This page has been archived and commenting is disabled.
Guest Post: Why Austerity Is Necessary
Authored by Jeff Young of Woodbine Capital,
Austerity Is Necessary
Austerity is under attack again, with Cyprus about to enter a program. Critics charge that austerity is self-defeating because it depresses growth, pushing up the debt/GDP ratio. However, austerity is a necessary (although far from sufficient) condition for countries with low national savings Indeed, there is some evidence that austerity is beginning to have positive effects. Higher savings have improved market perceptions of debt sustainability, making countries more resilient to shocks (Cyprus, Italian politics).
What is austerity for?
Austerity is sold as a way to reduce public deficits, but what it is really supposed to do is raise net national savings (savings minus depreciation) in the entire economy (not just the public sector, the private sector too). Certainly one lesson of the rolling European crisis is that excess debt can create funding crises regardless of which sector – the government, banks, households, or corporations – did the borrowing. What is important is, are savings in the entire economy sufficient to finance debt in the entire economy? If no, debt sustainability will be questioned. But if a country increases its internally generated savings, it can service its current debts, and it can invest to create a stream of income to service debts in the future.
In this sense, the commonly used debt/GDP ratio – the stock of debt divided by the current year's income – is misleading. More relevant is the amount of GDP that will be created over the lifetime of the debt, and this is surely related to the amount of savings generated by austerity. Market perceptions of debt sustainability can improve even though the debt/GDP ratio rises. This will happen when austerity depresses current growth but raises net national savings. After the ERM crisis in 1992-1993, debt/GDP ratios in the hardest-hit countries rose for many years, but bond yields declined rather quickly, as net national savings rose.
To be sure, European governments have been guilty of false advertising. They claimed that fiscal austerity would not hurt growth. But in order to raise savings, it is necessary to consume or invest less (unless a country is lucky enough to enjoy an export or productivity boom). As a result, growth will suffer as a country raises savings. But once savings begin to recover, elements of a "virtuous circle" begin to fall into place. Debt is serviceable and investment can return, which further enhances perceptions of sustainability. Appropriate banking and monetary policies are also necessary, but they do not obviate the need for higher savings.
Which countries are saving themselves?
Let's look at the performance of the three program countries – Greece, Ireland, and Portugal – and Spain and Italy. Greece and Portugal had negative net national savings in the five years preceding the outbreak of the European sovereign crisis in 2010. This means that they were not even saving enough to maintain their existing capital stocks. Ireland had positive net national savings, although the level declined sharply. Spain looked more like Ireland – positive but declining net national savings – whereas Italy had lower levels.
As of last year, Greece had improved to about -5% of GDP (from -14% in 2011), Portugal to -4% (from a trough of -8% in 2009), and Ireland had managed to maintain small positive net savings. Greece and Portugal in particular have much further to go, but it is noteworthy that both countries managed to raise their net savings last year: gross savings rose, investment declined, and depreciation fell.
Ireland was almost lucky to have had its problem centered in real estate overinvestment. Once the real estate bubble ended and investment crashed, net savings rose more or less automatically. The crash of investment and real estate prices necessitated banking support, but once that was in place, higher net savings allowed the bond market to stabilize. Ireland has even begun to invest again (capital formation rose 2.6% in the fourth quarter of 2012, from a trough of -31% in early 2009).
This is an early sign that the process is entering into a virtuous circle.
Greece is a different story. There, excess consumption (both private and public) had left gross savings chronically low, and there was not a lot of investment to slash. The only way to raise net savings is to cut consumption, which is much more difficult than cutting investment.
Spain resembles Ireland, in that it sported an Asia-like investment rate of 30% of GDP before the crisis, mostly in construction. Since Spain hit the wall, investment has plunged, but almost entirely in construction (-10% of GDP), which has helped repair national savings with only a minimal impact on future growth potential (machinery and equipment investment is down by just 1.5% of GDP). Italian dynamics are less favorable, as savings were lower to begin with, and investment rates are low enough that they cannot be cut much further. This implies that politically difficult cuts in consumption will have to be the primary means to raise savings.
The scale and timing of the required increase in savings is a different question from whether savings need to increase. In some cases an official sector program, or even restructuring, might be necessary. But this does not reduce the need to raise net national savings. It just suggests a different path for higher savings, or in other words, a different dosage of the same medicine, rather than a different medicine altogether.
Limited contagion from Cyprus?
