Will Austerity Be The Catalyst For War?

Tyler Durden's picture

As always SocGen's Dylan Grice comes out with some tremendous insights in his latest weekly piece "Double dips, siren calls and inflationary bias of policy." While the gist of the piece is presenting a comprehensive overview of the traditional and cognitive biases toward inflationary policies and away from hard, unpopular, deflationary/austere measures, Dylan provides a chilling anecdote involving the 1980s conflict between the UK and Argentina, in which it was precisely war that pulled an extremely unpopular government, that of Maggie Thatcher, out of the gutter of public opinion, and soaring in popularity. Thatcher, who came to power oddly enough on a "mandate to smash inflation, smash the unions and downsize government", saw her popularity immediately slide to 25% (see chart) as people realized the very real pain associated with austerity and a regime fighting run away government. A tangent in Grice's argument is that on very rare occasions, the people of a country do end up making the decision to take on hardship, instead of kicking the can down the road (are you listening Summers?). Yet they promptly grow to regret their decision. So what was it that saved the government, and allowed the Conservatives a second term in which to complete the painful austerity project? The declaration of war by Argentina's General Galtieri over the Falkland Islands. The result was soaring popularity for the Iron Lady, and the rest is history. Looking forward, now that all of Europe is gripped in austerity, and make no mistake - this very same austerity is coming to the US on very short notice (sorry Krugman), and popularity ratings for all political parties are crashing, has the political G-8/20 elite been focused a little too much on the Falkland war? Is war precisely the diversion that Europe and soon America hope to use in order to deflect anger from policies such as Schwarzenegger's imposition of minimum wage salaries yesterday (yes, this is pure austerity)? And is there a Gallup or some other polling "unpopularity" threshold that the G-20 is waiting for before letting all those aircraft carriers parked next to the Persian Guld loose? Read the below excerpt from Dylan and make up your own minds.

From SocGen's Dylan Grice

How about the UK in the 1980s though? Wasn't Thatcher elected in 1979 on the back of a promise to bring down inflation, smash the trade unions and downsize government? In other words, wasn't Thatcher elected with a mandate for deflation, which demonstrates that sometimes electorates do elect governments to take tough decisions?

Strictly speaking, the UK in the early 1980s doesn't belong in the same category as Canada, Sweden and Finland in the early 1990s. It had lurched between crises in the 1970s the way an all-day drunk lurches between lampposts: inflation peaked at 25% in 1975; the IMF were called in 1976; the bleak "winter of discontent" of 1978/79 saw widespread power cuts and widespread strike actions by, for example, rail engine drivers, lorry drivers and ambulance drivers.

More infamously, rubbish piled up in Leicester Square after Westminster Council allocated rubbish to be dumped there when refuse collectors went on strike, and coffins piled up in Liverpool after gravediggers went on strike. When asked what the council would do should the gravedigger strike continue Liverpool's Medical Officer said the decomposing bodies would probably have to be thrown in the sea! The gravediggers soon got what they asked for and the strike only lasted two weeks.

So when in 1979 the UK electorate voted in Thatcher on a ticket of painful deflation, the crises caused by a weak and out-of-control-government weren't simply abstract, as they are to most of us today. They were real, and it was in the midst of this chaos that Thatcher came to power.

However, despite winning a clear mandate to smash inflation, smash the unions and downsize government, her immediate reward for carrying out her election pledges was to be marked as the most unpopular prime minister in British political history and by early 1982 her approval rating had slumped to 25%. Despite having voted for Thatcher’s painful medicine and having even understood the need for it, UK voters in the “hot” state people inevitably feel when unemployment spikes had less tolerance for the bitter medicine than they thought they would have in the distantly “cold” state of May 1979.

Squealing with pain and begging for it to stop (364 economists - including former and future Nobel Prize winners - signed an open letter decrying Thatcher's plan to raise taxes in the depths of the 1981 recession to cut borrowing as having no basis in economic theory). Thatcher's chances of a second term to complete her project looked doomed...?

