The forces of austerity are in retreat all around Europe and the world. Let’s make no mistake about what this means. The word ‘austerity’ has come to mean many things, but austerity is shorthand for the European policy of lumbering citizens with the debts of the financial markets and contending that the resulting increase in the national debts is the cause of the problem, rather than the consequence.
Then, in order to heighten people’s anxiety, the policymakers continued to genuflect to the financial markets’ verdict about the policy when it was financial market unsustainability via excessive lending that caused the problem in the first place.
Obviously not all the increase in the national debt has been due to the transfer of money from the citizen to the speculator; a significant amount of the debt problem is the consequence of the crash itself and the impact of the crash on people’s balance sheets.
When assets collapse at a time of high debts, four separate but linked things happen which propel the economy on a negative trajectory.
First, the balance sheet of the broad middle breaks apart. This is because the “assets” of the middle class – houses, apartments and land – collapse in value. So the asset side of the balance sheet shrinks. In contrast, the liability side of the balance sheet expands because it is weighed down by the debt that was taken to buy those assets. How many people do you know who are in that situation right now? Another term for this is negative equity.
Second, resulting from the broken balance sheet, people are worried about the future. This means that even those people who have money and an income save. Those without savings and whose income is under pressure try to pay their debt back. All this means domestic demand is punctured. Retail sales drop and spending falls.
Then something odd happens: retailers respond by cutting prices. But when people who are worried see prices falling, rather than conclude that there is a bargain to be picked up, they conclude that prices will fall further, so they actually spend less. We are witnessing this in the retail carnage in Ireland at the moment.
The third development associated with the collapse in asset prices is that interest rates don’t work. It doesn’t matter how low interest rates are, people have too much debt and they don’t want to borrow and the banks have too much bad debt and they don’t want to lend. So money gets stuck in the banking system.
The fourth thing is that the “paradox of aggregation” takes hold. The banks tell the customer to sell their asset to recoup losses. This sounds sensible, doesn’t it? But it is only sensible if one person sells and everyone else buys. But what do you think happens if everyone is told to sell their assets at the same time? Obviously, asset prices will fall rapidly and while the debt remains the same, the paradox is that the person who tries to pay down debt quickest gets into more debt.
So the upshot of all this is that the savings ratio of the country rises rapidly and tax revenues fall. This causes the budget deficit to rise because the Government has little choice but to try to maintain demand in the face of the quadruple whammy to the economy. If it can’t sustain demand from tax revenues, it borrows the money and the national debt rises.
So you can see that the budget deficit and the national debt increase are the consequence of the downturn not the cause.
However, somewhere along the way ‘conventional wisdom’ decided that the analysis worked the other way and that the national debt and the budget deficit were the cause of the problem. So we get the policy of reducing the budget deficit at all costs.
Anyone with a brain can see that if you cut government expenditure the economy will slow and poor people will be hit hardest because they are most dependent on the State for income.
Taking a bit of altitude, when interest rates are 1pc in Europe and unemployment is 25 million, there is no demand for capital and there’s a massive excessive supply of labour. That’s what Leaving Cert economics would tell you.
But even in the face of reality, the proponents of austerity had to come up with a faux theory as to why austerity was necessary. The main plank of this was research by two economists from Harvard, Ken Rogoff and Carmen Reinhardt, who came up with research saying that historical data indicates that when debt-to-GDP ratios rise over 90pc, the economy of the country falls. This was taken as gospel until last week when other economists looking at the same data proved that Rogoff and Reinhardt had made some elementary statistical mistakes and there was precious little evidence to indicate that a certain national debt figure triggered economic Armageddon.
The IMF has been making squeamish noises of late as they see European growth plummet, unemployment rise and income fall.
Now that the intellectual pillars of austerity are seen to be made of salt, the politicians are jumping ship. Jose Manuel Barroso, the boss of the EU Commission, has said that austerity may be reaching its limits.
Even Michael Noonan, a supporter up until yesterday, has had a volte face extraordinaire and is now saying that the Irish presidency has been working tirelessly to dismantle austerity behind the scenes. This is obviously why the Irish presidency oversaw the austerity-driven shambles in Cyprus two weeks ago!