Contagion to other sovereign markets has been muted since the Cyprus crisis flared up, despite poor crisis management and losses on certain classes of claimants (bank depositors and creditors) that constituted about as severe a shock as could be imagined. Perhaps Cyprus is just too small to matter. But perhaps the increase in net national savings in periphery countries has left them in a stronger position to withstand shocks. With a bigger pool of domestic resources available for debt service, contagion is less likely. Much more remains to be done (after all, Portugal and Greece still have negative net national savings), so the improvements might be enough to withstand a really large shock. But they have made the system less fragile.
In a similar vein, the EUR has been largely stable since the Cyprus shock: the EUR is down, but only modestly and in line with cyclical factors, with no contribution from fragmentation and ‘redenomination’ fears. Since last year there have been greater self-efforts to rebuild savings, and a wider mutualized backstop at the European level, effectively reducing (although not eliminating) euro redenomination risks. To some observers, the high reliance on self-help to save a currency union is contradictory and maybe even mutually exclusive, but such is the hybrid that is the EUR.
»
- 17148 reads
- Printer-friendly version
- Send to friend
- advertisements -
In the 1930s it needed the US to get weapons contracts from France and Britain to make the New Deal work in return for fire sales of British private sector assets in the US.
Yep - keep bleeding the patient. And if the patient gets sicker that means we just ain't bleeding it enough - so open dem veins again.
Get medieval on their asses!
"Why do you want to hoard all that blood anyway? Don't you know that you're hurting your body's economy by hoarding it instead of letting it flow freely?"
You do not refer to the UK at all. Do you know it is in Europe ? It has an interesting experiment - QE to wipe out household savings - so far £220 billion wiped out or 20% total savings. Then it raises taxes dramatically to reduce the annual deficit. It floods the FIRE Sector with cheap money and loads it up with Government Bonds trading at a 300 year high to extract more from the pension sector.
A 30% devaluation raises food prices, natural gas prices, consumer goods prices, energy prices by around 60% over 2008 and it drives household incomes into the ground.
This brilliant strategy puts the economy into the longest Slump for a century - since the 1873-96 Depression in fact. National Income is still 6% below 2007 and household incomes might reach 2007 levels by 2019.
This brilliance is matched by a Government spending more, borrowing more, and adding 60% to National Debt in 5 years and spending more on Interest than Defence
We don't know how to describe this....is is Austerity for Households and Profligacy for Banks and Government.....or is it Welfare for 1% Austerity for 99%.
Maybe when you revise your article you could tell us ?
yeah, but is the UK then "in the same europe"? as you point out, it's "Austerity" coupled with currency debasement and a strong new support for FIRE
not exactly the same recipe as the eurozone, this mix of salt and new, fresh and delicious sugar
You can take your austerity and shove it up your schfing schfing. You go round up the banksters first. Throw those parasitic vermin into prisons and replace the FED with open source currency before you give me any bullshit about austerity. No good dirty M'fn guest poster.
those were my sentiments exactly.
What about the death penalty for financial fraud in banks ?
I wish. That only happens in China and Iran. Here the banksters are REWARDED for control fraud.
OK, OK, I get it. Austerity is a very inflaming word on ZH's comment section
Return to a gold standard, in comparison, it's good and virtuos
And yet the latter implies Balanced Budgets and Living Within Your Means
So for me most arguments here look like "I don't like it if not done with my favourite instruments" and "crash the system first, then it's mayby ok"
we'll see...
Not really. I don't think that the idea of living within ones means at the individual or collective level is at all offensive to most ZHers. The problem is that "austerity" when uttered by the usual suspects is merely a code-word roughly translated as "poverty for thee but not for me."
"Better them than me" is an 'american' behaviour.
Living within your means means special in an 'american' environment.
Nowhere in their history, 'americans' have lived within their means since they propagated the idea they could overcome the environment.
The environment being infinite, there was no reason to conserve and live within one's means.
What living in one's means in an 'american' environment means is the suppression of somebody's capacity to consume so that the released resources are consumed by the 'american' middle class.
As for now, the oil extraction has plateaued and 'americans' residing in Europe were elected to be pushed under the train.
Every barrel of oil that is no longer consumed by 'americans' in Europe is one barrel released to be consumed elsewhere by other 'americans'.
It is time for 'americans' residing in Europe to be sacrificed so that the 'american' middle class endures.
You must have served in the Peoples Liberation Army Air Force to be that off target.
Awful touch of propaganda.
I wish propagandists could come with renewed propaganda instead of hammering worn out bits.
You are missing the forest for the treetrunks.
It is part and package of Chinese 'american' citizenism to mindlessly drone on and on and on with the same tired propaganda bits. When truth is in the lack, repetitionizing is the only recourse.
Of course, insanitation is also known as "doing the same non-mattering thing over and over and expectationizing different results". So congruence with first point is happy accident.
In Chinese citizenism, the nattering class is the king class. It is also a pain in the class.
