Myths of Austerity?

Leo Kolivakis's picture

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
OldTrooper's picture

 I really like Arnold's choice to put all government workers at minimum wage until the budgets balance.

I think this was ordered only until there is A budget (not a balanced one).  Its hard to imagine anyone, even the Guvinator, being able to balance the CA budget.

Privatus's picture

If "millions of unemployed people are losing hope, waiting for policymakers to come up with a program targeting job growth," then they had better get comfortable with being unemployed. The biggest myth of all is that the state can do anything (except protect property rights and get out the way) to catalyse incremental economic activity.

Leo Kolivakis's picture

Really? I guess we can rely on the private sector alone to stimulate demand and create jobs? I wonder how long we can go at 83,000 a month before we make up for all those millions of job losses.


VogonPoet's picture


Remove minimum wage laws, unemployment benefits, and disolve public sector unions and you'll see the private market create jobs in spades. But then you'll complain probably that everyone is only making 30cents on the dollar of what they used to make. Guess what, at 30cents on the dollar workers would still be OVER PAID, because the Chinese are willing to do it all for 5cents on the dollar.

Hell, right now I'd hire 2 people to help me with things, but I have to be able to pay them $2.50/hr. Not legal here, but with 15% unemployment i bet there are people who would do it. THE GOVT WONT LET THEM WORK!

Leo, why won't the government let people work?

Jendrzejczyk's picture

May I inquire as to what type of business you are in?

VogonPoet's picture

sure, software, but thats not what id hire people at 2.50/hr to do. i have lots of things that can be done around the house.

overmedicatedundersexed's picture

Leo. only governments can send a man to mars, I vote you go.

Gordon Freeman's picture

Yeah, you're right--the public sector can stimulate demand and create jobs, just like it's been doing for the past 18 months.  Works great!

Leo Kolivakis's picture

Public sector is there to cushion the downturn. The whole point of public spending during a crisis is that when busines confidence is low, and they're not hiring, you need something to spur them on. It's not a magic solution, but you can't just count on the private sector alone to get us out of a recession.

Nihilarian's picture

 you can't just count on the private sector alone to get us out of a recession.


Leo Kolivakis's picture

I guess you don't believe in the multiplier effect...

Nihilarian's picture

That's an open ended statement. But if you're referring to the whether I think that If someone gets $100, that some of that money will go to person #2, then some of that will get spent and go to person #3, thus creating "economic activity", then yes. But that is not the issue.

The problem is when government starts to allocate resources everything gets skewed, which is further compounded by the multiplier effect. Resources continually getting misallocated. This causes many unseen problems (for instance, maybe there would be innovations or services that would exist if private demand drove resources toward where it was needed or wanted). If there's a lag between private resources allocation it's because there is a good reason for it. Whether or not private industry doesn't know where to put money into or to whom, eventually that would get sorted out and deflation allows this to happen. It's not an 'endless loop' as Keynesians think.

For instance, I know people that couldn't afford a house 2 years ago, but bought one this year. And now their spending contributes to the multiplier effect. All possible by way of deflation. But guess what, since they spent less money on the house, they have more money to spend on other things! Fast forward; more recently they bought furniture, got a new car, had money to go on a trip. None of that would have been possible with housing prices of 2006. The money that is being spent by them now is going to people, places, and companies that would not have seen a dime if house prices were as high as they were 4 years ago. Here you have deflation stimulating the economy in ways no central banker can possibly predict, much less imitate. 

And it causes many seen problems; People who want to work but can't get jobs. Long term unemployment that we're seeing manifest itself is a result of misallocation of resources. The fact that unemployment is high is b/c the natural market is trying to re-allocate correctly. Instead of allowing this natural progression to happen, you are calling for more government interference. Can you not see but 1 causal step in front of you? Open your eyes, man. 

Calling for government to constantly fill any spending gap of private sector reminds me of the furniture, real estate, car, or stock market commercials I constantly see/hear. In short, no matter what "Now is the best time to buy." Umm, no.

Leo Kolivakis's picture

Did anyone bother watching to the interviews?

maddy10's picture

same to you

Did you watch Fareed zakaria and niall ferguson's response

I know Krugman sounded practical when he said use the 3% funding rates and spend

But who decides what to spend where

Aren't these people the same who fought the central planning in Soviets and promoted so called free markets

Or should we officially call it Soviet republic of america

And he says trillions as if it doesn't matter much coz they can print it

Yeah why not give the money freely to friendly countries and life will be rosy for ever?