If the policy is abandoned, you can look forward to relaxed budget constraints, some tax cuts and possibly even spending increases on public infrastructure. The debt burden will have to be kicked out for many years. Given that any relaxation of austerity in Europe would force interest rates up, there is a debt tsunami in the guise of defaulted tracker debt coming down the road. Now would be a good time for the Government to try to get a deal on mortgage debt.
If austerity crumbles, all bets are off, new deals will be signed and the old rules will be thrown out. This is an enormous opportunity. Ardent supporters of austerity, like ardent communists turned capitalists in Russia, will embrace the new reality. The King is dead. Long live the King!
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I have house plant that I sometimes forget to water. Sometimes he weathers but usually a bit of water will revive him. I just don’t think this will happen this time. My firm belief is that the system is broken. Also, we here in Ireland cannot benefit from a change in fiscal/financial doctrine, because we have failed as a country. We need root and branch political reform. If anything good could be said about the past 15 years it is that we (Irish) have become focused on our method of government and have realized the need for reform. Let’s hope… Read more »
Barroso also said the the Austerity approach was 100% right! how can the 100% right approach have limits?
also
“But what do you think happens if everyone is told to sell their assets at the same time?”
what do you think would happen if all 200k distressed mortgages suddenly placed “For Sale By Owner” in the front garden…..
Politician – “We’re sick of austerity, lets try spending more money”
Market – “Go find your money somewhere else or get your central bank to print it”
What does “the end of austerity” mean in Ireland? I can understand as well as the next man that too rapid a contraction of government spending can cause problems for the economy. We might need some counter-cyclical spending. But before we decide which is the best way to where we need to go — without wanting to state the obvious — we have to decide where we need to go. And could some kind person fill us in on where that is? During the bubble years, we had a completely false economy fuelled by spending other people’s money on credit.… Read more »
it’s a very simple scenario. Germany Lead Europe imposed austerity without due consideration of its effectiveness, or in another way they didnt care. They wanted ireland to take its ‘bad medicine’ along with the PIGS to teach us a lesson and set example. Merkel needed to keep her bunch happy also especailly since they were not all going crazy on borrowed money. Now German export is slowing and flags are being raised Merkel/Germany has changed her tune and their euro minions (Noonan, Barroso & the like) are being despatched spead the new word. Viva Deutcshland Ober Alles PS: once austerity… Read more »
Cracking up… http://www.youtube.com/watch?v=fCBm_IESaVA New French labour laws were voted. Voted in the Assambley with 257 odd T.D’s present. Then voted through the Seeat , with the Governement using a procedure – repulsed by them when the others did it – of passing the whole law without full discussion on the amendments. Not being familiar with the terms in English , bit diffucult to explain, but the result will be slave labour and sucide. In French, an explination from Gerard Filoch, an ex work inspector, who somtimes must feel he is preaching in the desert. T.V., radio, papers , and all… Read more »
Have they found a goat to escape on in Ken Rogoff and Carmen Reinhardt? BUY! BUY! Al that disco will come crashing down again? I Used to play a game when was five or so, the game was called “Follow The Leader” myself or one of the others kids got in front of a human train. When following the leader it was fun as you could slag the leader off when they marched us to a dead ends. When leading there nowhere to go that was much better that the last person’s attempt as the choices was limited in a… Read more »
the flawed system is going to crash and burn,to much money loaned out.
infact the banks cant cover this they have nowhere near enought cast and the government dont have an endless supply of money,
what chance we did have was givin to the bond holders.
this country is been run by mad men and the dont seam to undrestand the word no they can understant no from banks.
The definition of optimism has change beyond recognition in the last decade
“George Osborne has welcomed news that Britain’s economy expanded by a stronger-than-expected 0.3% in the first quarter of 2013, avoiding a triple-dip recession.”
Was that rounded up from 0.250009 % or down from 0.34999999%?
