Olli Rehn: Austerity won't hit growth (where's the reality?)

[Beet]

BRUSSELS (Dow Jones)--The Europe Union's move to cut budget deficits won't stifle economic growth, European Economic and Monetary Affairs Commissioner Olli Rehn said Tuesday, responding to critics of the EU's recent turn toward austerity.

"Contrary what some people argue, Europe is not suffocating growth by this strategy of fiscal consolidation," Rehn said. "What we are doing is putting our fiscal houses in order in a gradual, differentiated way: faster where the doubts about fiscal sustainability have been biggest, and slower elsewhere."

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Um, NO. "elsewhere" needs to be massively stimulating right now, not cutting.  The credit rating agencies agree.

 July 1 (Bloomberg) -- Spain’s top credit ranking was placed on review for a possible downgrade by Moody’s Investors Service as the country prepares to sell as much 3.5 billion euros ($4.3 billion) of five-year notes today.

“Deteriorating” growth prospects and challenges in meeting fiscal targets mean Spain’s Aaa classification may be lowered by as much as two grades, Moody’s analysts including Senior Vice President Kristin Lindow

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The ratings agencies are DIRECTLY contradicting Mr. Rehn! Spain is stuck in between a rock and a hard place: don't cut its budget and get downgraded for being "irresponsible". Cut its budget and get downgraded for "austerity hurting growth prospects."

MESSR. REHN WAKE UP! People like you are leading Europe down the Road to Hell.

[Filuwaúrdjan]

Spain is stuck in between a rock and a hard place: don't cut its budget and get downgraded for being "irresponsible". Cut its budget and get downgraded for "austerity hurting growth prospects."

It's a bit like a Witch Trial, isn't it? If you drown, well, innocent but alas; dead. If you don't, you're a witch and must be executed at once.

[Beet]

Spain is stuck in between a rock and a hard place: don't cut its budget and get downgraded for being "irresponsible". Cut its budget and get downgraded for "austerity hurting growth prospects."

It's a bit like a Witch Trial, isn't it? If you drown, well, innocent but alas; dead. If you don't, you're a witch and must be executed at once.

It's hard to imagine what these people at the EC, the Bundesbank, and the ECB are thinking, what they expect to happen.

[phk]

I think volatility will rise in the long term in the EU in general. Investors will be sure to realize the relative insignificance of these "rescue packages" and "stimulus" and the true level of indebtedness in these countries.

With an assured recession + short run fiscal austerity. It is a damned if you do, damned if you don't type of proposition.

[Beet]

I think volatility will rise in the long term in the EU in general. Investors will be sure to realize the relative insignificance of these "rescue packages" and "stimulus" and the true level of indebtedness in these countries.

With an assured recession + short run fiscal austerity. It is a damned if you do, damned if you don't type of proposition.

Rising debt is an inevitable part of capitalism. As Japan shows, you can have a large amount of debt liquidation without a lot of volatility. They've had stagnation, but to the average person, investor, and businessman that is far preferable to extreme swings of up or down.

The problem is that Europe are doing the opposite of stimulus right now. They've been captured by the modern day Hoovers and Mellons.

[War on Want]

Beet=Paul Krugman?

[Beet]

Beet=Paul Krugman?

Krugman is the only prominent voice worth listening to on economics these days.

[phk]

I think volatility will rise in the long term in the EU in general. Investors will be sure to realize the relative insignificance of these "rescue packages" and "stimulus" and the true level of indebtedness in these countries.

With an assured recession + short run fiscal austerity. It is a damned if you do, damned if you don't type of proposition.

Rising debt is an inevitable part of capitalism. As Japan shows, you can have a large amount of debt liquidation without a lot of volatility. They've had stagnation, but to the average person, investor, and businessman that is far preferable to extreme swings of up or down.

The problem is that Europe are doing the opposite of stimulus right now. They've been captured by the modern day Hoovers and Mellons.

Reminds me of something I had read earlier somewhere about Germany in particular. I mean it is a common view here that governments should run a deficit in bad times, surplus or a balanced-budget in good times. I generally agree and it pans out in real time in the US.

But from a German PoV these are the good times and they want to run a surplus.

They have done pretty good fiscal management seeing as German bonds are a safe haven investment just like US Treasury securities and could be used as the risk-free rate in a CAPM model if its higher than US yields, yet they have a pretty bad debt-to-GDP ratio. Their bonds are rated AAA.

