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Bad News For Keynesians: Data Shows The Austerians Are Right

Tyler Durden's picture


Submitted by F.F. Wiley of Cyniconomics

Bad News For Keynesians: Data Shows The Austerians Are Right

Anders Aslund of the Peterson Institute recently made an interesting argument about Europe’s winners and losers. In a critique of Paul Krugman’s advice to Europe’s political leaders, he compares economic performance of the southern European laggards to the northern countries and, in particular, the Baltic states.

Aslund concludes that:

Today, the record is clear. The countries that have followed [Krugman’s] advice and increased their deficits (the South European crisis countries), have done far worse in terms of economic growth and employment than the North Europeans and particularly the Baltic countries that honored fiscal responsibility.

He also links fiscal adjustments to structural reforms:

Thanks to greater structural adjustment, the growth trajectory is likely to be higher in countries that quickly and enthusiastically embrace these reforms than elsewhere. Accordingly, the three Baltic countries that suffered the largest output falls at the outset of the crisis because of a severe liquidity freeze returned to growth within two years and have, over the same period, enjoyed the highest growth in the EU. By contrast, Greece, with its back-loaded fiscal adjustment, as recommended by Krugman, has suffered from six years of recession.

By comparing past reforms to recent growth, Aslund takes a sensible approach. But he focuses mostly on the tiny Baltics and secondly on continental Europe, which begs the question:  What about larger countries everywhere?

Let’s have a look.

We start with every country that has both a global GDP share of greater than 0.25% in 2007 (pre-global financial crisis) and sufficient data on fiscal balances and growth. This is 47 countries. We then divide the group into a European sub-group (23 countries) and a non-European sub-group (24 countries). For each sub-group, we compare real GDP growth for 2010 to 2012 (post-GFC) to the average structural budget balance for 2008 and 2009 (during the GFC).

Here are the results:

Not only is there a positive relationship between stronger public finances during the crisis and faster post-GFC growth, but the relationship holds both within and outside Europe. (For those who like statistics, the F-stat for the European regression is significant at 99.9%, while the other regression is significant at 90% but not 95%.)


We have two observations. First, the results may help explain why Keynesian pundits resort to nonsensical arguments. They often claim that poor performance in countries attempting to contain public debt proves austerity doesn’t work, which is like deciding your months in rehab stunk, and therefore, rehab is bad and heroin is good. A more honest approach is to compare fiscal actions in one time period with results in later periods, after the obvious short-term effects have played out (as in the charts). But if Keynesians did that, they would reveal that their own advice has failed.

Second, the effects discussed by Aslund don’t receive enough attention. As Tyler Cowen (who gets credit for the pointer) wrote, Aslund’s perspective “is underrepresented in the economics blogosphere.”

And that includes our wee blog.

Regular readers know that we’ve presented research on long-term fiscal policy effects. (For example, see our historical study of 63 high government debt episodes, or our Fonzie-Ponzi theory.) We’ve also argued that the short-term consequences of fiscal tightening, often said to support Keynesian policies as noted above, actually do just the opposite. (Consider that fiscal tightening is motivated by today’s massive debt burdens, and these happen to be explained best by Keynesianism – the deficit spending policies of the past that hooked economies on unsustainable finances in the first place.)

But until now, we haven’t offered research on intermediate-term effects – horizons of 2-5 years as in the charts above. And this evidence supports Aslund’s conclusions. Policymakers should heed his argument that “front-loaded fiscal adjustment quickly restores confidence, brings down interest rates, and leads to an early return to growth.”

(Click here for the country-by-country data that was used in the charts.)


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Sat, 11/16/2013 - 12:33 | 4160503 DirkDiggler11
DirkDiggler11's picture

Great, Austerians economics wins, but the Keynesians are the ones in control right now.

You could almost title this one " the Austerians win out, moar Keynesian policies to come...."