Just been announced that Spanish unemployment is at its highest level since records began running at 27%. It now transpires that a new law is being passed by the Spanish government preventing property owners from renting their property to tourists. It seems that this is being driven by the powerful 5 star hotel lobby who state that this practice is taking food from their table and causing job losses. The government are also attacking the privately owned bars and restaurants by sending out inspectors and closing these establishments on a whim. A bit like our government closing B&Bs restaurants and… Read more »
The only constant in any of this will be the obsession of the parasites at the centre of the power completx to increase and control the rest of society. In fact it has been the only constant in the entire EU Imperial adventure since the Treaty of Maastricht. This is what it is like to be in an imperial racket. We were in one before, and now within three generations we are back in one again. We never really attained freedom, because the gombeen culture survived independence, and is now back in business, at full throttle screwing the people again.… Read more »
It is a came of poker. And if you are being honest, then the chances are that you are being robbed. The only honourable course of action, to preserve your own honesty is to be a tight as tuppence. That is the only truthful course of action. And all of you have been dosed to the limit of propaganda to make you think that this is the most dispicable and most vulgar behaviour considered possible. The system of social mores in today’s Ireland is highly effective at undermining any effort by people to be free, or even slightly autonomous. It… Read more »
Good work D on writing a piece for the lay reader to understand and get a fix on the factual narrative of the so-called crisis underway.
Excellent article.
On the point about the insiders changing their script on austerity and its panacea I reckon what we are getting is simply another confidence trick gameplay to U-turn the narrative down a different route.
A couple of points… 1. I think that austerity should not be mistaken for profligacy. on the govt level for example, increasing public expenditure on a bloated and inefficient public sector will make things worse not better. We need to spend better not more. 2. Similarly on a personal level, people need to be less material and more practical, change the car when you need to, not when your neighbour does!! We need to be a bit moer Germanic. 3. Finally, we need to stop paying people ridiclulously high salaries which they do nto merit (this is a nod to… Read more »
just for the record it was a 28 year old student that found the flaw and it took month or more before he was taken serious after all he only a student working on economic project for his college work! Rogoff and Reinhardt where given kudos by the USAs Republican Party of course the Democratic Party did not debunk it, most likely they did not even read it. The Republican Party spread it across the pond, a straw of justification to clutch to, WMD all over again. Follow the leader to a cliffs edge. Group-think and deference abounds ‘Just Cos’… Read more »
Hi, I like the article. In our totalarian eiruba there’s a fly in the tank track grease though. We are spending billions more than we are taking in on taxes. Someone better square the circle soon. Brogie is right every man must look out now for himself and his family. So my question is what Opportunity are you referring to? Wage levels are in the gutter. Local labour is displaced by cheap foreign emigrants who are being treated dreadfully, the skilled middle class who can emigrate are gone, the super rich are in tax exile anyway, no one can borrow… Read more »
The Emperor is wearing nae gear. In the buff. Bereft of clothes. Apparel deficient. Stark bollock naked but still wearing his crown.
Post Austerity we have lots of unemployed, a small broken Banking system, no new industries, a shattered self employed sector, politicians not up to the job, an expensive below par public service, a huge level of private and public debt , a subsidised agricultural sector so the answer is ????
If Kenny Noonan Hayes et al come out now against austerity I will vomit
Hey David what about the pension bubble and the pension rip off .
Pension providers who take there fees at the start and cover themselves and could not careless about the customer.
Unfortunately, we seem to be being offered two options at the moment: ‘Austerity’ and ‘Optimism’.
‘Austerity’ involves the genius of the state deciding who gets what of the dwindling pie, and ‘Optimism’ seems to require the ‘magic of the market’ to make best use of all the money that everyone doesn’t save, and goes and spends instead.
Given 20 years of experience, and our current institutional, legal, and tax structures, this seems to offer a choice of suicide by jumping off a cliff, or suicide by swimming in the arctic ocean.
Excellent article David, very entertaining and a great analysis of the situation we’re in.
One thing though – There’s less money during a recession because when a loan is repaid to a bank electronically the money no longer exists. If loan repayments are greater than new loans the money supply contracts.
As well as this people may save more during a recession making it seems like there’s less.
Possibly off topic, but it’s too good not to pass on. Matt Taibbi has outdone himself again:
http://www.rollingstone.com/politics/news/everything-is-rigged-the-biggest-financial-scandal-yet-20130425
Ah, a very good article by Pepe Escobar
http://www.atimes.com/atimes/World/WOR-01-260413.html
59 comments; take note David your income may depend on it. Porn sells, that’s why the business post is sunk and the indo lives.
