Austerity Will Screw Up the Economy

Bonddad states the obvious.
Austerity in an economic downturn has been tried before, and its results are quite reliable.
For instance, as I noted before, all of Europe was affected by the economic downturn caused by bankster criminal gang of parasitical finance capitalists in the US.
Most states cushioned the impact with stimulus spending (classic Keynesianism), the Baltics, which have adopted some of the most radical neoliberal policies on Earth lately as a reaction to their bad experience with Communism, instead opted for austerity. They were rewarded for this stupidity with economic depressions. Latvia was hit worst of all. The neoliberal head of the Latvian Central Bank announced his goal to reduce the wages of Latvians by fully 1/3. This is neoclassical economics in action. It calls itself austerity and fiscal responsibility, but its mechanism is just the same old class war.
This is also the agenda of the Republicans you dipshits just elected to Congress – austerity during downturns resulting in depressions and probably a desire to reduce Americans’ wages by a high % too. The Latvian government and the Republican Party are on the same wavelength. They are both pushing the same radical neoliberalism. By voting for them, you vote for austerity during a downtown, which will result in an economic depression. Is that what you want? If you want a Depression, then please vote Republican.
You’re also voting for mass wage reduction for US workers. Is that what you want? If you’re not a worker, if you’re a rentier or a business owner, wage reduction is the ticket. If you’re a worker and you want wage reduction, you ought to have your head examined.
Latvia now has 20% unemployment. The Republicans are pushing the same policies as the Latvians. By voting Republican, you vote for higher unemployment. Perhaps as a business owner, you don’t care about unemployment. But if you’re a worker, you must be nuts if you want to raise the unemployment with no upside in return.
Ireland engaged in austerity in order to keep investor confidence in the country so they could continue to borrow money. But all it did was make the economy, and the deficit even worse. Their deficit was 7% of GDP at the start of austerity, then after austerity it had ballooned to 14% of GDP. It failed even to reduce the deficit! The more they cut spending, the more the deficit exploded! This is one of the paradoxes of deficit reduction. In addition, the austerity caused an economic depression in Ireland.
The UK and Portugal have both admitted that the austerity measures that they are embarking on with cause economic downturns, and possibly recessions, in their countries. But they are going to go ahead and do it anyway.
Bonddad lays it out in a formula (italics mine):

Here is the GDP equation:consumer spending + investment + exports net of imports + government spending = GDP
So, if we lower government spending (which BTW has historically accounted for about 20% GDP for the last 30 years) we are lowering GDP by definition.

Bonddad makes an excellent point at the end:

There is a time to put the fiscal house back in order. When GDP growth is slow, unemployment is high, consumer spending is slow, the housing market is trying to recover and demand is soft, cutting spending is a really bad idea – as in probably the worst idea you can imagine.

I don’t necessarily have a problem with fiscal responsibility, and for some countries, sadly, it’s a necessity (3rd World debt crisis). But now is not the time to be doing this.

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0 thoughts on “Austerity Will Screw Up the Economy”

  1. The PIIGS (Portugal, Italy, Ireland, Greece, and Spain..) as part of Eurozone (since they don’t have control of the money supply..) effectively have only three things they can do in response to the crisis.
    Austerity, default, or raise taxes.
    Following the links above Ireland has done two, austerity and raised taxes. A default for Ireland or any of the other PIIGS would likely result in a ejection from the Euro. (would possibly lead to an unraveling of the Euro which would be very chaotic…) Given those scenarios which would you choose..?
    Latvia is in a similar spot.. they don’t use the Euro but have petitioned to become part of the Eurozone and have much of their debt denominated in Euros. They could default on their debt but unlike Argentina (the largest sovereign debt defaulter so far..) they are not rich in resources but depend heavily on trade. Also default would substantially delay their entry to the Eurozone.
    The bond market has made it clear that they will not loan more money for stimulus. Given that these countries can not borrow more money (except at usurious rates which would make things worse fairly quickly) their options are defaulting or raising taxes. Apparently Ireland has already done the latter. Greece is notorious for tax avoidance (at all income levels..Supposedly sort of a holdover from when they were occupied by the Turks and tax avoidance from the Ottomans (at that time..) was considered patriotic.) but has taken no action to even pursue tax scofflaws.

  2. further reason to believe that Dems will take back Senate and House seats in 2012. the Rs are gonna fuck it up royally.
    one thing that was good to hear today was that Rand Paul is all for cutting military spending. he is also in support of cutting entitlement spending, which would be bad.
    i don’t think there’s much difference between the two parties though. and they’re not really in control of any thing, it’s the corporate puppetmasters who really run the show.

  3. ” The bond market will not lend… for stimulus ” I don’t think it works quite like that, but maybe that’s the effect. I struggle with this stuff. I try to read some of Bill Mitchell’s blog regularly (billyblog) on modern monetary theory, but I’m a long way from feeling on top of it. But I know this – the lessons of Ireland, or even the EU, are not necessarily relevant to the USA. Certainly the lesson of Ireland was predicted by Keynesians as relates to the effect of austerity: ” you can’t shrink your way to growth”, and THAT is just as true for the USA, but there is a big difference in the relationship of the state to the bond markets between that of nominal, hypothetical fiat currency regimes, as in the EU, and a real fiat currency like the USA (this is my personal contribution to economics, my own theory of fiat currencies). What makes the USA’s fiat REAL is: who says that it’s the bond market’s money in the first place? What’s to stop someone taking it off them (whoever they are – the Rothschilds?). Answer: the US military. Case proved. What’s my point? Money disguises a power relationship, as Marx pointed out, and we all know. The USA has the power; it can do what the fuck it likes; it is not beholden to any bond markets or anything else. It’s all just bullshit to make you go home and watch the tv instead of riot, while they dismantle your world.

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