Sat, 11/16/2013 - 13:04 | 4160548 doctor10
doctor10's picture

In the real world, a professional or gorup of professionals that have done to an individual or a business what these horeses ass' have done to entire nations and continents, would be explaining themselves to a judge and jury and investing hard time in Leavenworth.  Frankly, better that happen than the boiled rope and lamposts.


Maybe a Nurenburg Tribunal for economists, politicians and bankers? It certainly has been as equally heinoous at this point.

Sat, 11/16/2013 - 13:17 | 4160558 TeamDepends
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Krugman:  Data, shmata.  We be givin' you all-time highs, bitchez!

Sat, 11/16/2013 - 13:47 | 4160603 smlbizman
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geithner and krugman back to back...tough day to stop huffing paint, whts next corzine?

Sat, 11/16/2013 - 17:17 | 4160993 markmotive
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Weren't Reihart and Rogoff's conclusions about high debt leading to slow growth bunked?

Mon, 11/18/2013 - 23:37 | 4168313 novictim
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Yes...but the Zombies here on ZH don't know that and don't want to know that.

Sat, 11/16/2013 - 14:31 | 4160665 joak
joak's picture

Nuremberg trials ? Why not a fair trial in which defendants would not be tortured to confess the charges ? Nothing personal, but on a site that promotes the truth, I'm kind of fed up to hear this rhetoric. Nuremberg trials were a parody of justice, so please...

Sun, 11/17/2013 - 11:21 | 4162305 doctor10
doctor10's picture

The truth would appear as though Keynesian Economics is a cognitive/behavioral malignancy. As was the National Socialism that disrupted the world previously.

The "leadership/oligarchy" can deal with it rationally and  discriminantly under colour of law, or deal with the inevitable consequent social violence.

Sat, 11/16/2013 - 13:16 | 4160559 TheGardener
TheGardener's picture

Coyotenomics on the run commenting on Europe : "we don`t care about ethnic anthropologetic fundamentals, just Nordic cats, lazy cats, cool cats and coyote."

Sun, 11/17/2013 - 03:11 | 4161971 novictim
novictim's picture

You call giving the central banks loads of money to bail them out "Keynesian Economics"?  Crazy.  


FDR is rolling over in his grave!

Sun, 11/17/2013 - 03:14 | 4161975 novictim
novictim's picture

...BTW, your dick is waaaayyyy too small for your nom de guerre.

Sat, 11/16/2013 - 12:32 | 4160508 Doctor of Reality
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"Facts" don't matter to authoritarians.

Sat, 11/16/2013 - 12:45 | 4160523 orez65
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I had a psychology professor in my university that stated that "education does not cure prejudice"

Given that ideology is a form of prejudice Keynesians will never be cured in spite of their PHD's.

Back then I didn't believe my professor but he's been proven correct again and again.

Sat, 11/16/2013 - 13:10 | 4160553 Harbanger
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In the US, if you don't want to raise the National Debt ceiling, you a trrrist.

Sat, 11/16/2013 - 19:15 | 4161235 ncdirtdigger
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don't hostage us bro

Sat, 11/16/2013 - 22:23 | 4161631 Keyser
Keyser's picture

And according to Harry Reid, good Americans want to pay higher taxes. TPTB will continue to do as they please because the sheeple can't think beyond their value meal at MickyD's and who's playing their football team this week. 

Sat, 11/16/2013 - 12:46 | 4160524 Monk
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Fiscal adjustments did not take place out of the blue. Rather, they are a response to a global unregulated derivatives market with a notional value of over a quadrillion dollars.

In short, what caused the current crisis is free market capitalism.


Sat, 11/16/2013 - 12:51 | 4160530 SilverIsKing
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Free market capitalism caused the crisis? Where's the /sarc?

Sat, 11/16/2013 - 14:50 | 4160696 LetThemEatRand
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The problem with this whole debate is that there is no "crisis."  There is wholesale transfer of wealth from the middle class to the bankers and oligarchs, disguised as a response to a crisis.   Debating economic theory in this context is pissing in the wind.