Call your next book “porn economics” it could be a best seller, now i think about it. that’s a great name economics book.
Keep your pecker up
Cheers
http://www.broadsheet.ie/2013/04/25/that-seemed-to-go-well-3/
The truth is there has and still is far to much damage being done to this country and all the outside factors like oil ect.
The government don’t live in my world do They live in yours.
They said we would get change a new way of doing things,what we got was protection of the rich and a government that does its upmost to deflect from its self interest .
It’s rotting to its core.
Looks like a few things do need fixing first…
http://www.rollingstone.com/politics/news/everything-is-rigged-the-biggest-financial-scandal-yet-20130425
Lot of untouchables involved. Make you cry.
But as a very wise friend reminded me…At some point our feudal lords were untouchable, then the absentee landlords, then the Church, then FF…
Chin up!
I recently spent a few days in Canada, mostly Toronto, and asked a lot of questions. My contacts were mostly with academics and media types, both of which often have a somewhat skewed version of reality but at least they are well educated and well read. I wanted to hear what outward-looking Canadians thought of the present state of the world. They seem to be as puzzled as the rest of us. But Canadians are not as worried as Europeans. Canada has real wealth based on its vast natural resources. The U.S. has real power based on its military might… Read more »
Ireland might get its country back but what will we be left with . The public sector costing a fortune . The HSE like wises. The social well fair . The cost of living going out of controll. This government talks about making new jobs When there is thousands of jobs going, The main problim is no disposial income you can make all the jobs you like but with no disposial income it’s not going to make a difference . The only difference is dole figures but this will be over taken by Jobs cutting numbers like banks and people… Read more »
German Government Advisor Predicts End of Euro 25 Apr. (EIRNS)Speaking to the German Sunday tabloid Welt am Sonntag on April 21, Kai Konrad, chairman of the scientific advisory council of the Ministry of Finance, said that for him, “Europe is important, the euro isn’t. And I give the euro only a limited chance of survival, in the medium term perspective.” Welt asked what he means by that, maybe five years? Konrad: “It is difficult to define time spans; that depends on many factors. But five years, that sounds realistic.” Konrad also said he disagrees with the austerity course of the… Read more »
Put in the over payed and the lump sums and dont forget the to die for pensions, now tell me who’s supporting the living beyond you means gang.
This country is run like a banana republic and the poor and the middle class are supost to shut up and pay for this.
Received an email from Ulster Bank informing me that from June anyone who doesn’t have 3k in their account will pay €4 per month.
Your salary counts and if you are lucky to be pulling 3k per month then you will not pay the levy. Not that you would even notice it!
“If austerity crumbles, all bets are off” Not so fast brother. It depends on how you see the future. We can’t just return to the buccaneering ways of the past and grab all we want. For too long we have been sitting back watching and listening to the Alpha Male ego talking crap, grabbing what it needs to feed it’s inherent sense of insecurity and polluting the rest of us with their propaganda through sheer volumes of white noise. It’s time for a bit of quiet and some serious thinking about our future We have had 5 years of austerity… Read more »
Events of note this week – http://namawinelake.wordpress.com/2013/04/19/noonan-says-he-wont-vote-on-bank-of-ireland-remuneration-at-agm/ In 2012 Richie was paid a salary of €690,000 plus pension contributions of €186,000 plus perks of €34,000; Richie handed back €67,000 of his salary as a waiver.Bank of Ireland made a comprehensive loss of €1.5bn in 2012. Minister Noonan confirmed that he will abstain from using his 15% stake in Bank of Ireland to vote in favour or against the remuneration of Bank of Ireland’s board. http://www.irishtimes.com/news/consumer/gilmore-rejects-calls-to-intervene-in-aib-rate-hike-1.1372415 Tánaiste Éamon Gilmore has rejected opposition calls for the Government to intervene in AIB’s decision to raise mortgage interest rates. AIB is state owned. Next… Read more »
I have taken to emailing Enda Kenny every day now and I think as many other people as possible should to likewise. Today’s offering:
Enda Kenny (taoiseach@taoiseach.gov.ie)
You say you can’t interfere with the salary of the likes of Richie Boucher
Yet you have the gall to tell workers at the bottom of the scale to take pay cuts
You, Mr. Kenny, are a THUNDERING DISGRACE
and a lapdog for your bankster pals
Excellent article and summary David.
