Give Austerity A Chance: Growth Spending Failed

Tyler Durden's picture

From Peter Tchir of TF Market Advisors

Give Austerity A Chance: Growth Spending Failed

The markets may decide to play along with the renewed talk of growth and the death of austerity, but it is shocking how quickly writers and the media have latched on to the idea that growth will somehow save us and that the entire problem is the fault of austerity.

Although it seems like it has been around for awhile, austerity is fairly new.  I don’t think Greece even got nailed with austerity until May of 2010.  In September 2010 when EFSF and ESM were first officially launched, Portugal and Ireland were both contributing members.  The first time austerity was mentioned in Spain and Italy had to be the summer of 2011, if not later?

Until that time, I assume growth was part of the policy of most countries?  I find it hard to believe any country engaged in an anti-growth policy?  Was not every policy in Europe, up until at least 2010 if not beyond, actually a “growth” policy?  Why did they fail to create enough growth to stop the debt crisis?

Ah, that is the other problem.  It isn’t just growth that is needed, certainly not to comfort the bond market, it is growth that surpasses the amount spent (borrowed) to create it.



So Portugal has been mired in weak economic growth since 2001.  It spent most of the decade with growth between 0 and 2% and had two significant downturns.  The entire time, debt to GDP was increasing.  Was Portugal not “spending” the entire low growth period from 2003 until 2008?  It is possible that they kept “spending” to get some “growth” KNOWING that in the future things would be better?

This period is important.  There was low growth, yet the debt was increasing at a faster rate.  Why? The best guess is that they were spending trying to achieve better growth.  It didn’t work.  2008 hit, and growth was a disaster, which led to even more spending, but then growth slowed and took a turn for the worse, even BEFORE austerity hit.

The spending bubble to get through the 2009 period, aided by the global turnaround, failed to create sustainable growth.  Portugal was already seeing their economy deteriorate before austerity came into play.  Why?  Because the debt burden had grown so large that a country with a weak, deficit inflated economy couldn’t afford to maintain.

Has austerity made it worse?  Possibly, but the economy did worse in 2009 than it is doing now, so we shouldn’t underestimate Portugal’s ability to outperform to the downside.  Peopled seemed comfortable spending for 10 years with minimal results, but a year into austerity (amidst a global slowdown), and suddenly austerity is bad?  Portugal took a decade to judge that spending was not achieving growth, and in about a year has decided to go back to that?

And yes, austerity does have a near term negative impact to growth.  That was known going into it.  In fact it is basic math, so expecting cuts not to result in some economic slowdown is either the result of naivety or being too lazy to do some basic math on GDP calculations.  Some austerity measures have a bigger near term impact than others, but to expect no impact, especially in a weak global economy is just wrong.  The key is what the situation will be like in a year.  Yes, a year is a “long” time, but still, why are we so quick to judge?

On Portugal, it looks like spending to achieve growth failed miserably, and possibly caused the problem, and the rush to the conclusion that somehow austerity is to blame seems premature if not completely incorrect.


The chart for Italy is much more interesting and may also may make it less clear that austerity is such a bad thing.
Italy started the 21st century with a high debt load.  They took that debt load down over a period of years.  Initially it dragged GDP down, but then it seems like it supported a fairly stable economy.  It didn’t grow at a great rate, and they did seem to try and take spending and debt down during period of above 2% growth.  2008 was a disaster for Italy, as in most other countries.  Debt to GDP skyrocketed.  It wasn’t because of “austerity” it was to spark growth and stop the slowdown.  It kind of worked, as Italy managed to bounce back to decent growth (along with the rest of the world), but the debt level had shot up to incredibly high levels.  The slowdown in Italian growth began in 2010 and there was not a word about Italian austerity in 2010.  In fact, there wasn’t a word about austerity that had any actions associated with it until Berlusconi left office.  But by then Italian growth was anemic. Is the dip into recession all the fault of austerity, or did Italy spend too much and not take enough constructive measures in 2008 and 2009?  It looks like they spent far too much on “growth” in that period and are now paying the price.

