RIP: 1904 – 2012
Count me among those who do not mourn the passing of the childish fantasy of Confidence Fairies and Invisible Bond Vigilanties.
British Economy Slips Back Into Recession
By JULIA WERDIGIER, The New York Times
Published: April 25, 2012
Britain slid back into recession in the first quarter of the year, according to official figures released Wednesday, undercutting the government’s argument that its austerity program was working.
The British economy shrank 0.2 percent in the first quarter after contracting 0.3 percent in the fourth quarter of last year, the Office for National Statistics said Wednesday.
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The weak economic data in Britain comes as the outlook for the euro zone economies is deteriorating. The economy of the 17-nation euro zone, Britain’s largest export market, shrank 0.3 percent in the last quarter of 2011 and the European Central Bank said the regional economy might contract 0.1 percent this year.
Double-dip recession a terrible blow for George Osborne
Larry Elliott, Economics Editor, The Guardian
Wednesday 25 April 2012 05.44 EDT
Double-dip recessions are extremely rare in the UK. It is quite common for the economy to falter during a recovery with one quarter of negative activity but you have to go back to the mid-1970s, when the first oil shock of 1973-74 was followed by stagflation in 1975, to find a genuine double-dip downturn.
In the past, even during the 1930s, recoveries have been well under way by now. This time, despite the massive stimulus that has been chucked at it, four years into the deepest depression of the post-war era Britain is going backwards.
Output is more than 4% below its peak in early 2008, living standards are falling and there is no sign whatsoever of the much-heralded rebalancing of the economy.
IT’S OFFICIAL: Keynes Was Right
By Henry Blodget, Daily Ticker, Yahoo Finance
Tue, Apr 24, 2012 7:22 AM EDT
The “austerity” idea, you’ll remember, was that the continent’s huge debt and deficit problem had ushered in a “crisis of confidence” and that, once business-people saw that governments were serious about debt reduction, they’d get confident and start spending again.
That hasn’t worked.
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In other words, based on the experience of the last five years, it seems that Keynes was right and the austerians are wrong.
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In the aftermath of a massive debt binge like the one we went on from 1980-2007, when the private sector collapses and then retreats to lick its wounds and deleverage, the best way to help the economy work its way out of its hole is for the government to spend like crazy.
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(L)et’s face it: Austerity doesn’t work.
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The reason austerity doesn’t work … is that, when the economy is already struggling, and you cut government spending, you also further damage the economy. And when you further damage the economy, you further reduce tax revenue, which has already been clobbered by the stumbling economy. And when you further reduce tax revenue, you increase the deficit and create the need for more austerity. And that even further clobbers the economy and tax revenue. And so on.
Basically, austerity puts you into a death spiral in which you keep trying to cut your way to prosperity, but all you end up doing is digging a bigger hole. And in the meantime, tens of millions of people are out of work, the economy is retrenching, and everything is generally miserable.
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Most of the debt mountain we’ve piled up is the result of what we did before the crisis, not after it. In the years leading up to 2007, our absurdly undisciplined leaders took a nice big budget surplus and then squandered it. And they created absurdly loose lending standards and encouraged the whole country to lever up and buy stuff we couldn’t afford. And they never said “no” to anything except tax increases, no matter what, and denied all the structural problems that were building up for decades.
And by 2007, they had put us in one hell of a hole.
And, given that, it seems reasonable to think that, as Krugman has long argued, one of the problems with the economy now is that the original stimulus just wasn’t big enough.
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Austerians love to point at the 1930s as “proof” that Keynes was wrong. Look at the huge “New Deal,” they say. Look at all those expensive public works projects. Look at all the spending the government did to try to get us out of the Great Depression, and it never really worked. What got us out of the Depression, the Austerians smugly observe, was World War 2.
But what was World War 2 if not an absolutely gigantic Keynesian stimulus?
The Federal deficit in World War 2 was massive–much bigger than any time during the Great Depression. And we built up a huge Federal debt load. And… we set the stage for two decades of amazing prosperity, in which we worked off those debts.
Europe’s elites feel the backlash
Ian Traynor, Europe Editor, The Guardian
Monday 23 April 2012 14.02 EDT
For over two years, the mainstream political elites of Europe have been battling to save the single currency, seeking its salvation in a German-scripted programme of austerity and legally enshrined fiscal rigour that curbs the budgetary sovereignty of elected governments.
In elections in France on Sunday, in the Royal Palace in The Hague on Monday, and on Wenceslas Square in Prague on Saturday, a democratic backlash appeared to be gathering critical mass as the economic prescriptions of the governing class collided with the street and the ballot box. The collision looks likely to bring down three European governments.
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The fall of Sarkozy, if confirmed, and the demise of the Rutte government after only 18 months in office add to the political wreckage littering the chancelleries of Europe.
In the past two years, as a direct result of the debt and deficit crisis, the governments of Ireland, Portugal, Spain, Greece, Finland, Slovakia, and Italy have fallen.
“A majority of voters are kicking out incumbents,” said Thomas Klau of the European Council on Foreign Relations, in Paris, and the author of a book on the euro.
Europe Begins to Wonder About Austerity: Are We Doing This Wrong?
By: Scarecrow, Firedog Lake
Tuesday April 24, 2012 12:17 pm
Could it be that Europe’s financial and political elites are finally coming to a “d’oh!” moment, when an unbroken string of policy failures and the simple logic of “depression plus austerity = worse depression” finally begin to get through?