Tired of the same old lies, bigotry and offuscations? Too bad.
Welcome to the Chinese Citizenism world.
It is a very sloppy world.
Wipe your feet after mucking around in it.
akak said:
Alas, alas, a roadside minefield of Chinese citizenism dung droppings alas, it did truthness what your telling is told. Sometimes treetrunks go the missing even, offuscated out of viewability by blobbing up Chinese citizenism roadside poo pingos.
The failure of Chinese Citizenism Communautist Party propagandists in renewing their propaganda is the disaster of our times, a smelly new world odor disaster.
When one deals with Chinese citizenism, avoidings yield of disappointmentariness is given only when one goes with lowest of expectorations.
Tautology indeed. Inability of Chinese citizenism citizens to self indict gives cause of reluctating propaganda throating when approachment of mirrors. Not always easy for a corrupt to be lectured by an even more corrupt.
Chinese citizenism citizen depiction of a repeation of propagandicity grows a repeation itself. As if repeation makes the story true out of false facts.
Might want the shoes give to burning if not downwind.
Ah, truth rear ends his head in a mattering way!
You have assimilationized well the lessons of Chinese citizenism crackedpottery and scrapesgoatery. Crusty, oh so crusty.
However, you fail to sufficiently expound on the 'american' conflatulation of Chinese citizenism endlessly repeateds propaganda bits with floating river pig effluvia of fabled Chinese environmental blobbing-upness.
Once achieved, success will be the mattering thing.
Do not feel in a bad way, though. Masterbatery of Chinese citizenism takes much practice, much hard-learned skill at monolizing the speeching means in pursuit of offuscating the reality of the sordidness of it.
Give it another try. An 'american' try.
You'll get it in the end.
akak said:
Makes me laugh in thinking with it. On the time when I will typed by letter keys in the board, phenomenum typical resultance with US 'american' citizenism eternal nature expressionatted when I told the wordings poured.
Granteds was taken with expundity not given conflatulentardity Chinese citizenism with very the odourous. Sometime forgettings issue derivement from the earth peeps not all knowingness having in Chinese citizenism eternal nature. Gives occasions with importunate details neglects.
Chinese Citizenism Communautist Party propagandish expulsions arrivement in the intersnets give ground to virtualous stenchery. Attains it then upblobbing perspective verisimilitude with floating river pig endless corpse parade citizenism the reflectivesly. Stenchery much real given these phenomenums bothly, virtualous inside the intersnets with still the pungeance neverless olfactorial synesthesiatic.
Reminds time to remember an old saying: you can't draw blood from a river pig before fish for value it taking into river banks prosperously.
Before this happens, the people must take back the real Law Enforcement. Here is a perfect example.
https://www.youtube.com/watch?v=mlwgZzeq8oI
https://www.youtube.com/watch?v=pdQnTPdIn9I
Orwell updated:
War is Peace
Freedom is Slavery
Ignorance is Strength
...
Prosperity for Parasites is Praiseworthy
Peonage, in Perpetuity, for Proles & Their Posterity is Patriotic.
...
Perhaps we should tax stock market transactions, say by a measly one percent. That would help raise money and create austerity and would be a more just solution....
End of the Wall Street casino?
1. shares bought then sold in less than 3 months = 100% tax on capital gains
2. shares bought then sold within 4-6 months = 75% tax on capital gains
3. shares bought then sold within 7-9 months = 50% tax on capital gains
4. shares bought then sold within 10-12 months = 25% tax on capital gains
5. shares bought then sold after 12 months = existing rules apply
- in all cases, the tax would be handed to the corporation who's shares were bought and sold.
- capital losses would always be treated under existing tax rules.
"Austerity" means cutting government spending. The morons howling loudest against austerity are either recipients of government largesse (think TSA agents, DMV ladies, welfare queens or other government employees) or political advocates of greater government oppression (members of the Demogogue Party, journalists, commies like the unemployed commenters on ZH, etc.)
Got it? Good. Now back to your video games children.
What a pile of donkeyshit.
Try increasing the yield on savings deposits.
Oh, and since you are painted with common-sense retardant, make it law that no Gov't or Bankster can take my deposits. Particularly when it is to cover their fuck-ups.
Austerity is Prosperity- The Ministry of Truth.
In Portugal, in 2008 we were told to spend in order to induce growth and get out of the crisis. We spent, it didn't induce growth and now we're in a deeper hole than we were. I really resent it when (mainly) americans tell us to spend again to induce growth, which will never happen and will get us in an even deeper hole. No thanks, I prefer the German method: don't spend more than you have.
