Friday, January 27, 2012

Expansionary fiscal austerity all the rage at Davos

DAVOS, Switzerland -- As much of the globe grapples with lean economic prospects, and as Europe in particular sinks toward a recession that could spread to multiple shores, world leaders gathered here this week appear to be operating with a rough consensus over how to proceed: Attack budget deficits by cutting spending in a bid to sow confidence in bond markets.
The logic of austerity as curative assumes that the basic problem limiting economic growth is investor fears about the size of government budget deficits, and visions that the bond market may suddenly demand sharply higher rates of interest to enable lending. Governments could be forced to impose growth-killing tax increases to square their books. With such worries in mind, those in control of money are supposedly hewing to the sidelines, depriving economies of credit and investment.
Among finance ministers participating here at the annual World Economic Forum, the word “uncertainty” has been getting a vigorous workout. When times are troubled, goes the thinking, lack of clarity provokes investors to imagine the worst, and to act accordingly. They hold tight to their money, producing self-fulfilling prophesies of pullback.
“If you want to have more internal demand, you have to have confidence,” the German finance minister Wolfgang Schaeuble declared here Friday morning, during a discussion about the future of the eurozone. “If you make your deficit sustainable, people will gain confidence.”
But among some economists, deficit reduction as a growth strategy amounts to a wrong-headed leap of faith.
“Austerity won’t even prevent the next crisis, let alone solve the current one,” the Nobel laureate economist Joseph Stiglitz told The Huffington Post.
Cutting government spending in times of economic weakness further reduces demand for goods and services, he said, which reduces incentives for businesses to invest and hire -- a self-reinforcing dynamic of diminishing fortunes.
This is followed by George Soros's warning about debt-deflation as the risk of austerity, along with his accusing Germany of economic imperialism. Ouch.

Dr. Doom (Nouriel Roubini), too, predicting, well, doom.

Oh, and Geithner is on board with austerity “for parts of Europe, for a long period of time...."

Read it at The Huffington Post
World Economic Forum: At Davos, Austerity Reigns
by Peter S. Goodman

This is way beyond clueless and even exceeds moronic. It is malfeasance. "Ignorance is no excuse before the law." 

Belief in the confidence fairy is magical thinking. These people really do act like wizards waving their magic wands around.


Ryan Harris said...

If a Euro country implements the required Austerity, does the EFSF or IMF come in and lend extra money to provide an extra boost to the countries to compensate for the damage caused by the austerity?

Tom Hickey said...

As far as I can see, it is pretty much ad hoc since they don't really have a formal agreement worked out. They are already operating out of the bounds of the treaty, I believe.

What seems to be happening is that TPTB rush in when there is a crisis developing with some ad hoc measure. But the overall push is keeping the clamps on the periphery through austerity. In fact, bankers have pretty much been installed in those countries to make sure that austerity stays on track. They will keep the populace just at the edge of revolt and add what they have to keep things together.

Germany is now demanding control of Greece, and it is being called the new Anschluss. Instead of a military occupation force this time, it is bankers.

Basically, soft fascism (corporate statism), which the US and UK are slipping into also. Not a good sign for the future in the process of globalization.

Welcome to the new world order under your financial masters. This is an out and out power grab.

Ryan Harris said...

How can the Spaniards accept 23% unemployment rates or the Irish 15% and continue to support their system of government and economy. If it had not cost so much human life to free Europe from the despots and rivalries only a generation or two back, I suspect we would have a European spring sooner than later. Too much faith in the institutions IMO, a Hugo Chavez or Putin style populist will emerge to improve the economy. And people will make the trade off to rid themselves of the Rentiers, Germans and for a better life.

Tom Hickey said...

@ TB

Right, explosive situation building.

WillORNG said...

In France it's only the neo-fascist National Front under Marina Le Pen who advocates the sane economics or withdrawal from the Euro.

In Hungary it's a similar bunch who advocate democratic control of the central bank...I was surprised "independent" central banks are a EU requirement!