Half a dozen Euro nations are now officially in recessions, others nearly so, having accepted a common view that sustained austerity would breed confidence fairies that lead to growth and jobs. Instead, they’ve seen minimal or negative growth over the last two quarters, while their populations are facing depression level unemployment and impoverishment that show few signs of improving. Few theories have ever been so thoroughly tested and so thoroughly failed.
The destructive consequences of imposing austerity – depressing government and/or private spending in the middle of a serious recession – were predictable from standard economics text books and repeatedly predicted by Paul Krugman and many others, all still ignored prophets in their own lands.
In America, despite clear world-wide evidence their theories are a disaster, deficit hysterics still permeate both parties, religiously in one party, foolishly in the other, and unforgivably among the White House political advisers. (Why hasn’t a failing President with his reelection on the line fired this entire team?) Together, this ship of fools has effectively blocked all efforts to even examine the devastation wrought by state austerity measures and insufficient federal spending, worsened by flirtations with grand bargains, government shut downs and pending automatic spending cuts. Unfortunately, in America there is no one on the ballot arguing for any meaningful remedies.
In Europe, however, political leaders are paying a price for their indifference to suffering and logic. The political/financial elites insisted the confidence fairy would return as soon as they’d squeezed enough wealth out of the their own populations. When the anemic patient got even weaker, they applied even more leeches.
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The public generally doesn’t know what the technical economic solutions are, and the media keeps telling them, falsely, there are no good alternatives, because the deficit hysterics still control a conversation disconnected from the reality staring them in the face. But voters now know their elites don’t have a clue and don’t seem to care that the elite solutions fashioned mostly for banks and bond holders are worsening the human suffering without solving any underlying economic problems.
Herr Doktor Professor- I told you so!
The Big Wrong
April 25, 2012, 7:59 am
Recent election results in Europe seem to have raised consciousness in a way literally years of economic data couldn’t: the austerity doctrine that has ruled European policy is a big fat failure.
I could have told you that would happen, and sure enough, I did. Did I mention that after three years of dire warnings that the bond vigilantes are attacking, the interest rate on US 10-years remains below 2 percent?
It’s important to understand that what we’re seeing isn’t a failure of orthodox economics. Standard economics in this case – that is, economics based on what the profession has learned these past three generations, and for that matter on most textbooks – was the Keynesian position. The austerity thing was just invented out of thin air and a few dubious historical examples to serve the prejudices of the elite.
And now the results are in: Keynesians have been completely right, Austerians utterly wrong – at vast human cost.
I wish I could believe that this would really be enough for us to move on and consider what can be done, now that we know that the ideas behind recent policy were all wrong. But that’s wishful thinking, I suppose. Nobody ever admits that they were wrong, and Austerian ideas clearly have an emotional and political appeal that is resilient to any and all evidence.
The Unbearable Slowness of Internal Devaluation
April 25, 2012, 8:11 am
The euro area’s economic strategy, such as it is, rests on two pillars: confidence through austerity, and “internal devaluation”. You know how the first is going; what about the second?
For the uninitiated, internal devaluation means getting your wages and other costs to a competitive position, not by devaluing your currency, because you don’t have one, but by reducing wages relative to those of your trading partners. This is essential in the crisis countries, which all saw much more rapid inflation than the rest of Europe during the good years, and now need to reverse the process. When the euro was being created, the claim was that reforms would produce “flexible” labor markets, aka markets in which wages could easily fall as well as rise.
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What we see is that even in Ireland, which has made the most progress, wages have fallen only slightly. Since wages have risen in the rest of the euro area (that’s the bar labeled EA17), the actual internal devaluation is bigger – about 5 1/2 percent in Ireland’s case – but still only a fraction of what’s needed.
Oh, and Germany – which should be experiencing substantial internal revaluation, a rise in its relative costs – hasn’t.
Leveraging, Deleveraging, and Fiscal Policy
April 25, 2012, 8:26 am
It’s an awkward fact – for the fiscal responsibility types, anyway – that Spain and Ireland were running budget surpluses, not deficits, before the crisis. It was private borrowing, not public borrowing, that created the mess.
But, say some commenters, this was nonetheless malfeasance on the part of the authorities; they should have been running even bigger surpluses to offset the private credit bubble.
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But here’s my thought: do all the people who believe that it’s appropriate for governments to run big surpluses to offset rising private-sector leverage also believe that it’s appropriate to run big deficits to offset large-scale private deleveraging – which is what’s happening now? If not, why not? Why the asymmetry?
Cameron’s Remarkable Achievement
April 25, 2012, 10:07 am
When David Cameron became PM, and announced his austerity plans – buying completely into both the confidence fairy and the invisible bond vigilantes – many were the hosannas, from both sides of the Atlantic. Pundits here urged Obama to “do a Cameron”; Cameron and Osborne were the toast of Very Serious People everywhere.
Now Britain is officially in double-dip recession, and has achieved the remarkable feat of doing worse this time around than it did in the 1930s.
Britain is also unique in having chosen the Big Wrong freely, facing neither pressure from bond markets nor conditions imposed by Berlin and Frankfurt.
Now, the defense I hear from Cameron apologists is that the austerity mostly hasn’t even hit yet. But that’s really not much of a defense. Remember, the austerity was supposed to work by inspiring confidence; where’s the confidence? Basically, the expansionary aspect should already have kicked in; it’s all contraction from here.
Needless to say, Cameron and Osborne insist that they will not change course, which means that Britain will continue on a death spiral of self-defeating austerity.
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