective would be to ignore the real changes in the world economic structure, and these changes are not of the sort that can be wished away or ignored. The choices are simple, and the choices are 'who pays, and when?'

Notes:

A long time ago I wrote some posts which proposed reforms which would try to maintain the essential underlying principles of several entitlement programmes in the UK (e.g. NHS, Education and Benefits) . I wrote them from a basic principle; that we could not afford the current structures going forwards. I sought to balance the underlying social and political demands with the coming shrinking of wealth. What we are now seeing is the discussion of necessary cuts, and I can only hope that these are undertaken in conjunction with the necessity for reform of the systems themselves.

What I would like to see is that, in the recognition of the difficulties ahead, that those in the future might enjoy something similar to what we (in the UK) have grown used to. In other words, the same underlying protections but pared down to achieve the original basic principles at the time of the establishment of the benefits. In addition to cuts, it is therefore necessary to reform, and I hope that this is the next phase in the transition. Unfortunately, since the time of writing the proposed reforms, governments have racked up ever greater debts, making it ever less possible to achieve this goal. This is why I have, since the start of this blog, argued against government borrowing.

As a further note to US readers, the examples of reform I give might seem to be puzzling in the context of the US experience. I am a firm believer that safety nets, education, and health care should be available to people, and you will see in the examples methods that might allow for these to be achieved in the context of the UK's history and situation.


20 comments:

  1. cynicus :
    I spent some time picking nits out of your last post, maybe this time, with a larger perspective, we can more or less agree.
    In a few words, the UK used to part of the 'rich man's club', while most of the world was 'poor man's club' - undeveloped, uneducated , poverty stricken & basically at our mercy.
    The Times They Are A-Changin', to coin a phrase, and the rest of the world , through sheer hard work, is not only catching up but surpassing us.
    Simultaneously, we are heading into the unthinkable - what they call 'peak oil', which looks to me likely to have huge consequences . If wealth of the world is a pie , then not only are the rest of the world rightly insistent on getting their fair slice ( which implies we get less, of course) but the size of the pie is going to shrink, meaning we are going to end up with less & less of a smaller & smaller pie.
    Now, the austerity versus govt spending argument is really just a debate about to handle the transition most painlessly, and in the long run, it doesn't matter. Either way, 'thing's can only get worse' , as the song nearly said, and our national expectations of ever increasing material opulence are going to have to undergo a 'sea change'.
    I can't help but think it would be better to handle this on the basis that the pain should be fairly spread all round, rather than nominating some set of national unfortunates to take all our pain for us.
    Plus of course in the long term we will all have to find some new kind of meaning in a life neccessarily no longer devoted to 'shopping' as a kind of national religion , carried out each weekend by ravenous hordes in those temples to the gods of over consumption we call 'Bluewater' / 'Lakeside' etc etc.
    My prediction is this will take quite a while. :-)

    ReplyDelete
  2. ChaingangCharlie:

    I am glad to see a positive response. The point in my proposed reforms is to try to use the resources we are left with, which are going to be more limited, in a better way.

    ReplyDelete
  3. An interesting admission, perhaps (not enough context):

    http://www.cbsnews.com/8301-503544_162-20008924-503544.html

    ReplyDelete
  4. Interesting post, with some thought provoking comments.

    I have a new post here on fractional reserve banking:

    http://socialdemocracy21stcentury.blogspot.com/2010/06/fractional-reserve-banking-evil.html

    ReplyDelete
  5. CE

    Are you saying that growth will not occur again? Or are you saying that after a painful period of recession that steady, sustainable growth can once again resume? My gut feeling is that sustained growth (for the UK particularly and probably globally) will never occur again. If that were to turn out to be the case, where would that leave our debt based monetary system? Wouldn't it have to be scrapped and something much less 'free market' put in its place?

    ReplyDelete
  6. This concentrates on the financial again and not real resources. That is looking at the problem from the wrong end.

    It is a simple fact that a government can always settle the debts in the currency it controls. If push comes to shove that is what will happen and the exchange rate will take the strain. The ECB is already buying Euro debt for cancellation with magic money.

    If you look at transactions in terms of their 'real' components, then what is happening at the moment is large ships full of real stuff are turning up at US ports allowing their citizens to enjoy a high standard of living. In return the Chinese get green bits of paper that are only valuable if you are settling a US taxation demand.

