Why austerity won’t fix global budget mess

May 26, 2010

Bond guru Bill Gross makes this point:

Tougher sovereign budgets produce government worker layoffs, pay cuts, reduced pension benefits and a drag on consumption and the ability of the private sector to accept an attempted hand-off from fiscal authorities. Recession becomes the fait accompli, and the deficit/GDP ratio moves ever higher because of skyrocketing risk premiums and a plunging GDP denominator. In many cases therefore, it may not be possible for a country to escape a debt crisis by reducing deficits.

Me:  This certainly seems to be the case with Ireland, as it has for most countries trying this path to escape a debt trap. As I point out in this Weekly Standard piece I wrote, the best way to solve a sovereign debt problem is by cutting spending and boosting economic growth.


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uhm, so while you agree that austerity is probably bad, you think the best way to escape a debt trap IS to cut spending, and that somehow miraculously you can boost economic growth at the same time. Where to begin with the ridiculousness of those combined statements…

For MY part, I believe there is no one stop solution for debt – each individual case will involve several different factors – but I think the key underlying theme needs to be growth at any price and moderate inflation. And when finally the growth becomes self-sustaining there are two ways to go: either start paying off debts with surpluses (a la Canada) or continue to inflate so %wise the problem is more ‘manageable’. Any other solution is just a variation on a theme of these two courses.

Posted by CDNrebel | Report as abusive

CDNrebel: Mr. P refers to cutting Government spending and cutting taxes, in order to return purchasing power to taxpayers and the private sector. It’s not a difficult concept. Canada reduced its deficits by cutting interest rates and letting the CAD crash to a record low. Tough medicine, but it worked. The fact that Ottawa offloaded many costs to the provinces certainly helped as well. However, Mr. Martin did cut taxes (there’s that tax cut thing again!) and the results are too well-documented to be ignored.

Posted by Gotthardbahn | Report as abusive

devaluation was an important tool in Canada’s case, and can be in many other countries as well (this is I suppose the flip-side of the inflation coin) but it’s not really an option in America unfortunately being the world reserve. America has tried it’s damnedest to inflate away but ‘extraordinary measures’ has so far only been able to keep deflation at bay, barely. Also to that point, there is no where for interest rates to go but up – at the time of Canada’s cuts, they were pushing 20% rates.

Paul Martin did cut taxes, but that was once the economy was humming with oil dollars, ie already producing federal budget surpluses. The Mulroney/Campbell era nearly destroyed the country, and it wasn’t til Jean Chretien took power and installed Martin that things began to turn around.

Offloading costs to the provinces has been a problem, but with the transfer payment system it is not as terrible a situation as it may appear

Posted by CDNrebel | Report as abusive

WORLD is broke ?

15,20 p.m.
New York City
Wall Street – NYSE Stock exchange

Fifteen minutes ago, Dow fell suddenly 900 points, scaring even the glamourous dogs peaceful morning walk at the high Central Park, with one of the most sudden drops ever seen in the US market.

One minute later, Dow and SP500 climbed again till a -3,6% level, closing around -3,20%, waiting for tomorrow´s new surprises.

It was said that Greece concerns over a possible debt default affecting additional countries in South Europe, has been the main driver of this panic scene.

A systemic risk once again flouring around the world economies, just in case several key european countries cannot pay their huge sovereign debt and renew therefore, their cash needs.

I am really impressed on how we forget our recent past, or how we care for things that one day after another have been there and nobody has paid any attention to.

1) HOW MANY TIMES has been said that the US PUBLIC DEFICIT is unsustainable ?

2) EVERYONE expects that one day, the US will pay its entire debt charge ? … Of course not. But this has been so, for such a long time that if one day the markets panic because of this reason I would not understand the surprise of many.

I completely agree that today´s situation or even these week´s drops in Dow and SP500 are driven by speculators playing games again. But this time, playing with entire countries such as GREECE, PORTUGAL, SPAIN or ITALY. But they play with issues that are there, that are critical and that nobody looks at them the way they deserve.

So, and as investors, how must we react to these events ?

Very simple. Ups and Downs, volatility, etc … But the riskiest thing now in markets worldwide is that this volatility is increasing heavily, and this makes extremely difficult to guess future market trends.

I strongly believe in the CYCLES theory ( I published a post in this blog with regards to this point called “CYCLING” ), but in our current market situation, even this theory becomes terribly doubtful.

SP500 was reaching maximum levels. That is true. So, a correction was expected.

But my doubt now is: Is this movement today a correction signal or maybe a once again systemic default risk ?

I really think the answer is NO. It is NOT acceptable that governments once again let the world enter into a systemic risk, so I really hope that this will only be some kind of wear correction.

Let´s see tomorrow … and the day after tomorrow … to confirm if this hope is real.

Meanwhile, it is also true that problems such as the countries PUBLIC DEFICIT is there, it has always been there, and if we get really serious with this, let me tell you the problem has not an easy solution.

Jose Luis Revilla Escudero
Chairman & CEO
WWShares, Inc
-Private Wealth Advisors-

Posted by WWS | Report as abusive