114 replies to this topic

[FCP Bob]

The Wrong Austerity Cure

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BERKELEY – Fiscal profligacy did not cause the sovereign-debt crisis engulfing Europe, and fiscal austerity will not solve it. On the contrary, such austerity has aggravated the crisis and now threatens to bring down the euro and throw the global economy into another tailspin. In 2007, Spain and Ireland were models of fiscal rectitude, with far lower debt-to-GDP ratios than Germany had. Investors were not worried about default risk on Spanish or Irish sovereign debt, or about Italy’s chronically large sovereign debt. Indeed, Italy boasted the lowest deficit-to-GDP ratio in the eurozone, and the Italian government had no problem refinancing at attractive interest rates. Even Greece, despite its rapidly eroding competitiveness and increasingly unsustainable fiscal path, could attract the capital that it needed.Deluded by the convergence of bond yields that followed the euro’s launch, investors fed a decade-long private-sector credit boom in Europe’s less-developed periphery countries, and failed to recognize real-estate bubbles in Spain and Ireland, and Greece’s slide into insolvency. When growth slowed sharply and credit flows collapsed in the wake of the Great Recession, budget revenues plummeted, governments were forced to socialize private-sector liabilities, and fiscal deficits and debt soared.With the exception of Greece, the deterioration in public finances was a symptom of the crisis, not its cause. Moreover, the deterioration was predictable: history shows that the real stock of government debt explodes in the wake of recessions caused by financial crises

[hblask]

Real world effects of "austerity".Some highlights:

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The Canadian government cut defense, unemployment insurance, transportation, business subsidies, aid to provincial governments, and many other items. After the first two years of cuts, the government held spending growth to about 2 percent for the next three years. With this restraint, federal spending as a share of GDP plunged from 22 percent in 1995 to 17 percent by 2000. The spending share kept falling during the 2000s to reach 15 percent by 2006, which was the lowest level since the 1940s.

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Aside from budget cuts, Canada improved its fiscal outlook by fixing the Canada Pension Plan, which is like our Social Security system. In 1998 Canada began moving the CPP from a pay-as-you-go structure to a partially funded system. Today the CPP is solvent over the foreseeable future, which contrasts with Social Security's huge unfunded obligations

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Canada's fiscal reforms undermine the Keynesian notion that cutting government spending harms economic growth. Canada's cuts were coincident with the beginning of a 15-year boom that only ended when the United States dragged Canada into recession in 2009. The Canadian unemployment rate plunged from more than 11 percent in the early 1990s to less than 7 percent by the end of that decade as the government shrank in size. After the 2009 recession, Canada has resumed solid growth and its unemployment rate today is about a percentage point lower than the U.S. rate.

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The most dramatic cuts were to corporate taxes. The federal corporate tax rate was cut from 29 percent in 2000 to 15 percent in 2012. Most provinces also trimmed their corporate taxes, so that the overall average rate in Canada is just 27 percent today. By contrast, the average U.S. federal-state rate is 40 percent.[...]Canada's federal corporate tax rate has been cut from 38 percent in the early 1980s to just 15 percent today. Despite the much lower rate, tax revenues have not declined. Indeed, corporate tax revenues averaged 2.1 percent of GDP during the 1980s and a slightly higher 2.3 percent during the 2000s.Now compare Canada with the United States. In 2012, Canada is expecting to collect 1.9 percent of GDP in federal corporate income taxes with a 15 percent corporate tax rate. The United States is expecting to collect 1.6 percent of GDP at a 35 percent corporate tax rate. Thus, the high U.S. rate is not only bad for the economy, but it also doesn't help the government collect any added revenue.

[FCP Bob]

We've had some pretty responsible governments in Canada starting with the Liberals and now the Conservatives.They cut spending when they should just like Keynesians would suggest when the economy was growing and they stimulated the economy during the recession by investing in infrastructure and bailing out GM and Chrysler.We also have been very fortunate that our banks are closely regulated and aren't allowed to take on the risk that banks in other countries do so we haven't had to bail out our financial industry.When business is deleveraging because there is no demand and when consumers are deleveraging at the same time while you are in a liquidity trap and monetary policy no longer can work that leaves government to provide that demand in an economy since it won't come from anywhere else in the short term.

[hblask]

FCP Bob, on 06 June 2012 - 04:10 PM, said:

When business is deleveraging because there is no demand and when consumers are deleveraging at the same time while you are in a liquidity trap and monetary policy no longer can work that leaves government to provide that demand in an economy since it won't come from anywhere else in the short term.

So moving money from one pocket to another stimulates demand? There really is no logical explanation for that; the only attempts I heard are just hocus-pocus that counts the easily seen and ignores the unseen. "Oh look, we spent a billion dollars on the Digging Holes With Spoons Initiative, look at all the jobs!". No mention is made of the 5000 businesses that didn't hire because their taxes went up, or had to lay people off.Moving money from the productive economy to the political economy can never have a net positive effect on growth.But I don't mean to take away from Canada's success. Every country could be better, and over the last decade, Canada has had our lunch.