After unification in 1989 the Germans tried (against their will, they had to) more than a decade of massive fiscal stimulus, and subsidization of consumption, starting with well under full employment, and yet with mediocre results?  That wasn't long ago.

Only about 40% of Germany is actually employed today.  

The Germans are well aware that most of their neighbors have not managed their finances nearly as well as they have (Greece, Spain, Italy, etc.).  How should we expect them to respond, if we, and others, now tell them that, after all their careful management, it is now time to run up debt to spend more money in their neighbors' shops?  

This is an addition to EU transfer payments from Germany to lower-end EU nations.

[Beet]

I think volatility will rise in the long term in the EU in general. Investors will be sure to realize the relative insignificance of these "rescue packages" and "stimulus" and the true level of indebtedness in these countries.

With an assured recession + short run fiscal austerity. It is a damned if you do, damned if you don't type of proposition.

Rising debt is an inevitable part of capitalism. As Japan shows, you can have a large amount of debt liquidation without a lot of volatility. They've had stagnation, but to the average person, investor, and businessman that is far preferable to extreme swings of up or down.

The problem is that Europe are doing the opposite of stimulus right now. They've been captured by the modern day Hoovers and Mellons.

Reminds me of something I had read earlier somewhere about Germany in particular. I mean it is a common view here that governments should run a deficit in bad times, surplus or a balanced-budget in good times. I generally agree and it pans out in real time in the US.

But from a German PoV these are the good times and they want to run a surplus.

They have done pretty good fiscal management seeing as German bonds are a safe haven investment just like US Treasury securities and could be used as the risk-free rate in a CAPM model if its higher than US yields, yet they have a pretty bad debt-to-GDP ratio. Their bonds are rated AAA.

After unification in 1989 the Germans tried (against their will, they had to) more than a decade of massive fiscal stimulus, and subsidization of consumption, starting with well under full employment, and yet with mediocre results?  That wasn't long ago.

Only about 40% of Germany is actually employed today.  

The Germans are well aware that most of their neighbors have not managed their finances nearly as well as they have (Greece, Spain, Italy, etc.).  How should we expect them to respond, if we, and others, now tell them that, after all their careful management, it is now time to run up debt to spend more money in their neighbors' shops?  

This is an addition to EU transfer payments from Germany to lower-end EU nations.

How should we expect them to respond? Well first of all, is spending money really so painful? Yes, you draw down some savings, but you get something pleasant in return.

Seriously though, we should expect "them" to see that without German demand, peripheral Europe will only spiral further down into the abyss, and that this will happen very soon. And to see that when this does happen, it will hurt Germany a great deal, and force Germany to spend a great deal of money nonetheless. It will also hurt Germany's earnings power and no amount of savings will be able to help Germany recover that earnings power.

I agree that Germany did a good job in the past. But it is not doing a good job today. It is the biggest and most influential gorilla in the European union, a union whose problems clearly originate from imbalances between countries. It is precisely because Germany has run big surpluses in the 2000s that Germany should not be doing what Greece is doing and should instead be doing the opposite. Germany should be doing its part to help address regional imbalances.

[Sam Spade]

Beet=Paul Krugman?

Krugman is the only prominent voice worth listening to on economics these days.

Krugman doesn't know his ass from his face, and that's a compliment as far as I'm concerned.

[Torie]

Big government debt when  interest rates go up, can tank nations, as the cost of debt carry becomes like some exponentially strong sulfuric acid, dissolving everything in its path. First  things first. Running up the debt to keep public employees employed at above market rates, while the rest not employed just get a check  for unemployment benefits "forever," is just nutter Nancy Pelosi. Nutter!

[Beet]

Beet=Paul Krugman?

Krugman is the only prominent voice worth listening to on economics these days.

Krugman doesn't know his ass from his face, and that's a compliment as far as I'm concerned.

If he's so dumb, then why is he the most prominent person [besides those who work inside ratings agencies and those who trade bonds... but those people aren't pundits] who seems to understand that cutting spending doesn't help your finances if growth/revenues is falling even faster?

[opebo]

Beet, there is no need to pay any attention to Torie and SS here - they consistently believe our problem is interest rates and inflation.  In other words they don't know their asses from their faces, and fear exactly the opposite of what is actually occurring.