This is the crux, Can any human resist temptation and act unfavorably enough to run a credible central bank?

The answer so far is NO

Prof Krugman writes about benifits of increased efficiency and productivity due to globalisation but fails to see the plain loss of jobs due to that

He simply fails to see the distortions created by currency arbitrage that causes huge imbalances worldwide and blames everything on china as if that will cure the consumption disease

There are consequences of excessive consumption

Perhaps economies are like animals

they won't grow beyond a point


OldTrooper's picture

I will eventually.  Kinda saving it to help me get to sleep tonight.

You have a lot of nerve, giving me an hour and half of homework on Independence Day.

demsco's picture

You need not worry about bond vigilantes simply Americans shifting assets away from treasuries into another asset classes and you have the same impact, tact on what the vigilantes do on top of that and watch out. I honestly have not seen one article I agree with Leo on other than how screwed pensions are. It just cracks me up that everyone, well mainstream everyone, thinks that it can never happen here because we are America and we are the exception to the rule. We are too big and too smart. The Fed is too strong, blah, blah, blah... Bullshit. The US shifted from long-term financing to short-term financing, in the trillions, show me anywhere in the world where that worked long-term. Eventually this will fall apart and the Fed will go out swinging, but they will lose taking the dollar down with it. BTW, Krugman is a complete idiot he is saying we are entering a deflationary depression because we did not do enough spending, please. I knew he was going to say this when he said, for the stimulus, think of a big number and double it. The proof that the stimulus is not working is evident right now, we are STILL spending billions and the data is rolling over, more will only make the problem worse.


"I was happy to see president Obama announce that the government is handing out nearly $2 billion for new solar plants, but this is a drop in the bucket, basically peanuts."

Solar power = NWO baloney

Show me one solar panel factory that uses solar-generated power to build their solar panels. There is no such critter. All solar panel production facilities draw their power from local power grids whose power comes from plants that burn hydro carbons or nuclear power plants or dams. If you want more solar panel plants you will have to burn more hydro carbons or build more nuclear power plants or dam up more rivers.

Solar panel generated power is NOT sustainable - it is the exact opposite. Solar power is PARASITE power which cannot exist without solar panel plants that are parasites on the local power grid.

Solar panel plants are a New World Order scheme to bankrupt us by throwing scarce resources down a rat hole so a bunch of useless eater Bilderberg and Fabian Society parasites can get their collective rocks off while they bomb the entire world with depleted uranium birth defect bombs and use the hunt for Osama bin Subcontractor as an excuse.

On the other hand I would approve of a solar powered guillotine and recycling thier filthy NWO carcasses into bio diesel.




Idiot Savant's picture

I'm ignorant on this topic and would appreciate clarification. Are you saying that it takes more energy to produce, service, and operate a solar panel, than one would consume using electricity instead?

I would expect solar panels to reduce strain on power grids, in the long run.

Gully Foyle's picture

Idiot Savant

"I'm ignorant on this topic and would appreciate clarification. Are you saying that it takes more energy to produce, service, and operate a solar panel, than one would consume using electricity instead?"

At least with the production.

AllSingingAllDancingCrapof theworld's picture

Let's just kill the vigilantes. I don't owe them a God damn thing. The banksters either. :-)

Come 'n get it.

mtomato2's picture

This argument of Krugman's is exactly like a skin diving instructor emphatically urging his students to breathe underwater, because there is plenty of air up above for when they resurface.

Misean's picture

YAWN!  I fell asleep after "The B.S. recovery is threatened by the government reducing its expenditure on hole diggers and fillers..." or some such nonsence.

This article is valuable so we can see the "important" debate going on amonst our betters in Warshington DC and other fetid environs?  I can see no other purpose...well except as a sleep aid.

lawton's picture

Austerity will mean the depression is 6 years instead of 13 years...

Temporalist's picture
With the US trapped in depression, this really is starting to feel like 1932

By Ambrose Evans-Pritchard
Published: 9:33PM BST 04 Jul 2010

"Let us be honest. The US is still trapped in depression a full 18 months into zero interest rates, quantitative easing (QE), and fiscal stimulus that has pushed the budget deficit above 10pc of GDP.

The share of the US working-age population with jobs in June actually fell from 58.7pc to 58.5pc. This is the real stress indicator. The ratio was 63pc three years ago. Eight million jobs have been lost.

The average time needed to find a job has risen to a record 35.2 weeks. Nothing like this has been seen before in the post-war era. Jeff Weniger, of Harris Private Bank, said this compares with a peak of 21.2 weeks in the Volcker recession of the early 1980s.