Maybe Italy needs to look back at what created that period of stability from 2002 until 2007, and determine that a lower debt to GDP ratio is preferable, because the alternative is unsustainable.  Once again, after a few years of aggressive spending to get as much growth as possible, that has since failed to achieve sustainability, the politicians should be careful about assuming the current slowdown is all about austerity and not about past “growth” decisions gone horribly wrong.



This might be the most interesting chart of them all.  Spain used a period of strong economic growth to reduce the debt to GDP.  That is probably a more impressive case for how growth can reduce the debt, rather than a case of austerity helping growth.  The debt to GDP ratio is low in any case, but Spain does seem to push  more on to regional governments than other countries and has been a big fan of guarantees rather than actual debt, so that should be kept in mind.

Then in early 2008, growth dropped significantly.  It was definitely experiencing problems a bit earlier than other countries.  It swung to big declines in GDP that were only reversed when the global economy turned, and with excessive spending – just like Italy. 

The weird thing about Spain is how growth failed to take hold in 2010 even as spending increased.  In fact, spending continued to increase, yet growth didn’t materialize.  It wasn’t again until at least the middle of 2011 that any form of austerity was happening in Spain, yet the failure to “grow” in response to spending occurred earlier.

Certainly some of the same explanations that apply to Italy, apply here, namely that too much money was spend to hide a problem, rather than address it, so growth didn’t follow spending, and now the debt burden is impeding everything.  Maybe there is some element of payback for the huge deficit spending designed to get the economy growing again, that just didn’t work longer term?

Spain has the added question of whether the growth in the early part of the decade was too high, and since Spain and Spanish banks have done everything to avoid recognizing the bursting of the property bubble, maybe the downturn in growth occurred much earlier, or the 2008 recession was much worse, and it is only now slowly but surely being leaked into the data.

Spain raises many issues, but after the massive increase in spending for growth in the 2009-2011 period failed to achieve a meaningful growth rate, and let debt continue to pile up, maybe 1 quarter of a new government, whose policies have barely taken force, should be given a bit more time, before embarking back on the failed policies of growth at all costs that have helped create the problem.


Neither spending nor austerity is universally good or bad.  Each has short term consequences and potential long term consequences.  Bouncing back and forth between them is highly unlikely to produce a useful solution.  A plan needs to be developed.  It needs to minimize short term pain of austerity while ensuring future obligations that are manageable.  Obviously neglected areas where some spending has an incredibly high likelihood of generating more growth than it costs should be targeted, but assuming it is easy to achieve growth is a fallacy.  Finding the right investments to get long term growth is difficult.  And long term is the key here.  Austerity will hurt GDP this quarter, and maybe next.  Spending will help this quarter and next, but without taking into account future constraints caused by debt service and debt repayment, the spending will only make things worse.  This is a difficult time.  It took years, if not decades to create this mess, and will take years to fix, and spending alone won’t help, because growth is not that easy to find.  If it was, there would be 1000’s of companies like AAPL, but there aren’t, and it is less likely the government will find growth than companies.  Sadly, it seems like the politicians, media, and the markets have latched on to the idea that growth Is the key and is highly likely to be successful.  Kicking the can was a disaster for Greece as the situation got worse and worse, and is still awful, and Europe is now heading down this path under the hallucination that they can create growth above and beyond the debt created to achieve it.

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chubbar's picture

When is it going to be time to consider that a monetary system which is structured in a manner to require infinite growth isn't going to work? Get rid of debt based money and create a mechanism to restrict printing. Christ, it's like all these smart fuckers are completely blind to the base problem.

Dapper Dan's picture

The growth model has worked well now for several hundred years in Europe and North America, but there are increasing signs that continual growth is getting harder to sustain and is imposing undesirable side effects. As some point the rate of growth must slow, especially in the developed countries and perhaps even stop.

Growth in an economy can only be the result of three factors. First, is the rise in population. Each new person requires the basics of existence and production must expand to satisfy this demand.

Second, innovation may lead to improved productivity which allows more to be created using the same amount of input as before. Efficiencies in the use of raw materials can also allow for growth with a fixed rate of consumption. For example, we can now store an hour of music on a minuscule piece of silicon. At the start of the recording era this was 20 lbs of shellac records.