Sat, 11/16/2013 - 20:40 | 4161415 UP Forester
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Wholesale theft of time, jobs and property, all transferred to privately owned Central Banks in the forms of currency slavery, and mortages isn't a "crisis"?

News to me.

Sat, 11/16/2013 - 12:53 | 4160534 DeficitAlchemist
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What was capitalistic or freemarket about Central bank intervention into every price determining exchange? Or industry specific bailouts for failure? Do you still think we would have a growing Quadrillion derivitives market if Long term Capital was amde to fail, and bad decisions on leverage and lending to them was prosecuted.. even at least just civilly sued... and if Greenspan 'actually' did his job and took the punch bowl away when needed.. government and Federal intervention into pure capitalism and re-allocation of capitl for failure created these distortions...

Sat, 11/16/2013 - 13:36 | 4160592 moneybots
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"What was capitalistic or freemarket about Central bank intervention into every price determining exchange"



Sat, 11/16/2013 - 12:48 | 4160528 DeficitAlchemist
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For me the escalation to a reset, where the insiders collect all the chips again is 'the plan'... they are aware of the unsustainability, just intent on a ramp and smash down which is great for collecting the highest amount of chips in the shortest time. Krugman is just an outrider for the mass media controlled elite. Keep preparing for the eventual, spreading the truth, forget trying to win the arguement, where the insiders are controlling the sheeples broadcasting system and thereby the message. Your superior outcome post reset will be all the victory required, and at that point the truth will be undeniable and former antagonists will have reframed there arguments to state they saw the crash coming all along anyway.

Sat, 11/16/2013 - 14:49 | 4160693 NIHILIST CIPHER

DeficitAlchemist              So, would it be fair for ZH'ers to cash out their PM's at the right point during the reset and profit like the elite? Why not play the game the way they do, buying up assets for pennies on the dollar? We cant't change this train wreck, it's too late. There is a hell and I don't want to go there but hey I didn't create this mess. There will be a big market for trailer parks real soon at least according to the CARLYLE GROUP... that's what they are looking to invest in, so I've read.

Sat, 11/16/2013 - 15:00 | 4160722 NoDebt
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Payday lenders.  Check cashing stores. 

Sat, 11/16/2013 - 12:52 | 4160533 CHX
CHX's picture

If there is a punch bowl, some cool or band aid to ease the pain instead of taking the real pain and cure it, any politician in office, and especially every CBer, will do so. So, S.O.S over and over again, till the can can be kicked no longer.

Sat, 11/16/2013 - 13:15 | 4160562 suteibu
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Of course the problem is that politicians have a 2,4 or 6 year time frame and can not afford to offer real solutions which might cause short-term pain (elections have consequences).  It is the same for CEOs and BODs who have to satisfy short-term (quarterly) financial data reporting, demanded, in part, by the aforementioned politicians and the useless bureaucratic regulators.

Keynesian economic theory was a godsend for the sociopaths.

Sat, 11/16/2013 - 13:24 | 4160570 joego1
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In the meantime Janet quietly attaches the turbocharger to the new mach 7 fiat hyperprint.

Sat, 11/16/2013 - 13:46 | 4160602 TBT or not TBT
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Inflating on hyper print ain't like dusting crops, kid. Now buckle up.

Sat, 11/16/2013 - 14:41 | 4160682 DoChenRollingBearing
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Those printing machines need big bearings that can take high speeds.  

That is not not cheap.  Or add another zero to each FRN.  Make sure your harness (not just your belts) are buckled in well.

Sat, 11/16/2013 - 13:30 | 4160578 withglee
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A battle of two totally wrong views of what money actually is ... "a promise to complete a trade." One drowns the economy. The other strangles it.

Only traders can create trading promises (and thus money) and only broken trading promises can hurt any economy. Even broken promises can be mitigated by an equal amount of interest collections guaranteeing the marketplace a pleasant zero amount of Medium of Exchange (MOE) inflation.