    And that will continue until the Chinese stop thinking the green paper is worth boatloads of real stuff. Then they have a problem of who else to ship their boatloads of stuff to.

    So although the 'wealth' in paper terms appears with the East, the 'wealth' in real terms is coming the other way.

    Looks to me like the US and the West are getting a good deal at present.

    ReplyDelete
  7. Cynicus you are not the only one predicting trouble.
    Here is a good article which give background to some of our woes.

    http://kn.theiet.org/magazine/issues/1009/best-of-john-dwyer-1009.cfm

    Is it surprising that youth lives to get hammered at the weekend? Even if they cannot rationalise it they know that their future has been robbed. Is it a good thing that they are too drunk drugged or ignorant to riot? Is it good that thinking has been eliminated from our education system?

    I fear that the Ponzi scheme cannot last long enough to see out our old age.

    ReplyDelete
  8. "I have always realised that, if governments cut now, the consequence will be shrinking economies. I have never seen any way out, except to take this 'pain' sooner or later."

    We have to take the pain of rebalancing the real demand in the economy and we have to get away from 'growth' as a target per se. It should be doing more with less.

    ReplyDelete
  9. Lemming:

    The following might interest you:

    http://www.zerohedge.com/article/guest-post-destined-fail-%E2%80%93-magical-thinking-g20

    ReplyDelete
  10. If you've lived for years on your credit cards - running a series of them up to their limits and paying only the minimums - the time comes when the credit reaches its end.

    If you are able to continue making all the minimum payments then you'll be looking at a much less enjoyable time, a period of austerity if you will, but you will survive.

    If you are unable to continue making all the minimum payments then you're looking at disaster.

    Either way, the 'good times' have to end. Because they weren't real. But if you're in the habit of looking at the past with rose-tinted glasses than what will you see? A period where you crippled your financial security with reckless borrowing and spending, or a period of plenty which could have gone on forever?

    The world appears to be waking from its fever dream and not a minute too soon.

    ReplyDelete
  11. Some Balance on the Developing World

    You say:

    At this stage, it is worth offering a perspective on the scale and depth of the existing levels of debt in the developed world.

    A more balanced argument would also have looked at the gross government debt to GDP ratio of the developing world:

    Lebanon 156.00%
    Singapore 117.60%
    Sudan 104.50%
    China 96% by 2011
    Nicaragua 87%
    Sri Lanka 82%
    Egypt 79.80%
    Jordan 69.90%
    China 60% (2009)
    India 59%
    Philippines 58.70
    Uruguay 58.70
    Tunisia 47.20%
    Brazil 46.80%
    Aruba 46.30%
    Colombia 46.10%
    Thailand 45.90%
    Pakistan 45.30%
    Bolivia 44.00%
    Mexico 37.70%

    http://en.wikipedia.org/wiki/List_of_countries_by_public_debt

    The figures for China are here:
    http://www.2point6billion.com/news/2010/03/04/china-debt-96-percent-of-gdp-by-2011-4261.html

    http://money.cnn.com/2009/07/27/news/international/china_debt.reut/index.htm

    Also, India has current account deficits and also quite high public debt:

    http://www.tradingeconomics.com/Economics/Current-Account.aspx?Symbol=INR

    So clearly the two largest third world nations also have high government debt. No doubt you will say China has a massive current account surplus, but India does not.

    And if you say that China’s large public debt does not matter because of massive current account surpluses, then Japan's public debt should not matter either by the very same reasoning

    And then we have Germany and Norway, Western countries with large current account surpluses. In fact the whole Eurozone has trade balance.

    Given that you regard current account deficits as “living beyond one’s means”, then logically you have to concede that the Eurozone is not living beyond its means.

    You also state that the West faces an “aging crisis”.

    I ask: then why ignore the fact that China and the rest of Asia (even if we exclude Japan as a developed country) faces a similar crisis which may even be worse than in the US or the EU?:

    Asia at 'epicentre of ageing crisis'

    Report Says China Facing Looming Aging Crisis

    Looming population crisis forces China to revisit one-child policy

    All in all, many of points that “prove” the end of West as we know it could just as easily be made about the developing world.

    ReplyDelete
  12. the real growth is taking place outside of the developed world, and the developed world is just living off that real growth

    If the Eurozone as a whole has a trade surplus, then in what sense is it "living off" the developing world? If anything, it's trade partners would be living off it...

