Will austerity come to the US?(Read article summary)
The United States may be headed for the same belt-tightening austerity that has caused an uproar across Europe. Done right, it could actually work.
The financial news yesterday was dominated by alarming reports from Europe.
âBacklash,â said The Financial TimesâŚreferring to an âanti-austerity waveâ that washed over Europe in weekend voting.
If the FT doesnât mind mixing metaphors, we donât either. But our metaphors are a bit different. What has happened is not a backlash but a wake-up call. It comes as voters realize that the placebo medicine â phony, half-hearted austerity measures peddled by the Euro elite â donât work. They want an elixir with more of a kick to it. Thatâs why the leftists are gaining so much ground.
In Greece, support for leftwing parties has trebled since the last elections. But what do you expect? The typical family has lost almost a third of its real income since the recession (which continues) began. Youth unemployment is at 50%. Young Greeks fear being a âlost generationâ that must emigrate in order to find jobs.
In France, Francois Hollande promises to be reasonable. But he won the election by attacking Sarkozyâs austerity moves. He wonât make Sarkozyâs mistake. Instead, heâll go after the rich with a top marginal tax rate of 75%âŚand promise âgrowth,â not âausterity.â
The trouble with the austerity proponents is that they didnât go far enough. Budgets were cut. But not enough. The average deficit is still about 5% â well above the Maastricht 3% limit. This left the deficit nations in tough spots. They cut spending, which angered the leftists and the layabouts. But they still were beholden to lenders to cover their deficits. And whenever their unemployment rates roseâŚor the GDP growth rate fellâŚthey had to pay more for their borrowed money.
Real austerity â with deep cuts and balanced budgets â could work. But it contradicts the whole idea of government, which is to transfer as much wealth from the outsiders to the insiders as possible. Besides, such deep cutbacks would probably trigger a zombie revolution.
And by the way, âausterityâ is coming to the US too â if Congress doesnât stop it. Economists are calling it the âfiscal cliff.â The nation is scheduled to run off the edge on Dec. 31stâŚ Mohammed El-Erian explains:
Economists are rightly starting to warn that the United States faces a worrisome âfiscal cliffâ at yearâs end. The blunt spending cuts mandated by the 2011 compromise on the debt ceiling â and the failure of the âsupercommitteeâ that followed â along with across-the-board tax increases would derail the US recovery and undermine the well-being of the global economy. We should be avoiding the edge of this cliff â and politicians should not believe that they have until the end of this year to act.
The sequestration mandated by the Budget Control Act of 2011 and the reversal of the Bush-era and payroll tax cuts would essentially mean withdrawing from the economy some 4 percent of the national income in one blunt go â and this doesnât factor in possible knock-on effects. The importance of this issue cannot be overstated. A fiscal contraction of this magnitude and composition would stop dead in its tracks the economyâs nascent healing and job creation. Consumption and investment would be harmed. Foreigners would become more cautious about buying our ever-increasing debt issuance. And with our internal growth momentum weakened, the headwinds from the European debt crisis could prove overwhelming.
The austerity show has been playing in Europe for the last two years. Thatâs why half of Europe is in recessionâŚwith the other half not far behind. Europeans are tired of it.
So, now the Europeans seem to be giving up on phony austerity and turning to phony growth. They are going to spend more borrowed and printed money. This will look vaguely like âgrowth.â There will be more jobs and more incomes. But there will be precious little real prosperity going on.
Of course, going for growth is precisely what got the developed world into such a jam in the first place. Too many people spent too much money they didnât have on too many things they didnât need.
In America, the Fed encouraged it with low ratesâŚthen after the private sector debt bubble blew up, the feds made up for the missing spending by spending more themselves.
In Europe, the euro-feds made a debt bubble possible by establishing a single currency blocâŚwith harmonized interest rates. All of a sudden Greece and Ireland could borrow as easily and cheaply as France and Germany. And so they did; they borrowed their way to the brink of bankruptcy.
Now, Francois Hollande has a plan. He wants to make Europe more like AmericaâŚwith a central bank that lends to government directly and âmutualizationâ of credit risk. In other words, he wants to do what Alexander Hamilton did to the US in 1791: make the states collectively responsible for each otherâs debt. And then heâll let the ECB print the money to buy sovereign bonds directly.
Yes, dear reader, the trend towards centralization continuesâŚwith central financial planningâŚcentral bank counterfeitingâŚand everybody going broke together.
In Europe, as in America, itâs one for allâŚand all for oneâŚ
âŚand every man for himself.
Â for The Daily Reckoning