That's the best any MOE can do and it's a trivial task for any MOE to deliver that performance.

Sat, 11/16/2013 - 13:34 | 4160588 moneybots
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"They often claim that poor performance in countries attempting to contain public debt proves austerity doesn’t work"


That is because they are trying to justify continuing to spend borrowed money like a drunken sailor and maintain the status quo.

The problem isn't austerity, but prolonged living beyond means.

Sat, 11/16/2013 - 13:52 | 4160610 TBT or not TBT
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Germany has a different problem this century. Lots of other nations debt sitting on its balance sheets that will never be serviced. Between that and European demographics, they hear not a mild sucking sound but more of niagara style roar dead ahead and they are trying to get their dragging anchor to stick.

Sat, 11/16/2013 - 13:40 | 4160593 Haager
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I can't see any Austerian policy. Just a pig with lipstick on it.

Sat, 11/16/2013 - 13:52 | 4160611 rwe2late
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 Some like to criticize 'Keynesians' by alleging that 'Keynesians' believe all spending is the same (guns vs. butter, war vs. improving infrastructure).

But by the same token, 'Austrian economists' should not suggest that all 'austerity' is the same. (There can be cutbacks to weapons, NSA policing, and TBTF handouts OR cutbacks to old-age pensions, public parks, and wastewater/sewage treatment).

We ought not be indifferent to the preferences of TPTB.



Sat, 11/16/2013 - 15:28 | 4160768 Bioscale
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You got it wrong. Keynesians' main point is that the state has all the money and can spend whatever through taxing those who have some capital; they just don't fucking care about the implications, they just see the act of spending and don't give a fuck about the tax consequences. They approach the whole world from the centralized point of view having a state monopoly in anything their theory requires to prove correct; they can make any fucking system up according to the needs of the mafia standing behind the political elites. Keynesianism is a mix of statism and narcism which main point of interest was supposed to be economics, but only the macro level for the purpose of hiding its nonsense.

Sat, 11/16/2013 - 16:13 | 4160835 ZH11
ZH11's picture

Keynes advocated that upon the 'crisis' being overcome and the economy returning to 'normal' conditions you started to pay back the debt etc you incurred in correcting the market.

"Prior to Keynes, governments generally viewed balanced budgets as the ideal. Keynes concluded that balancing the budget wasn’t inherently good or bad. Governments should base spending decisions instead on how they wanted to influence aggregate demand within their economies. Keynes understood deficits were inflationary and surpluses deflationary. His point of view was that in a crisis, you used a deficit to spur growth and to overcome deflationary tendencies. When growth was restored, you don’t just balance budgets, you then pay off the debt built up in the crisis."

If Marx was no Marxist I think Keynes would not be a Keynesian by the standards of those who take his name nowadays.

Sat, 11/16/2013 - 14:00 | 4160624 syntaxterror
syntaxterror's picture

The spiritual leader of the Free Shit Army just shat himself.

Sat, 11/16/2013 - 14:06 | 4160635 Melin
Melin's picture

Reality-based reasoning loses when reality-rejecting regents rule.

Sat, 11/16/2013 - 14:10 | 4160639 squid427
squid427's picture


great point, austarity is always directed at the people and never at the .gov or the banksters which makes it unpalletable for the people and makes no real systemic reform. 

Sat, 11/16/2013 - 14:10 | 4160641 yogibear
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It will takes years of rehab for  PhD's, like Ben Bernanke, Janet Yellen, Glenn Hubbard, Charles Evans, Lawrence White  and William Dudley to think differently.

There may be no hope for the money printing junkies.

Sat, 11/16/2013 - 14:29 | 4160663 OpenThePodBayDoorHAL
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Rehab? For their crimes? No, China has it right. Lampposts.



Sat, 11/16/2013 - 14:22 | 4160653 Flakmeister
Flakmeister's picture

Oh goodie, another non peer reviewd study likely along the lines of Rogoff and Reinhart epic Excel error, ahem, cherry pick...