[Torie]

Beet, there is no need to pay any attention to Torie and SS here - they consistently believe our problem is interest rates and inflation.  In other words they don't know their asses from their faces, and fear exactly the opposite of what is actually occurring.

I know my ass from my face, and these days, my ass looks more attractive than my face, so you are wrong once again Opebo!  Wrong!   And what gave you the idea that I "fear" something?  I personally have nothing to fear Opebo - nothing.

Anyway, a big debt, and higher interest rates associated with the cost of carrying it,  is a mathematical exercise, nothing more, and if you believe interest rates will remain low until the supernova, OK. I guess leaps of faith don't always need to be in the sacred context. In fact, more often than not, I am finding, that they are in the secular realm actually.

[Ban my account ffs!]

2.02% percent year over year inflation as of May 2010.. clearly we need major budget cuts and major hikes in the interest rates before inflation kills the economy!

Not every recession is 1981, you know, Torie.  Some are more like.. you know.. that one that occurred in 1929-1932.

We needn't worry about inflation.  Government should be spending like crazy to stimulate the economy.  Then if inflation begins to nudge upward.... raise the rates.

But this whole "we need to cut taxes and raise interest rates and beat inflation and cut spending!" will do nothing but make the situation much much worse.

[Torie]

2.02% percent year over year inflation as of May 2010.. clearly we need major budget cuts and major hikes in the interest rates before inflation kills the economy!

Not every recession is 1981, you know, Torie.  Some are more like.. you know.. that one that occurred in 1929-1932.

We needn't worry about inflation.  Government should be spending like crazy to stimulate the economy.  Then if inflation begins to nudge upward.... raise the rates.

But this whole "we need to cut taxes and raise interest rates and beat inflation and cut spending!" will do nothing but make the situation much much worse.

Get back to me Snow, when banks start lending again. Ironically, it will be when the economy actually does recover to the point, where it is safe to lend again to other than Torie and Warren Buffett, that the crunch will come, and cause things to unravel, as interest rates then do ratchet up. Another irony, is that absent the Euro being even more of a basket case, interest rates would have already risen, making the cost of debt service higher. We are close to the edge. When the debt hits 90% of the GDP, about a couple of years away if you believe Obama's phony numbers, and interest rates go up a couple of points, either due to inflation, higher real interest rates, or the cost of a higher default risk, watch and see what happens. Anyway, Europe for some reason thinks it needs to slash spending. The main reason is that the debt levels are a bit higher, and the Euro is not the reserve currency of choice, which means that places like China are less interested in enabling the place. We are on borrowed time.

[Beet]

If the economy actually recovers to the point where interest rates rise, revenues will go up and the deficit will come down.

Popular understandings of interest rates are literally Neanderthal.

Even among some pompous historians like Niall Ferguson.

Rising interest rates doesn't always mean investor worry. Usually what it means (99.9999% of the time) is that the opportunity cost to hold bonds has increased. After all, in the market for government bonds, just like any market, the price for any one supplier is determined in part by the closeness and attractiveness of potential substitutes.

Therefore, if rising interest rates lead to a credit event in government bonds, the first thing that will happen is that overall economic prospects will weaken, and this will lead to a rush from corporate and high risk bonds into government bonds, lowering the yield again.

All of this is academic anyway. Deal with the problem at hand. It's more than enough.

[opebo]

... I personally have nothing to fear Opebo - nothing.

Well, nothing economic, old.  But I didn't mean 'fear' in the sense that you were cowering or something - it is common usuage to use the term 'fear' for 'believes something negative may happen'.  Such as, I may say 'I fear the Gulf Coast will be filthy with oil for the rest of our lives' or 'I fear the american people will elect a fascist in 2012'.  I do expect those things, but I don't 'fear' them in the sense you mention.

...if you believe interest rates will remain low until the supernova, OK. I guess leaps of faith don't always need to be in the sacred context. In fact, more often than not, I am finding, that they are in the secular realm actually.

We're at the 1933 stage, Torie so even in the unlikely event we get good policy (WW II/New Deal/Great Society level spending), we don't have to worry about inflation or interest rates for about 35-40 years.

Get back to me Snow, when banks start lending again.

Banks won't just spontaneously 'start lending again', Tory.  We're in a downward spiral that can only be broken by good (Keynesian) policy.   

I understand why you and yours chose to talk about a non-existent problem, because you don't like the medicine for what actually ills us.