For those pushing for austerity in the U.S., lets take a look at one real-life (perhaps more extreme) example of austerity in action... Ireland.
"Ireland is seen as having done better than most others in restoring market credibility," said Eurasia Group analyst Jon Levy. "There are still some worries but the feeling is they have done better than most and with a reasonable degree of internal consensus.
"Ultimately, Ireland's trade unions say they know deficit reduction is vital if Ireland is not to be priced out of international bond markets like Greece, but they want a greater burden to be paid by the rich through higher taxes.
Let me also say that Ireland’s recent policy moves — raising taxes and cutting spending in the face of a severe recession, so as to reassure nervous lenders — are an extremely disturbing omen. Iceland was one thing; but now another advanced economy, with a 7-digit population, has hit the limits of anti-recession policy.
Ireland proved unable to shake off rising sovereign-debt fears Thursday, with bond yields jumping as investors reacted to indications some Anglo Irish Bank bondholders may not get all their money back and official data showed the economy contracted unexpectedly in the second quarter.
The yield premium demanded by investors to hold 10-year Irish government bonds over German bunds topped 4.3 percentage points Thursday, the highest on record and up from around 4.1 percentage points on Wednesday. The cost of insuring Irish government debt against default hit a new record Thursday.
The spread on five-year Irish credit-default swaps was seen at 490 basis points in late morning action, up from around 460 on Wednesday, according to data provider Markit. That means it would cost around $490,000 a year to insure $10 million of Irish debt against default for five years, up from $460,000 Wednesday. The spread hit 500 basis points for the first time earlier in the day, Markit said.
Ireland isn't a case against austerity. It is an example of what happens when you don't clear a massive credit binge / debt overhang. The debt must be cleared to make way for new growth. Continuing the charade through debt financed spending (aka no austerity) only prolongs and deepens the death that will eventaully occur to the economy. The US is on the same path. The argument isn't over austerity or not (red herring). It should be about what is the correct solution. You must clear the debt and determine the true value of assets on the books (transparent balance sheets). Allow the insolvent entities to be wound down through banruptcy or receivorship and allow those responsible (management, boards, bondholders, shareholders) to take the hit prior to any taxpayer money.
ReplyDeleteI agree with the following: "Continuing the charade through debt financed spending (aka no austerity) only prolongs and deepens the death that will eventaully occur to the economy" over the long term. But over the short term (i.e. before Ireland was back on its two feet), austerity combined with tight monetary policy (i.e. Ireland's lack of flexibility being on the Euro) resulted in the inevitable... the inability to organically grow out of the problem and in fact made (in my opinion) things worse.
ReplyDeleteI agree with Anonymous. I would add to Jake and others that we have not given it any time yet. What has it been? A few months (not even) of austerity? Of course the economics are going to roll over a bit - people are cutting back. That doesn't mean disaster, nor does it imply the need to micromanage CDS spreads. Time.
ReplyDeleteWithout austerity, the bond spread might have gone even higher. Would anyone buy Greek bonds without austerity? Maybe the title should be "The Case *For* Austerity." ;-)
ReplyDeleteThanks for all the feedback and differences of opinion, but I don't get how starving a fat kid helps. Less food over the long run of course helps, but you can't just go cold turkey.
ReplyDeleteFrankly, I'm not sure how giving a drug addict drugs makes him better either. I don't see resounding benefits from Methodone clinics. And actually, if you stop feeding fat kids AS MUCH, or feed them HEALTHIER, then they also cease to be overweight. Austerity is not about cold turkey, it is about rational LT solutions, not overnight quick fixes. Bernanke thinks there is a magic pill. There is no magic pill. The reality is that you can't get a smoker to quit if you keep tossing him cigarettes, and you can't solve a debt problem with more debt.
ReplyDeleteFrankly, I'm not sure how giving a drug addict drugs makes him better either. I don't see resounding benefits from Methodone clinics. And actually, if you stop feeding fat kids AS MUCH, or feed them HEALTHIER, then they also cease to be overweight. Austerity is not about cold turkey, it is about rational LT solutions, not overnight quick fixes. Bernanke thinks there is a magic pill. There is no magic pill. The reality is that you can't get a smoker to quit if you keep tossing him cigarettes, and you can't solve a debt problem with more debt.
ReplyDeleteI don't see why Irland be an example for austerity. While they maybe raised taxes and cut spending on civil servants, they actually increased spending on filling black holes in the banks' balance sheets. This is not austerity. This is waisting money.
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