Austerity is not work! – it is unemployment
http://www.irishtimes.com/business/economy/austerity-deflects-us-from-true-nature-of-economic-crisis-1.1372931
John Waters Hits the Nail On The Head Again
In his latest Irish Times article, ‘Austerity’ deflects us from true nature of economic crisis, John Waters hits the nail on the head again, on what he calls the “pseudo substance we call money. “
U.K. Independence Party Leader Farage Endorses Glass-Steagall April 24, 2013 (EIRNS)–UKIP leader Nigel Farage endorsed Glass-Steagall, answering a {Guardian} journalist’s question after a speech at a press gallery luncheon in Westminster on April 23. Reporter Michael White reported on the exchange in the {Guardian}’s “Politics” blog: http://www.guardian.co.uk/ politics/blog/2013/apr/24/nigel-farage-ukip. “As a City of London man himself (dad was in the metals market for 60 years, granddad for 50, and both his sons are there today), how would he have tackled the City’s self-inflicted banking crisis of 2007-09, I asked. Well, he wouldn’t have repealed the U.S. Glass-Steagall Act of 1931 [1933–ed.],… Read more »
John Law Practiced Quantitative Easing April 25, 2013 (EIRNS)–Schroder’s “Dialogue” newsletter paraphrases Philip Coggan at the Secular Market Forum, the article saying that none other than top hoaxster John Law is one of the fathers of quantitative easing: “Following the reign of Louis XIV at the start of the 18th century,” the article runs, “the French monarchy was essentially bankrupt and so turned to a Scottish mathematician, gambler, and economist called John Law to come up with a way of paying off the huge debts. “He did this through a scheme that involved the creation of a joint-stock company, the… Read more »
can somebody explain what the national pension reserve fund is and what happens if it is empty.
So the government takes the money and bail out the banks, people need to wake up this government should have asked the people to vote on this because this Is life changing .
Now it’s to late because the money is gone.
This country gets worse by the day.
Why can’t we vote on any thing that is life changing, the government are handed to much power.
Some bad news, austerity must continue, see link:
http://www.youtube.com/watch?v=4-bSKsVDr_M
http://www.irishtimes.com/business/economy/sticking-with-austerity-is-ireland-s-only-hope-of-a-viable-future-1.1374407
Well holy no god! Martin signals shift in Fianna Fáil position on austerity, Pearce Doherty must be grinning ear to ear… SF FF any one This puts more pressure on FG for an about turn I TOLD YOU SO! lol YOU TOLD THEM SO! Reminds me of the forest grump movie when forest grump started running for no reason and then people just ran after him for years – then he stopped – what next! So the emperor has new suit but we need to be vigilant and make sure it’s not just a new birthday suit. DAVID, where would… Read more »
Warning from Inside the Southern European Concentration Camp 26 Apr. (LPAC) Portuguese Socialist Party figure Manuel Alegre, a 76-year-old poet, former Deputy, and twice candidate for President (2006-2011), who in the past has called for following the Argentine model on the debt, wrote a short March 26 article, published in Jornal i under the title “Cyprus and Us,” which speaks for itself. Let’s be honest, there is a concentration camp in Europe, again! To continue with this Euro disaster is plainly obvious for what it is. All of this is because Europe simply cannot muster, again, a tradition to break… Read more »
great article and comments. loving my trip to Dublin. had a queit night in hotel. scrabble and an orange then early night . woke up sweating from a nightmare. dreamt i met some of the folk on this blog and got pissed and started talking shite in a pub. thank god it was just a bad dream. phew! off to the RDS now to address FF. ill
does anybody know how many jobs are being lost compaired with new jobs being made,proper jobs and not the mickey mouse jobs ,that the government use in there figures.
like part time jobs,fass,intermships ect.
most of the jobs that are lost seam to be full time jobs,proper jobs.
http://www.independent.ie/business/irish/seamus-coffey-ireland-is-not-in-a-position-to-move-to-zero-austerity-29219535.html
Thank god for Seamus Coffey, one of the few sanguine voices out there.