    Canada and Norway (not a member of the EU) have current account surpluses (a massive one n Norway's case). In what sense are they "living off" the developing world?

    I am not sure whether your definition of the "developed world" concludes Japan, but Japan has a huge current account surplus. In what sense is it living off the developing world?

    ReplyDelete
  13. What this chart shows is the reality that has long been the subject of this blog, including in a recent post on post-Keynesianism. The money that is being borrowed and thrown into developed world economies is not producing a return ....
    I know that the post-Keynesians will claim that their kind of borrowing and spending will be different....

    Quite so!
    James Galbraith shows us here how to get the best return on stimulus spending:

    http://motherjones.com/politics/2008/12/stimulus-suckers

    ReplyDelete
  14. If government borrowing and spending is removed from the equation, it is apparent that the economies of most developed countries are facing reversals in wealth as a result of the competition from the emerging economies.

    Government spending has ALWAYS been a fundamental part of modern GDP ever since the 1930s, and the same is true of developing and third world nations.

    China's GDP is now also fundamentally dependent on government spending - just like the West.

    If you took away China's stimulus, Chinese GDP would shrink too. Without our export markets, their export-led growth model cannot work, since domestic wages are not sufficient to buy manufacuring output.

    The largely foreign owned high-tech sector would also slump, if the West slumps.

    Basically, the Western nations have allowed their own multinationals to move prodcution to China, but at the moment the only large market for their goods is the US and the EU.

    The crisis has shown that with the failure of China's structural export-led growth model and social chaos threatening the government, the only alternative is massive government spending in China too.

    ReplyDelete
  15. On the one hand, in response to the internal changes, there is the choice of using ever greater taxation to pay for the costs of a growing pool of retired people from a diminishing workforce. This would place a significant burden on the upcoming generation, whose potential for a 'good' lifestyle would be diminished through significantly higher taxation.

    Same problem as China too, as I said - maybe much worse.

    or through allocation of funding now to support future entitlement programmes.

    If this means govermment allocation of funding, how does setting money aside today "fund" future entitlements when the government's budget surplus destroys money?

    An entity with the power to create money has no need to "save". Its surplus drains money and destroys it.

    And if the state invests the money on financial markets, it is utterly ridiculous to believe that this is any guarantee it will be available in the future:

    “The only possible meaning of ‘unfunded liability’ is in contrast to a ‘funded liability,’ …. But in the end, … a “funded” liability is really no different than an “unfunded” one. To illustrate, he gave an example of parents who promise to buy their daughter a car when she graduates from college in four years. The couple needs to invest $26,654 today to buy the car later on, assuming a $30,000 price tag and after-tax earnings of 3 percent a year, which Kaplan says are both guesses at best. Where to invest so the cash is there when it’s needed is an even bigger rub, he says. Most Americans fund retirement and other long-term savings with a healthy percentage of stocks, which the recent economic crisis has shown could quickly turn their “funded” liability into an “unfunded” one. “Even if Congress were to set aside tax revenues to fund Social Security, Medicare and every other ‘liability,’ that money would still need to be invested in some kind of assets,” Kaplan said. “And those assets just might be worth much less when they’re actually needed than when they were first invested.”
    Bonds are a safer alternative, and U.S. government bonds are the most trusted, he said, but are nothing more than IOUs that promise future payouts. “Consequently, an ‘unfunded liability’ by the government to make good on some financial commitment in the future is functionally no different than a ‘funded liability’ that consists of the only dependable asset around - namely U.S. Treasury obligations”


    http://www.physorg.com/news157831522.html

    The issue with future retired generations is whether output in the future will support them and the working population with rising living standards.

    Contracting the economy's capacity to produce output now and for a decade is no way to do this, as you are effectively making the future economy permanently poorer through lost potential expansion of output.

    ReplyDelete
  16. More on China's aging problem:

    China is the fastest-ageing nation on Earth ... Its labour force will begin to decline in 2010 or so and fall every year for the foreseeable future. For a while, the transfer of the 80 million rural migrant pool to higher-productivity urban jobs will mask much of this impact, but only for a few years.
    By 2040-50, China will have more people aged over 65 than the entire predicted population of the US. In fact, on every demographic measure, China will be worse off than the US by the middle of the decade.


    http://business.timesonline.co.uk/tol/business/economics/article6937019.ece

    ReplyDelete
  17. Thanks for the link CE. Those thoughts seem to align quite closely with mine.