And if you want a different take on the euro crisis, just write on your search engine: wordpress blog The euro crisis explained to grannies.
I really resent it when (mainly) americans tell us to spend again to induce growth, which will never happen and will get us in an even deeper hole. No thanks, I prefer the German method: don't spend more than you have.
I'm an American, and I resent most of the shit I hear from Americans. The surest way for a country to shit the bed is to listen to any of our Policy designers. Basically, they would fuck a snake if somebody would hold the head. Do you think they give a shit about Portugal?
Nothing indicates that Portugal would have been better off if the piece of advice was not followed.
Germans are 'american', as such, they've consumed way beyond their means.
Another way to raise net savings is to stimulate Demand, through JOB CREATION.
If only there were an enormous gaggle of Super-Wealthy people evading taxes and stashing Trillions of unused money in offshore Banks, who INSIST that they are JOB CREATERS every time a government tries to tax them.
Oh, yeah-- we DO!
If no, debt sustainability will be questioned.
___________________
Except 'americans' demonstrate their self proclaimed ability to overcome the environment, 'american' economics have been working on unsustainable debt since the very beginning.
'Americans' do not believe themselves they are able to overcome the environment.
They know it and therefore are trying to push people around under the train so it releases resources and the 'american' middle class keeps enduring.
Not only the talks about a return to sustainability is at worse 'american' fantasy, but 'americans' work very efficiently so that a return to sustainability is made impossible.
'Americans' from the start have been claiming a kind of superiority supposedly due to their capacity to overcome the environment.
As such, the world should be handed to them.
In the doing, they first pushed out of the way people who were far less able than 'Americans' when it comes to consuming faster and bigger the environment.
Now, they are pushing people who have some capacity in consuming the environment faster and bigger but are certainly not the most efficient around.
The 'american' selection program ensures that at the end, only the most effective in consuming faster and bigger the environment will remain.
Which is the direct route to unsustainability due to depletion of resources.
In order to solve an overconsumption problem, 'americans' first eliminated no to small consumers, they are now eliminating average consumers so that only the bigger and faster consumers remain.
When an overconsumption problem is solved by get rid of anyone else but the best consumers of all, the end is known and certain: everything that can be consumed will be consumed. No conservation. No return to sustainability possible.
AnAnonymous poured this tired, repeationed drivel:
Please, sometimes, being serious never kills.
You cant play this card as it was already played. Many times. By you.
This kind of remark show how much the Chinese Citizenism Communautist Party mindset is ingrained and distorts possible outcomes.
Welcome to delusional land. It is funny to see what propangadists indulge themselves into when it comes to deliver propaganda. It is unsure they realize how weak their efforts have become.
But hey, it puts food on family.
ABSURD. THE PROGRAM IN CYPRUS (And soon to be everywhere) IS PURE "SYSTEMIC THEFT" NOT "AUSTERITY".
THERE "IS" A DIFFERENCE, THOUGH TO THE CORPORATIST MENTALITY IT CANNOT APPARENTLY BE DISCERNED.
Yes, the elitists want us to be austere while they make no changes. All of the slaves and peasants should get used to a lower standard of living while we continue to travel on private jets and yatchs.
The elitists should be the first to be austere and pass the money through to those who create value and do the work instead of being parasites and hoarding it for themselves ... and this includes the government and banking parasites.
In a real economy what the author said has a chance to work over time. However, in our economy savings are irrelevant because Berstinkie won't stop the flow of free money to the elitist bankers.
Austerity is a complete sham without uther structural changes coming first.
cy'
'
'
'
There's been no contagion through the muppets because they are caught in the headlights, blinkered, not knowing what to do.
It's called the normalcy bias.
They are sitting in their beds while it's on fire.
The smart people are moving their monies now. Those who fear first, fear best.
The governments will not use austerity due to political reasons, but they will raid every pension fund, grabbing you by the ankles, turning you upside down and shaking.
That wil be the solution. They cannot do the right thing as it will be too forthrightly painful.
•?•
V-V
They steal your money to give it to banksters, and then tell you that you have to give up MORE money because the programs they FORCED YOU TO FUND are going broke because they're filled with IOU's because they spent the money on whacking Petrobuck naysayers.
No, they aren't spending too much...You're giving too little.
Austerity for thee, but not for me is the cry of the unholy alliance of Govt. & Banks.
Red, blue, makes no difference...Spin it any way they can but that's the story in a nutshell in the US.
Granny gets Alpo and a heart attack because they stole her savings with ZIRP and now want to cut her medicaid and S.S. because they pissed her PAID IN money away.
Ponzi-ed. Plain and simple.
Fuck you, Jeff Young. Your article is an apologetic bankster appendage-sucking POS.