Google "Rogoff Reinhart Error"

Sat, 11/16/2013 - 16:26 | 4160853 Bazza McKenzie
Bazza McKenzie's picture

Oh goodie, another ignoramus/neo-Keynesian recycling the same dishonest allegations about Reinhart and Rogoff.

Sat, 11/16/2013 - 20:45 | 4161432 Flakmeister
Flakmeister's picture

We have revisionist historian in the audience tonight...

Ladies and Gentlemen, can we have a big round of applause?

Sat, 11/16/2013 - 14:39 | 4160679 0b1knob
0b1knob's picture

Everything you need to know about economics you can learn from watching monkeys.   Different pay for same work = shit storm at the monkey cage.


Sat, 11/16/2013 - 20:52 | 4161459 Bazza McKenzie
Bazza McKenzie's picture

Thanks for the link.  Definitely a must watch.

Sat, 11/16/2013 - 14:51 | 4160690 tony wilson
tony wilson's picture

who cares about kenya let der keynesians sort it out.

wese have to worry about der homeland godamit.

us whitey folks cant even look after ourselves never mind der black mans burdun


let asia sorts itself out i says dem arabs or nuttin but touble see.

Sat, 11/16/2013 - 14:54 | 4160701 lovejoy
lovejoy's picture

It is a shame that the author igores the fundamental reason for the divergence. 

Any country that does not have a free floating, non convertible currency (the Euro) will have problems. Countries that have to borrow in a foreign currency can have difficulty in paying off their debt. This is why all third world countries that borrow in a currency other than their own struggle. Europe has converted itself into a third country because no member of the EEC has a free floating non convertible currency. They all have to borrow in Euros, not their own currency which they can create. Now, if they incurred debt in their currency, they would always have the ability to pay off their debt. They could never default on such debt unless their decison was to default. Granted, if they generated too much of their free floating non convertible currency, the markets would respond by depreciating the value of their currency in relation to other currenies, which in turn could produce inflation. Thus it always comes done to how good the central bank is at managing the fiat currency.

A good book explaining this is Soft Currency Economics. It was written in the 1990s when the author, a hedge fund manager, noticed that Italian government debt was trading at a steep discount to Italian corporate debt. The markets were pricing the risk of the Italian government default higher than Italian corporations. To the hedge fund manager, this was a market mispricing that was the perfect opportunity for arbitrage. It was obvious to him that the markets were clueless on central banking and how money was created. He went long Italian bonds and short Italian corporate debt. It turned out to be a very good trade. Today Italy could default, because it has to buy a foreign currency for its debt, the Euro. The Lira is long gone.

Sat, 11/16/2013 - 15:27 | 4160765 withglee
withglee's picture

Now, if they incurred debt in their currency, they would always have the ability to pay off their debt.

Only traders can create money (i.e. currency). Money is "a promise to complete a trade". Any country or group of countries or segment of a country or collection of traders that uses a properly managed Medium of Exchange (MOE) can thrive. With such an MOE, traders are free to have their trading promises certified (free to create money); on delivery, the certificates are returned and extinguished; defaulted trades are mitigated by like interest collections; inflation of the MOE is guaranteed to be zero at all times everywhere.

This is as good as any MOE can ever do.

Sat, 11/16/2013 - 16:04 | 4160823 ZH11
ZH11's picture

The above is more bunkum of filtering results to suit ideological theses.

1. The results for europe show clearly that running a deficit doesn't preclude an increase in GDP therefore it's a bit rich stating that a balanced budget means GDP growth. Turkey is assidiously reducing it's budget deficit whilst seeing it's GDP contract significantly while Greece is cutting itself to pieces to try and balance it's deficit only see it is only ever undermining itself.

2. Simplistic A = B nomothetic edicts like the above are betraying the mass of dynamic factors that are in operation at any one time in the economies of the countries analysed. What works in Germany will never work in Greece etc, thus, there are no single panaceas to solve the riddle and it's disingenuous to say so.