    On the 'obvious' point that Chris Martenson makes that we cannot have infinite economic growth on a finite planet, I wonder if I missed part of the significance of the 'knowledge economy' as it was touted over the years. Is it possible that growth can continue indefinitely if the stuff being bought and sold is 'virtual'? Not that we are there yet; people seem very keen on buying shiny new hardware to go with their 'apps', and PCs consume a lot of power - but are progressively becoming more efficient.

    Which leads me onto my pet theory: that the population is currently docile and happy not just from the warm afterglow of a national borrowing binge, but because of the universal availability of the internet. I just have this idea that the streets are a safer place at night these days because young people are no longer bored out of their minds looking for something to do; they're all at home 'surfing', obsessively downloading music and films and keeping in touch via Facebook etc. It is a great social leveller, it seems to me, because it doesn't matter if your PC was pulled out of a skip or cost a thousand pounds; it does 'the internet' equally well. And whether you get your kicks from poring over academic papers or playing online poker, the same box does it all. My own personal experience is that when travelling alone, the dread prospect of a solitary evening in a hotel is transformed by the availability of WiFi and a laptop; the PC is very good at absorbing your time - whether you want it to, or not! From this I extrapolate that unemployment now would not be quite so terrifying to some people as it was in, say, the 80s. I would be interested to know if anyone else had any thoughts on this.

    ReplyDelete
  18. I have a new post here on economic value and a critique of Cynicus’ subjective labour theory of value:

    http://socialdemocracy21stcentury.blogspot.com/2010/06/what-is-economic-value.html

    ReplyDelete
  19. If we can just look at the actual result of one fairly local experiment in austerity for a moment =>

    "Rather than being rewarded for its [austere] actions, though, Ireland is being penalized. Its downturn has certainly been sharper than if the government had spent more to keep people working. Lacking stimulus money, the Irish economy shrank 7.1 percent last year and remains in recession.

    Joblessness in this country of 4.5 million is above 13 percent, and the ranks of the long-term unemployed — those out of work for a year or more — have more than doubled, to 5.3 percent.

    Now, the Irish are being warned of more pain to come.

    [..]

    Despite its strenuous efforts, Ireland has been thrust into the same ignominious category as Portugal, Italy, Greece and Spain. It now pays a hefty three percentage points more than Germany on its benchmark bonds, in part because investors fear that the austerity program, by retarding growth and so far failing to reduce borrowing, will make it harder for Dublin to pay its bills rather than easier. "

    http://www.nytimes.com/2010/06/29/business/global/29austerity.html?ref=business

    Did everybody get that last part ?

    "It now pays a hefty three percentage points more than Germany on its benchmark bonds.... because investors fear that the austerity program, ...will make it harder for Dublin to pay its bills rather than easier. "

    But surely , common sense & the 'household budget' analogy tells us that Irish bonds *should be selling like hot cakes at nice low interest rates* ?

    Now for the other side of the coin . Look at the US.
    Despite the huge US defecits, there's so much demand for treasuries they pay pretty much zero interest over any time span short of eternity.

    So.... the score so far is :
    Wild govt spending to avoid deflationary spiral 1
    Common sense solution to simple problem 0

    Now back to our regular programming.

    BTW, Lord Keynes : Although I find you posts interesting *when I can find two hours to read them* , and find a lot of what you say persuasive, can I suggest you cut the sheer volume of your posts down to something substantially less than the size of the article you are responding to ?
    Maybe distil down to essence & put up link to enormous article elsewhere ?
    Pithy, imho, is good, even though I obviously conspicuously fail at that m'self!

    ReplyDelete

You are more than welcome to comment on the posts, but please try to stay on topic....I will publish all comments, excepting spam and bad language, and my moderation of the comments is just to exclude these.

Please allow up to two days for the comment to appear.

I have had a request for an email address for the site and have created the following:

cynicuseconomicus[at]yahoo.com

I have ommitted the @ symbol to avoid spam....

For general purposes I would suggest using the comment form, but will occasionally look at this email account. Please be clear what is for publication and what is not, though I will also not guarantee publishing of email comments, unlike the comments through the form! Thanks.