Third, we can increase the size of our economy by taking from others. This was blatant and explicit in the days of colonialism, but today is more subtle, being obscured in "free trade" programs and the like.

The world cannot continue to support an ever increasing population; the access to specialty natural resources will become limited and there may be constraints on the sources of energy as well. Compound growth is an exponential function and is mathematically unsustainable. Even a modest 2% growth rate implies a doubling of size in just 35 years.

Read more @

oogs66's picture

the growth model has worked well for several hundred years in europe????  the reason we have the Euro is because they had 2 massive wars in the past 100 years, and it wasn't much better before that!

GetZeeGold's picture



I've just turned to the last page on the growth model.......are you sure you want to see it?


Vampyroteuthis infernalis's picture

It is not the concept of debt that is the problem. It is corrupt, opaque markets driven by banksters that is the problem. The regulators turn their eyes while the banks screw their customers and everyone else underneath the sun. Force every investment onto honest, transparent markets and open every bank's balance sheet to the public. Force gov'ts to be accountable for their actions. This would result in many of our problems vanishing. 

NidStyles's picture

Feinman is a moron. So are you for piping that shit here.

Breaker's picture

Growth is not the problem. Deficit spending and monetary pumping to create magical unicorn growth is the problem.

oogs66's picture

spot on...seems like we need to create a system that lets people enjoy life in a stable environment...will take years to get there, but right now, needing growth not to collapse is scary

Umh's picture

I believe that growth provides the illusion of wellness. Constant inflation also provides an illusion of improvement, since people keep getting raises. So many people never seem to get that there N% earning is trumped by N+1% inflation while they're dreaming.

Yes; I know that most people haven't been getting raises lately.

bigwavedave's picture

borrow. spend. get (re)elected. print. repeat 


edited myself lol

Peter K's picture

The problem with Euroland is that they are in denial to the FACT that socialism es muerte:)

JustObserving's picture

"It needs to minimize short term pain of austerity while ensuring future obligations that are manageable."

Future obligations are too large and growth too small to make them manageable.  Many countries will default or hyperinflate including the US which has debt and unfunded liabilities to GDP ratio of 898%.

Even with modest "official" GDP growth, the US is running up $1.5 trillion a year debt and spending $450 billion on interest.  What happens when interest rates go up?

Breaker's picture

"the US is running up $1.5 trillion a year debt and spending $450 billion on interest.  What happens when interest rates go up?"

This. That's just one of the reasons the stimulus and the trillion plus deficits were a bad policy response to a debt bubble. Those policies inevitably put us in this no-exit box. Now the Fed HAS to keep the ZIRP intact or the whole system comes down. But the longer ZIRP stays intact, the worse the systemic problems get. That was obvious in 2009 to anyone who gave it even a moderate amount of thought.

Not just a bad policy. Stupid, venal, evil . . . I can't come up with terms strong enough. 

The Onion Of Twickenham's picture

I couldn't agree more. This is no matter of black and white. So go tell it to Dr. Merkel. She appears to have decided to create a 1000 year reich in which the orthodoxy of austerity shall never yield to the heresy of investment. Hollande has already been put on notice that he might have to be replaced by a Goldmanite and he hasn't even been elected yet. 

So yes, it's not a question of one of the other: but when the fiscal compact enshrines austerity into law and makes it illegal for future sovereign governments to spend as they see fit, then Europe is not a series of democracies but a set of colonies that owe fealty to BuBa.

Breaker's picture

"...a 1000 year reich in which the orthodoxy of austerity shall never yield to the heresy of investment."

Government transfer payments are not "investment." Most public employee jobs are hidden transfer payments that add little or nothing to the economy. So they are not investment either. We've now eliminated most government spending in Europe and the US as being a source of "investment."

So how would austerity affect investment?

Orémus's picture

austerity is not a good idea as long as the system will crash anyway, spend more money until the end is better

Sudden Debt's picture

Keep buying gold untill the bounced cheques will cause them to take away your chequebook!

Mountainview's picture

Some more the final countdown...

Peter Pan's picture

This is all crap. The only way austerity can have a chance of succeeding is to either have a partial debt write-off or a debt moratorium so that both sides of the ledger can contribute to a revival.