"Legions of individuals have been left with stale skills, and little prospect of finding meaningful work, and benefits that are being exhausted. By our math the crop of people who are unemployed but not receiving a check amounts to 9.2m.""

TBT or not TBT's picture

The government stimulus is in full swing though, just like the Great Depression.   Think of the war footage we'll get on these ubiquitous little HD camcorders.

Gordon Freeman's picture

Nice, positive piece by AEP--loved it.  Especially the last sentence...

zen0's picture

It doesn't matter if the powers pretend to stimulate or pretend to be austere, pretense will always be undone by reality. The oil spill is a financial allegory in realtime.

The oil is debt.

 When it is under control, contained in its proper place,  it is wealth personified.

When oil is rampant, it is death and destruction.

Sow the wind, reap the whirlwind.

Every trader's dream.

Species8472's picture

  I was happy to see president Obama announce that the government is handing out nearly $2 billion for new solar plants


So, it's the governments job to pick winners in new industries?


Nihilarian's picture

No. That's Leo's job. It's the governments job to funnel money towards Leo's intimate knowledge of the future. You ever heard of Ms. cLeo?

Jasper M's picture

1) Austerity does not "Threaten the recovery", as the recovery is fake, and a doomed fake, at that.

Credit expansions can saturate, and we are So there. It WILL contract. It Might be delayed one more time, much as the fallout of the bust was delayed. But the cost would be even higher.

No thank you. Thank you, no. And again, no, I thank you. 

2) Did I just see Krugman call someone out on wishful thinking!? Well, I guess he is an expert on such things . . .

Rogerwilco's picture

Austerity is needed because we can no longer claim with any credibility that current obligations can be serviced, let alone the trillions in new obligations fools like Krugman and Obama propose. Even average Joes with a bit of common sense can understand what econ PhDs seem to ignore -- future generations are not stupid, and intelligent, mobile, high-earners will adjust their output or leave the tax base.

Double the income tax rates, end all discretionary federal spending, try to balance the federal budget, and you find that entitlements and debt service are still too large, and the people left to pay for them will say "No" in a most unpleasant way.

Graphite's picture

Leo: your faith in the Fed's powers to muscle the markets around is a modern day analogue to prehistoric tribesmen who believed their chieftains could make it rain.

Leo Kolivakis's picture

At the end of the day, the Fed is the biggest hedge fund in town. Don't bother fighting the Fed, you'll always come out on the losing end.

doggings's picture

mm. yea what like when France forced a default off the Gold standard?

even the French kicked the Fed's ass, just because they have the biggest supply of imaginary money in thw world does not change the facts.

unsustainable, only a matter of time until default.

deal with it Leo.

maddy10's picture

yeah right!

The Fed can never fail, Until it does!

didn't we hear something like this on Housing,Internet stocks et al

Be scared of sureties! that's for 21st century!

Ahh How can I forget those people laughing at Peter schiff on TV even in July, August 2008! 'Banks can never fail'


Kayman's picture

Leo- you mean like the Wizard of Oz- a big scary voice and an empty vault.

I don't know when or how the Fed runs out of gas or the credit machinery seizes up, but I also couldn't believe the Berlin Wall would come down either.

As each day passes the Fed becomes more and more stuck in the Japanese liquidity trap. 

Leo Kolivakis's picture

"As each day passes the Fed becomes more and more stuck in the Japanese liquidity trap."

Are you so sure of this? Maybe that's what they want you to believe to ensure QE 2.0.

idoubtit's picture

Yes, because QE 1 worked so well.

If the system was rigged so that the Fed could conjure up money out of nothing maybe, but (before all those that start screaming at me for not understanding that they can, and have, created money out of thin air, I know how money is created, thanks.) the system only works with the belief that debt needs to be paid back.  It's the backbone of the fiat system.  They need the plebs to believe that when they sign a loan document, they are obligated to pay the loan back.  Once that belief begins to waver, the fiat system would collapse.  There is no way the Fed would ever let that belief waver.  They might do all sorts of things behind the scenes but the Treasury figureheads will always claim to "have a debt plan" to pay the money back.  That is where the limit to borrowing comes from.  It's less a monetary amount than a confidence threshold.  The Fed and the Treasury is trapped between maintaining credibility that the debt will be repaid and the need to maintain stimulus.  Anybody recall Bernanke bringing up deficit concerns?  Once the US reaches a point where the debt is at a level where people cannot believe that it will be paid back, the game is up.  Although we might have hit the monetary limit of debt issuance, I'm not sure we have yet hit the credibility limit.  Some might argue that we are close to that point.  I'm not sure we are.  But when the "credibility" limit is reached, the Fed will be powerless.