But Britain wasn't the only divided nation in need of social healing at that time. On the other side of the world the widely-hated Argentinian military dictatorship of General Leopoldo Galtieri was experiencing severe economic crisis and widespread social unrest of his own. And to deflect from his domestic problems he did what pressed tyrants have done since the beginning of time - he picked a fight with a foreigner he felt sure he could beat.

Located in the South Atlantic only 300 miles from Argentine shores but 8,000 miles from Britain, the tiny Falkland Islands has been a territory of the UK since it was appropriated from the Argentines in 1833 for its strategic value in navigating Cape Horn. Since this had rankled with generations of Argentinians (as it still does today), Galtieri calculated that an invasion would deflect from his disastrous domestic policies. He also calculated that the UK would balk at the military response required to defend the Islands. The Brits would be vastly outnumbered with implausibly long supply lines and, anyway, the islands were mainly inhabited be sheep.

And America was his new best friend too. Hadn't Reagan just warmly received him as a bulwark against communism in Latin America? Hadn't the administration's National Security Advisor just called him the "majestic general"? Convinced that even if Thatcher wanted to retaliate, she'd be talked out of it by the Reagan administration, he launched a surprise invasion on 2 April 1982. And that morning, Galtieri must have felt pretty pleased with himself. And that morning, Galtieri must have felt pretty pleased with himself. Upon hearing the news, enthralled crowds of patriotic Argentines momentarily forgot the death squads, the 9,000 to 30,000 disappeared "subversives", the daily grind of high unemployment and 130% inflation, and instead gathered outside Galtieri's balcony in a carnival-like atmosphere to celebrate and show their approval of the invasion. His plan was working like a dream.

But the tribal instinct is a part of the human condition, not only the Argentinean one, and the British public were equally thoroughly gripped by the same fervent collective delusion that we call 'national pride.' Galtieri had miscalculated. Thatcher did respond militarily. The British army - though outnumbered - were better trained and equipped than their foe, whom  they dispatched within two months. In the national delirium of that rare episode in the terminal decline of what had once the world's largest empire - a national victory - Thatcher's approval rating, like that of her previously despised party, soared (see chart below). An election was called, duly won by the Conservatives, and the painful austerity project was completed in a second term. The rest, as they say, is history.

Thatcher has gone down as the iron lady who turned Britain around and transformed its fortunes. But how different would the story have been had it not been for the "majestic general?" The Thatcher experience shows how fragile support for painful economic policies can be even when the democratic mandate for those polices has been won.

Like the Canadian and Scandinavian austerity experience in the 1990s, the painful programs adopted succeeded as much by luck as by political bravery. And this is what worries me. It's not that I'm ideologically wedded to one side or the other, it's that the precedents just aren't encouraging. The Weberists are right to worry exactly because the Krugmanites are right  that the required austerity will be so deeply painful and politically risky. Policymakers won't make it happen, so the bond market will make it happen instead.

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Caviar Emptor's picture

We're officially at "bear-market" conditions, 20% off the peak in the Russell 2000

Ragnarok's picture

Give me $50 on Venezuela.

 

Oil - Check

Minerals - Check

Axis of Evil - Check

In the US sphere of influence - Check

Call Obama a "house negro" - Check

Douche bag dictator (Venezuela or US?) - Check

CPL's picture

I'll take $40 on the vuvuzela!!!!

 

Brrzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzz

 

Der Kommissar's picture

$100 on China:

  1. Get rid of 1T in debt -- governments do not pay to enemy states
  2. Destroy manufacturing capacity of a major competitor
Back to 1945!!

 

 

 

B9K9's picture

Who gives a shit about the markets. I gotta laugh at the market playerz who frequent this site. Sure, TD covers a lot of financial market information, along with certain major geo-political & environmental events. However, the analysis & commentary directed at the underlying fraud, corruption & outright illegal actions is meant to SERVE as a means of illuminating the foundational rot underpinning our entire economic & governance systems, not as  mundane trading & investment advice.