Austerity cannot be just on the debtor. It must also be imposed on the creditor. Full stop. Any proposition to the contrary is voodoo economics in the present climate.

oogs66's picture

yes, PSI or default or restructure, but do it now, don't wait like greece did, and screw the ecb and troika too

Sudden Debt's picture


SheepDog-One's picture

'Growth' of sure, we can sign-spin our way out of a 100.8% debt/GDP I'm sure.

Sudden Debt's picture


oleander garch's picture

You can have austerity or you can have growth or you can have any intermediate model you want but so long as financial fraud and failure is coddled and excused the market price mechanism will remain broken and unable to deliver progress for most of mankind.  That broken system will, however, continue to deliver extraordinary returns to the priviliged, pampered few.  So, we got that going for us.  

Sudden Debt's picture

I've got the solution!!! Hire a new accountant!

Miss anthrope's picture

Hello all!

Please give zero hedge chat a look!............ we welcome you with all your fight club views!





Sudden Debt's picture

My wife doesn't like it when I chat with other woman Miss anthrope. Unless you post nudity pictures off course.

GetZeeGold's picture



First time on the ZH have to fight.


Mister Ponzi's picture

You have to take into account one important factor that helps explaining why growth has been abysmal in the periphery during the last two years, while economic figures in Germany - from growth numbers and company balance sheets to unemployment figures - are so surprisingly good: Capital flight. A lot of wealth - previously parked in higher yielding investments in the periphery - has been repatriated and consequently invested domestically boosting productivity and competitiveness. Therefore, by simply comparing growth numbers and government spending over time you may not grasp the whole picture.

Shizzmoney's picture

There's more red than a BOA balance sheet on this Europe Recession interactive chart

goforgin's picture



Allow governments to collect enough taxes from the top to pay off all the debts, that is, pay off the rent seekers with their own money. Austerity as is currently practiced involves only cuts into YOUR benefits in order to repay rent-seekers debts. If you think this is too radical, how about imposing AUSTERITY only on debt re-payments while allowing governments to print their own debt-free money. Yes, austerity could indeed be a beautiful thing.

q99x2's picture

They mean growth for the banks not the economy. Oh I mean fraud. Wait a minute fraud is the economy. Anyhow growth is when they give taxpayers money like the Gold in Greece to the banksters. I think that is what they are talking about. Or is that austerity? It is good they are changing the wording in any case.

tabasco71's picture

so where does that leave the US, who apparently spent $2.42 to achieve $1 of growth in Q1 this year.

GeezerGeek's picture

Austerity is usually used in the context of a government's willingness to live within its means rather than borrowing money to spend. When private enterprises practice austerity the macro effects are far different and the consequences more limited. The two instances are not to be confused.

Government is a drag on any economy, whether through competing for available funding (borrowing) or through regulation (even strangulation) of economic activities. Ignoring the difference between the government - including the so-called crony capitalists -  and private enterprises prevents proper assessment of the situation and determining possible cures. What I think is needed is austerity of government regulation/interference. A free market still yields the best results for the maximum number of persons.


goforgin's picture

Some of us live in the real world boy.

writingsonthewall's picture

Some of us live in the real world boy.

Clearly you don't - or you would not be cheering a system which has failed to work properly since it's inception and which is flawed by design - and still have faith that "doing the same thing again" will solve it this time!!!


I mean seriously - these times when markets were allowe to collapse - you know, the 'hey day of the free market' when Governments stood back - how stable were they?


In the same way Capitalists point to the last 100 years and insist "LOOK - what capitalism has done, it's brought us Ipads - we should be grateful"


I will point to the violence and wars which have come directly from the failures of Capitalism - and say "LOOK - we could have had peace for the last 100 years if Caitalism didn't need asset price destruction every so often - and arms dealers didn't need to sell their weapons to maintain perpetual growth"


Most capitlaists DON'T live in the real world - as they begin history at a 'convenient point for capitalism'

writingsonthewall's picture

A free market still yields the best results for the maximum number of persons.

You cannot say that - as there has been NO scientific comparison done between free market economies and other economies.


In fact the 'free market economy' only lasted a short while before regulation (or as you call it - intereference) was DEMANDED by the consumer in order to protect them from the exploitative capitalists.