3. Not all countries will all balance their books, it's impossible, especially so within the European Union structure. The autarchy model is nice in theory but the world doesn't allow everyone to do that.

In summary we deserve a better analysis of the situation before either school of economic thought can be declared the winner.



Sat, 11/16/2013 - 17:12 | 4160948 Youri Carma
Youri Carma's picture

Austerity would work only if it's for a short time and would shrink the debt. This is not the case because debt is piled upon debt so is increasing and countries are in a debt spiral. Just as simple as that also because Austerity lowers tax income.

And I don't remember Keynes saying, print money and only give it to the banksters.

Sat, 11/16/2013 - 17:58 | 4161083 orangegeek
orangegeek's picture



IS THAT YOU AGAIN?????!!!!!!

Sat, 11/16/2013 - 18:03 | 4161090 Stockmonger
Stockmonger's picture

Bogus Keynesian correlations, meet bogus austerian correlations!

Sat, 11/16/2013 - 20:15 | 4161365 yochananmichael
yochananmichael's picture

you mean there is no such thing as a magic multiplier?

Sun, 11/17/2013 - 03:05 | 4161967 novictim
novictim's picture

This is BULL SHIT produced by the Peterson Institute

Their  particular straw man in this case is equating debt per se with Keynesian economics.  

And what is so cynical about this Peterson Institute report is that Northern European economies are, in fact, absolute evidence of correctly engaged Keynesian principles.  When the private sector failed to maintain demand and consumerism, the so called "nanny-state" regimes (should be said with a sneer by some American Banker) provided public subsidies and employment to fill the gap.  Think Germany and Sweden.  


Chicken and EGG!  HELLO!?  Corrolating economic growth with low debt with no attention to national specifics is like blaming poverty on the lack of a luxury automobile.


The debt of Italy and Greece and Spain are examples of their fascist and corrupt economies that do ANYTHING but deploy Keynesian solutions for their peoples.  America is following with this same oligarchical path (trickle-down economics) with banks being loaded up with national wealth and the American consumer going unemployed as their jobs get outsourced on taken over by a H1b Visa holder willing to work for cheap.



If you still really think that austerity will somehow magically make the economy right then don't forget to leave some coins under your pillow…that is if you have any teeth left after that beating I just gave you.

Mon, 11/18/2013 - 19:14 | 4167295 Percy Crump
Percy Crump's picture

"...The debt of Italy and Greece and Spain are examples of their fascist and corrupt economies that do ANYTHING but deploy Keynesian solutions for their peoples.  America is following with this same oligarchical path..." 


You're kinda confused...aren't you.  The debt of Italy and Greece and Spain (and the US) are examples of 

Keynesian principles.       

Mon, 11/18/2013 - 19:12 | 4167302 Percy Crump
Percy Crump's picture

"...The debt of Italy and Greece and Spain are examples of their fascist and corrupt economies that do ANYTHING but deploy Keynesian solutions for their peoples.  America is following with this same oligarchical path..." 


You're kinda confused...aren't you.  The debt of Italy and Greece and Spain (and the US) are examples of 

Keynesian principles.       

Wed, 11/20/2013 - 14:13 | 4174058 novictim
novictim's picture

Percy, you are flat out wrong.  It's just debt with no stimulus to consumer buying power.  

Keynesian principles were not followed.  

Lip service was given to the Italian people while corrupt politicians feathered the nests of themselves and their cronies.

Sun, 11/17/2013 - 03:06 | 4161968 GoldIsMoney
GoldIsMoney's picture

What are the EC countries with don't have deficits? And well there should be five of them, sorry, but that looks wrong.

Sun, 11/17/2013 - 17:38 | 4163301 Andy Lewis
Andy Lewis's picture

Austerity ain't nuthin' but shit, and neither is anyone who promotes it.

Mon, 11/18/2013 - 18:55 | 4167216 Percy Crump
Percy Crump's picture


John Maynard Keynes was gay.

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