Willem Buiter: The US Must Prepare For Savage Austerity

In an interview with Tom Keene yesterday, Citi strategist Willem Buiter, alongside Howard Davies chairman of the London School of Economics, said that "savage austerity" is in the US' future. "The only question was really the timing and the composition." Alas, for that to happen it would require an overhaul of the entire US kleptocratic oligarchy, and the entire premise of tenured politicians, who don't realize that in addition to boosting revenues, sometimes outlays have to be trimmed as well. Of course, as this is precisely the fatal flaw of Keynesianism, we can only commiserate with Buiter, who calls it exactly right. Too bad that even the possibility of actual austerity in the US would result with riots so severe it will make the ongoing economic freeze in France seem like the peak of Chinese economic growth.

In discussing the ability to postpone the inevitable domestic austerity, Buiter notes that "the U.S. will still be able to borrow for a while at “risk-free rates” , even when there is risk, because its markets remain bolstered by the dollar’s role as the world’s reserve currency. It won’t last forever, that buffer of protection. Market discipline is being eroded by the burden of unsustainable deficits." Which of course explains why the market continus trading as if each day will be its last, and risk on, risk off is the only thing that matters, as only those with the fastest selling systems feel insulated in their hope they can dump positions during a bidless market.

And lastly, Buiter calls out the Treasury on its hypocrisy of condemning others of performing currency manipulation, when the Fed's QE2 threat is the biggest FX intervention move ever, and furthermore, at least others retain some dignity by doing their operations in the open. While the Fed, like a coward thief in the night (stealing from the middle class) can only operate by undermining the credibility of its currency by monetizations. The last part is ours.


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