[FCP Bob]

Investing in good beneficial infrastructure increases the productive capacity of the country.

[Balloon guy]

FCP Bob, on 06 June 2012 - 07:20 PM, said:

Investing in good beneficial infrastructure increases the productive capacity of the country.

Like solar panel manufacturing plants?

[FCP Bob]

Cleaning up the mess: Bank resolution in a systemic crisis

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Daniel Gros Dirk Schoenmaker6 June 2012In Greece, the problem is an insolvent government bringing down the banks. In Spain, the problem is now insolvent banks bringing down the government. This column argues that despite their differences, the potential costs to the rest of Europe mean that both problems require a European solution.The diabolic loop between the solvency of the banking system and the sovereign fiscal position is now apparent (Lane 2012).•In Greece, it is the insolvency of the government that has sunk the banks;•In Spain, the banks are sinking the government.What is common in both countries is that savers are running away when they see the banks and the sovereign propping each other up. Unless the banks in both Greece and Spain are soon recapitalised, the on-going gradual deposit flight might turn quickly into a classic run, the consequences of which are hard to imagine.ARTICLE CONTINUED AT LINK ABOVE

[Balloon guy]

Spain: Save us or the Euro falls

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Spain is warning that Europe's single currency will unravel unless its leaders decide within weeks to centralise budget and tax policies in the eurozone and agree on a strategy to pool responsibility for failing banks.

[mrdannyg]

Solution to over-centralization: more centralization! Makes perfect sense, right Henry?

[hblask]

FCP Bob, on 06 June 2012 - 07:20 PM, said:

Investing in good beneficial infrastructure increases the productive capacity of the country.

If the government was good at that, that would be a valid point. They build the freeway system 40 years ago, and since then it's just been flushing money down the toilet on pork projects. So is the NET gain measured over 50 years still positive?Most of what the government calls "stimulus" is just pure, wasteful pork, the equivalent of digging holes with teaspoons.

[hblask]

mrdannyg, on 07 June 2012 - 07:26 AM, said:

Solution to over-centralization: more centralization! Makes perfect sense, right Henry?

Yep. The losers always like being put into the same boat as the winners. I'm guessing Germany isn't so thrilled about Spain's idea.

[FCP Bob]

hblask, on 07 June 2012 - 02:06 PM, said:

Yep. The losers always like being put into the same boat as the winners. I'm guessing Germany isn't so thrilled about Spain's idea.

Well anybody who understands economics also understands that a currency union can not exist without a close fiscal union as well.Germany has benefited hugely from the Euro Zone and the policies that benefited them and their banks are the reasons that Spain is in trouble not because of Spanish overspending by their government.Spain still has less Government spending per person than Germany does and was running budget surpluses before the Financial Crisis hit. If they had their own currency they would still have issues because of the housing bubble that was caused by policies designed to help Germany integrate East Germany but they would be able to make the adjustments.Only the simple should think Germany good, Spain bad.

[Balloon guy]

Germany is stuck with guilt keeping them in.Once they overcome their guilt over the last 2 world wars, they will begin serious take over plans for Europe economically.

[FCP Bob]

Berlin is ignoring the lessons of the 1930sBy Niall Ferguson and Nouriel Roubini in the Financial Times

[FCP Bob]

The markets are reacting like something real has changed, I hope it's true.Europe: Back from the brink

[InternetExplorer]

this is just gonna keep happening until they start issuing eurobonds.

[akoff]

hblask, on 07 June 2012 - 02:05 PM, said:

If the government was good at that, that would be a valid point. They build the freeway system 40 years ago, and since then it's just been flushing money down the toilet on pork projects. So is the NET gain measured over 50 years still positive?Most of what the government calls "stimulus" is just pure, wasteful pork, the equivalent of digging holes with teaspoons.

you give them to much credit, the Interstate network was building the 50's correct? it has been over 60 yrs....

[FCP Bob]

It's getting uglier and uglierThe Growing Pain in Spain

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Yiagos Alexopoulos at Credit Suisse estimates that Spanish capital outflows are currently running at an annualised rate of 50 per cent of GDP. No question, the bank run is clearly accelerating, and one can easily understand why. The country is turning into a Little House of Economic Horrors. The alleged “rescue” of Madrid’s banks is a non-starter. 100 billion euros won’t begin to cover the scale of the problem on any honest accounting or “stress test” (and that’s before we get to the next phase of announced austerity measures).Chuck Davidson of Wexford Capital has completed a report where he looked at the Spanish banks, extrapolating to all of them from a close look at the big five.. He haircutted their assets by 25%, which hardly seems excessive. Moving from the big 5 to the entire banking system, he came up with 990 billion euros as the capital needed to get Spain’s banks to Basel 3 risk weighted capital standards. Madrid, we have a problem!

[mrdannyg]

Switzerland sold 5-year bonds recently with a negative yield. That is some serious 2008 Bear Stearns stuff.

[InternetExplorer]

US TIPS bonds have been negative since 2010. real yields on US debt below 10y have been negative since like 2009.