Think for a moment about what that really means. What we see & think we understand about our world is not really the case. Since not one of us has any personal experience in the major social events that have taken place between 1776/1789-1815 and 1914/17/18-1945, we have NO concept of what happens when major institutions we take for granted, and quite frankly, consider inviolable, are nothing more than mirages!

Austerity doesn't mean we're going to knuckle under in order to pay-off phantom principle+interest to a cabal of private interests who never lent real capital in the first place! Doesn't anybody get it? We are going to DEFAULT! We are going to repudiate the debt. It may not be us (our generations), but I can damn well guarantee that the millions of little Johnnies & Janies currently attending 6th grade sure as shit ain't gonna agree to a life-time of debt servitude in order to pay off the national credit card encumbered for the benefit of some random, anonymous "others" when they turn 18 (and can vote) in 6-7 years.

So what happens when the ponzi ends? Sure you wanna find out? Well, we don't have a choice - it's coming whether we like it or not. Think about how you're gonna get out of this situation alive. Think skills, think resources, think community, think security. We're getting very close to the point where the great unwashed are going to find out there really isn't any Oz.

You don't work, you don't contribute, you don't get along, you die.

Cathartes Aura's picture

Who gives a shit about the markets. I gotta laugh at the market playerz who frequent this site. Sure, TD covers a lot of financial market information, along with certain major geo-political & environmental events. However, the analysis & commentary directed at the underlying fraud, corruption & outright illegal actions is meant to SERVE as a means of illuminating the foundational rot underpinning our entire economic & governance systems, not as  mundane trading & investment advice.

 

+1000 B9K9. 

for that paragraph, and the rest of your post, excellent stuffs.

scratch_and_sniff's picture

"You don't work, you don't contribute, you don't get along, you die."

 

Looks like most of the people here are fucked then.

cossack55's picture

BUT....

If you do work, you do contribute, you do get along, you STILL die.  You, sir, are quite right.

russki standart's picture

Great Post. Now that I am ILLUMINATED, where do I sign up for my  free parcel of slaves?

mcguire's picture

sorry, but the "truth" that the markets are manipulated is not going to feul any revolutions...

if you want that, work on 9/11 truth.  most people just dont know about it.  i didnt, not until just 3 months ago.  it was the first time i had seen actual footage of wtc7 falling down, but once i did see it, i knew, KNEW, that this was an inside job.  i spent the whole week without sleep, trying to prove it wasnt the case to myself, but the evidence just grew stronger and stronger. 

please, if you have never seen anything on world trade center #7, watch this...

http://www.youtube.com/watch?v=iEuJimaumW4

in short, i agree to an extent with what you are saying... but the financial picture is only one part of a much larger, and much darker picture. 

it is my opinion that just as 9/11 had the power to change the world to what it is today, once people see that it was the biggest crime in the century, it has the power to change everything.  the truth behind 9/11 *does have the power to affect revolutionary change... 

 

SMG's picture

The problem is deniability. The people behind the curtain are very good at covering their tracks, at least most of them.  While there might be some suspicious stuff going on with 9/11, the triangle people always do a good enough job of leaving enough doubt out there to make the everyday person look at you like you're crazy when you bring it up.

The problem is if you focus on the past, there can always be some doubt sown, because really the past can be changed by changing generally accepted opinion.

If you really want to make a difference, help people discover the eyeball triangle overlords using things that exist in the present.

The pyramid and the eye of Horus on the dollar, the tiny owl above the one on the front, the apotheosis of Washington painting in the capital building, the Masons ( at least the high level ones), the federal reserve, the Georgia guidestones, the Bilderberg meetings, the IMF, the UN, the G-8 etc.  Don't go into it too quickly, but very gradually with someone, because it's alot to process and if you overload someone, they just kind of shut down and pretend they never heard the information.

Change will come when the majority of people realize there is unelected royalty working through a corporate structure, to hijack our republic.  That majority will have to be built one citizen at a time.

 

 

 

WaterWings's picture

the triangle people

Heh. Nice!