...or shall we go back to the REAL free market - where if you sell me a product which doesn't work or food which makes me ill, I return the next day and shoot you in the face.


Like most Free market capitalists - you preach freedom and liberty - but you quickly retreat behind the rule of law for protection from real 'laws of the jungle'.


You're basically demanding an economy which allows the exploitation of others for your benefit - whilst offering you protection from those you exploit.

writingsonthewall's picture

Another article by another 2 bit dumbass who is arguing about whether the sneeze or the cough is the CAUSE of the common cold.


It's a virus - and it's called Capitalism.


Spend / don't spend - it makes NO DIFFERENCE TO THE OUTCOME.


The only consideration for Government is "which will cause least riots" - deflation and depression, or hyperinflation.


I don't think Government spending will 'fix it' - because ii cannot be fixed - but it's the 'least worst option' available to us.


Come to the UK and expereince austerity before you start talking it up - it seems that the 'grass is always greener' for the deserately obtuse who are clambering for 'silver bullet' solutions.


Ricky Bobby's picture

"It's a virus - and it's called Capitalism." That virus hasn't infected a state for over 100 years. As a matter of fact I believe the current form of the modern state is immune to that virus.

writingsonthewall's picture


Capitalism has been the virus since it was introduced - all you have seen for the last 100 years (or so) is a bucket of attemtped 'fixes' to the system.


Sadly most capitalists cannot appreciate the following logical concepts.


"In a system of capital accumulation - those who are most 'suuccessful' can maintain their position through monopoly power - therefore 'overrewarding' them for any previous risk taken or hard work endured.

(the banks demonstrate this excellently with ursury)


"In a system where there is profit, by defintion there must be a loss - with the capitalists in constant 'winning' mode - the loser is the worker."


Sadly, again the capitalist falls over on concepts. they see 'worker' and 'consumer' as seperate entitites - when actually (considering the spending level of the poorest vs the wealthiest) - they are MOST LIKELY the same thing.


So to argue that forcing the workers wages down will assist the ailing economy is banana talk.


P.s. - poor people are so because they SPEND - the wealthy don't (whcih is why they have so much)  - and yet your 'solution' to the problem is to make the spending part worse off and the saving part wealthier?

GeneMarchbanks's picture

Possibly you haven't looked at how deep this all goes? I mean, this perversion of logic where the masses cheer for their own destruction.

Free market mythology is always held onto dearly by the white and the comfortable in the States as the simplistic rhetoric of 'ending the State' always demonstrates. I advise you to move on considering that there is no battle to be won there. When the 'State' is on their side the silence is deafening, when it acts as an arm of the always eventual Oligopoly, it's complaints as loud as they are impotent.

sockratte's picture

1. basel coming too fast, too furious

2. collectivisation of debt (bailouts)

3. wrong measures taken

its simply the wrong anti-virus program. does anyone know the root causes? ;-)

supermaxedout's picture

It is common sense that nothing can grow forever. Things can grow big and bigger but their size is then their weakness. And then their size kills them finally.  Or in other words: The solution is the problem!

 Thinking about Germany a rather small country in territory but home to more than 80 million people and an industry producing goods and services in ever growing quantities. At least till now. Besides that Germany has to shoulder the bulk of the European traffic be it cars, trucks,buses, planes, trains, ships you name it.

Think about the demographic change. The population is going to shrink and the active workforce is getting smaller having to provide the resources for the many, many methusalems to come.  This is the szenario appx. during the next 30 to forty years.  This means tough times for the people in Germany but its unavoidable. Its the same in many countries in Europe.. There is no solution except massive immigration from Africa and Asia.  But this is most probabaly not gonna happen.

In this case no solution but a big problem solved.  Small is beatiful!  Once this demographic crisis is ending nature can take a big breath and try to overcome what the extreme dense population and the industry have done to this place through centuries. And it is my opinion, that the "reduced" Germany is a better place to live compared to now.  The same accounts for the rest of Europe.


vh070's picture

There is good spending and bad spending; good austerity and bad austerity; good and bad governance.  Start from there.  Lose the dysfunctional labels.