At that point two things will happen:

Either deflation in order to clear the way for more debt growth (fiat system continues) or we go back to the wild wild west.





Nihilarian's picture

Leo gets lifetime supply of the Emperor's New Clothes. Strut your stuff, Leo!

hooligan2009's picture

ugh...whats "austere" about reducing a deficit form 12% of GDP to 9% then 6% then 3%? Any deficit is expansionary as it is spending more than is earned. Why must we be fooled by G increaing or decreasing in relative terms ALL THE TIME. With the accumulated debt hurtling to 300% of GDP in ten years!

What part of the effect of the current political spectrum about the deficit isn't understood here? We know the Fed is sterilising the deficit by the purchasing all kinds of crap. The Fed buys Treasuries plus FRE and FNM and any other paper, giving cash to the sellers who have nowhere else to go but the treasury market.

There is no Treasury "market" it is manipulated by a Fed and cheered on by other "uber communists" like Krugman.

This is an attack on a democracy by the powers that prefer power concentrated in their hands only. Support Q/E and you support further migration to the failed nation state and communism. Just wait for the next "five year plan".

The private sector can create wealth, but right now the private sector is swamped by the sheer volume of deficit spending and financing.

This is not a market, it is a regulated disaster. I recommend you re-read 1984 and think about the PIIGS running the farm and then come up with some reason why the US is not getting distinctly PIIGSy and turning Japanese.

The Government can take money from people and waste. So could you or I, Leo. We have a conscience (I hope) so we prefer not to steal other people's livelihoods.

DR's picture

"The private sector can create wealth, but right now the private sector is swamped by the sheer volume of deficit spending and financing."

The private sector is using US ZIRP financing to carry trade and build factories in emerging markets...make no mistake the "private sector" is busy, just not in the US.

hooligan2009's picture

yes I know I'm talking to myself now (checks for hairs on palms) but really I could hardly bear to get past the intro with some whacked out Fareed with staring eyes claiming that he has the two most important people in the world debating the only two sides that matter. CNN was great in 1991, now its so full of the shit it spouts its lost all credibility.

One last bleat, that link to a post by Mish says it far more eloquently than I could. I will have a go though! :)

If you know theres an axe murderer in your street, breaking into dont tell him/her to go slower so you can clean up the mess he/she is making. You take him out and stop him/her immediately. This is what people just don't understand. It is not "austerity" or "deficit reduction"... it is the prevention of crime. A crime is defined as anti-social behaviour impacting the property or well being of another. We are living a crime. It has to stop. It is not able to "managed".

ozziindaus's picture

Comment was intended for CB

Catullus's picture

Government spending is never additive to economic activity.  Krugman and others are blinded by the GNP = C + I + G equation.  Yes.  Under their formula, if you lower G, GNP or GDP will decrease.  So being blinded by the equation, they correctly claim that decreasing government spending will cause GDP to fall. 

But the government doesn't produce anything.  They can only ever take from one group to give to another.  That's not a productive event.  That's just a transfer. Cutting government spending means cutting transfers from one section of the economy to the other.  This is will not result in a collapse.  And given that most of the taxes are income taxes, cutting government spending means cutting the transfer from the productive to the non-productive.

The major economic myth that needs to be refuted is that government spending is additive to a productive economy. 

DR's picture

The government is responsible for providing public or collective goods. Even Hayek and A. Smith endorsed this view.

Honestly, do you really want the investment banks to run everything?

ozziindaus's picture

You are exactly right when the government is controlled by crony capitalists. Funneling public money into non productive ventures will only stifle growth in key areas of the economy since it deprives funding where it is truly needed. Hoover, just like Hitler, kick started the economy with stimulus spending on public works projects that still contribute the the economy today but I think these public ventures are limited today due to the publics paradigm shift in thinking over the past 80 years. Today's average schmo seeks instant gratification with a selfish perspective on growth and a sense of entitlement. eg. A light rail system in Michigan or SC will certainly piss anyone off that's not in the path of THAT oncoming train. 

Therefore public money must satisfy the largest contributors to GDP. Without new technologies for consumers to spend on, it's unlikely the economy can return to a pre crisis state (minus bubbles). It may be viewed as unfortunate that our society has progressed to tech junkie status but IMO that's exactly the addiction growth depends on.