I was explaining to some friends/acquaintances the Gaga-thingy and showed them the vigilantcitizen.com explanation. And just like the Matrix and Allegory of the Cave descriptions of slaves lashing out to defend the system I now have some stand-offish, quasi enemies instead of people I can relate to. Sad that they defend it outright. Their worldview is dying. They are "triangle zombies".

I can imagine the website tagline: "Get more frenemies without spending a dime! Send 'em our way and we'll take care of the rest!"

I have more farming books to read and guns to grease anyway.

reckoning's picture

"will austerity be the catalyst for war?"...

 

i guess i am a little confused by the question itself... we are in 2 wars at the moment... does the author mean more war?... worse war?... new war?...

 

if the US government makes a concerted effort to spend, and therefore borrow less, the US federal reserve bank will find a way to force an increase in conflict, borrowing and resultant interest payments to the fed.

 

<the analysis & commentary directed at the underlying fraud, corruption & outright illegal actions is meant to SERVE as a means of illuminating the foundational rot underpinning our entire economic & governance systems, not as  mundane trading & investment advice.>

 

use the information as you wish in your daily life, however, it is an excellent observation that the commentary leads one to question our current system of finance and governance, as well as the incestuous relationship between the two...

 

abolish the US federal reserve bank, pay back every "dollar" of debt owed to the bank with its own useless and pathetic fiat.... then issue a US government note... one free of conjured and fictitious interest payments required at conception for no other reason besides fraud and greed... just as john f kennedy attempted to do... and was killed for...

 

at that point.... there would be absolutely NO NEED OR INCENTIVE to fight any wars at all... little johnnie and janey would owe nothing at birth, and live a life free of debt servitude...

 

the only problem remaining at that point would be... where would obama's (or any other politician's) next campaign contributions come from???... there in lies the rub... as long as all those power hungry cheap little whores are for sale at these "cheap" prices... ben's bosses will eventually buy their way back in as the sheeple watch "dancing with the stars"..

Mercury's picture

Yeah the politicians will get their war.

A civil war.

Scooby Dooby Doo's picture

I suggest: 'The War on Credit'™

AnAnonymous's picture

Or war on debt.

Lets declare war on debt.

You know, with a verbose speech full of allusions to freedom, liberty, truth and justice as the US love to give.

SMG's picture

War on the eyeball triangle!

The Disappointed's picture

Yeah, and we will get the same kind of results as our 'War on Drugs' and 'War on Poverty'.

inflation.studentloan--0's picture

just trying to help out the slow...

you mean more drugs, more poverty and ergo more debt, right?

John_Coltrane's picture

It seems the way out of our problems lies with legalizing all recreational drugs.  The law enforcement savings and taxes alone justify it on economic grounds.  And suddenly, discontent vanishes like an overdose of soma.  Of course, like the lottery, it is a stealth tax on stupidity.  But it does deal with the surplus labor problem in a modern high tech society (which we tried to solve via the phony FIRE economy) where most lack both the skills and IQ to contribute to productivity in a meaningful way.

RichardENixon's picture

Good luck getting the Law Enforcement/Incarceration Industry to go along with that plan, sound though it may be.

jeff montanye's picture

there is historical precedent:  alcohol prohibition ended by the last deflationary depression.

StychoKiller's picture

Obamatron:  "Today, I'm appointing a new 'Debt Czar...'"

e_goldstein's picture

if we did that, what would we fight all the other wars with?

Adam Selene's picture

How about "war on Solvency." That has a nice ring to it.

CPL's picture

Shhh, speak not the name of the devil or someone will notice!!

 

Huzzah huzzah!!  <jazz hands!>

RichardENixon's picture

We've already fought and won that war.

OutLookingIn's picture

 

 When all else fails - Go to War! (Last line - economics 101)

Temporalist's picture

You have a typo...(Last line - Keynesian economics 101)

Crummy's picture

Collateral damage keeps the mortician working.

Gold...Bitches's picture

Carl von Clausewitz - "War is merely the continuation of policy (politics) by other means."

Alcoholic Native American's picture

Good news everyone,

When NATO gets done winning in Afghanistan they can go home and become austerity enforcers for their respective countries.

