noun, plural aus·ter·i·ties. 1. austere quality; severity of manner, life, etc.; sternness. 2. Usually, austerities. ascetic practices: austerities of monastery life.
Hmm...sounds pretty awful.
I wouldn't want to live in a monastery or live a "stern" lifestyle. But does cutting back on government spending equate to "austerity?" Well, maybe in the short-run for those whose incomes drop as a result, but what about longer term, what does austerity mean? There seems to be this popular notion among mainstream economists that there are periods, like the one we are in today, where the private sector, willy nilly, just stops spending. This is otherwise known as a "crisis in aggregate demand," and the solution, according to people like Paul Krugman, is for the government to step in and spend money. But why is the private sector not spending. Again, mainline economists point to something called "the paradox of thrift,"
in order to explain away this...well...paradox! They believe that people, responding to negative future expectations about growth, income and security, choose to save an ever greater amount of their ever declining income. By doing what is in their own best interests, as the theory goes, the whole of humanity drives itself and its economy to a grinding halt and back into the stone age. If everyone saves, there is no one left to spend, and if there is no one left to spend, then there is no economic activity. GDP contracts, incomes crash, and savings evaporate. Essentially, it is a self-produced depression.
Sounds pretty straightforward right? Only it isn't. What economists like Paul Krugman, Ben Bernanke and others fail to recognize, is that there is a reason why the private sector is not spending, which has nothing to do with an elaborate, psychological feed-back loop. It is true that negative future expectations do reinforce a negative trend, but at some point, that trend DOES HAVE to reverse. A bottom WILL form, and from that point the economy rebounds. So what then, is preventing the bottom from forming? Enter, that four letter word, D-E-B-T. The reason that the economy cannot recover, and the reason that the private sector is not spending, is because it is in the process of deleveraging from a debt binge that has gone on, arguably, for almost 4 decades in the US, and with a bit more variation in Europe.
The problem is not a lack of demand. This is a symptom. The disease is a stock of nominal debt so large that it has created a negative drag on the economy. Attempting to carry this debt, i.e. not defaulting on it or not forgiving it, is a path towards feudalism...towards serfdom. This is why we have bankruptcy laws for the private sector. The notion that this should not apply to government debt as well is bank propaganda.
As we have mentioned often on this show, excessive debt levels lead to the distortion of prices and the misallocation of capital. This misallocation ultimately pushes economies into recession. A recession isn't pleasant, but it is a natural economic process. You can't have booms without busts, and a recession is just the economy's way of purging itself of all the malinvestment created during the boom. In the economy, as in life, you cannot run a race forever without taking a break. At some point, you need to rest, and if you don't do it on your own according, your body will force it upon you. Debt is a stimulant for the economy, the same way that amphetamines are a stimulant for a runner. It may help you get more growth in the short-term, but you will pay for some of that extra growth with a recession later on. That's life. Nothing moves in one direction forever.
And on that note, this intro seems to be bumping up against those limitations, so let's turn now to our guest Mike "Mish" Shedlock for his take on all of this. He has been writing about the downturn in Spain and Germany, the fight between Paul Krugman and Ben Bernanke, and more!
Source
No comments:
Post a Comment