IQ 145's picture

 The timing doesn't work; 55 years from now, the austerity will already by taken care of.

CPL's picture

Unless part of the austerity angles is to dump the military overseas and hang them to dry.  Honestly, if it does get that bad would you want 2 million trained troops armed to the teeth running around your country wondering why the checks bounced?

Pensatulla's picture

Hugo Chavez does have his soldiers checking on prices in grocery stores.

Mako's picture
The Catalyst For War is the same as it always is, people not getting what they want.  The current system is providing less and less what they want, the liquidation is going to happen with or without a large scale war. 
BobPaulson's picture

ROTFL. What are you ****ing talking about?

Sorry, usually I just junk posts like this but I have the day off and can't help it.

Eternal Student's picture

I do believe that you've been trolled.

BobPaulson's picture

The original post is gone. My post was in reaction to a comment saying Turkey and the US were planning to invade Israel.

Crummy's picture

Well, that's ridiculous, Israel has nothing of value.

Unless you consider a divisive scapegoat to be valuable, but in that case you don't invade it you just point at it.

Pensatulla's picture

I think wall building has some value.

resipsaloquacious's picture

Brilliant stuff.  You are a modern day Cardinal Richelieu.

Clayton Bigsby's picture

either that or a modern day Fuckaire

Clayton Bigsby's picture

fucking agreed - I have read (and, yes, I'm sure even posted) some REALLY dumb shit on here (and a lot of very smart shit, so don't get your panties in a knot everybody) - but this is perhaps the dumbest fucking thing I have ever heard - no, really, the dumbest fucking thing I have ever heard - no, really.... ad infinitum...

Let them all fail's picture

Israel sucks, we need to lessen our ties, why the fuck are we so close with them other than our large Jewish communities?

I am not being rhetorical, I really want an answer to this question, thanks.

tj3's picture

http://en.wikipedia.org/wiki/Israel_%E2%80%93_United_States_military_rel...

 

Israel has received more U.S. military assistance than any other country, both in terms of grant aid and military sales on a concessional basis. However, unlike other countries who receive military aid and are required to spend the money in United States, Israel may spend 25% on its domestic military projects.

Since 1987, the U.S. has provided an average of $1.8 billion annually in the form of Foreign Military Sales (FMS), Foreign Military Financing (FMF) and funds to support research and development.[2]

A bilateral memorandum of understanding was signed in January 2001, at the end of the Clinton administration, under which defense aid was increased to $2.4 billion annually from $1.8 billion, while the $1.2 billion of economic aid would be eliminated. This was predicated on the basis of the defense aid being increased by $60 million per year until the full amount was reached in 2008, while the economic aid is decreased by $120 million per year until eliminated.[3][19]

In 2007, the United States increased its military aid to Israel by over 25%, to an average of $3 billion per year for the following ten year period (starting at $2.550 billion for 2008, growing by $150 million each year).[20] The package is scheduled to start October 2008, when regular economic aid to Israel's economy is to end.[21] Officials have insisted the aid is not tied, or meant to balance, simultaneous American plans to sell $20 billion worth of sophisticated arms to its Arab allies in the region, including Egypt and Saudi Arabia[21]. U.S. President George W. Bush assured Israeli Prime Minister Ehud Olmert that the U.S. would help keep a "qualitative advantage" to Israel over other nations in the region.[20]

[edit] Foreign military sales

Israeli Air Force McDonnell Douglas F-15I Ra'am

Note: This is not a comprehensive listing of U.S. military sales to Israel.

Year FMS DCS TOTAL 2001 $766,026,000 $4,019,000 $770,045,000 2002 $629,426,000 $1,427,000 $630,853,000 2003 $845,952,000 $16,455,000 $862,407,000 2004 $878,189,000 $418,883,000 $1,297,072,000 2005 $1,652,582,000 $1,110,223,000 $2,762,805,000 2001–2005 $4,772,175,000 $1,551,007,000 $6,323,182,000
Vix_Noob's picture

Wow, you said it better than I did and sent it off a bit faster too.  We should hang out.