The article then points out other leaders like David Cameron, Angela Merkel and Japan’s prime minister Yoshihiko Noda who are currently going down the austerity path. This is contrasted with Obama’s plans which generally follow the Keynesian approach, but we all know how Obama’s plans turn out lately- he can’t get anything passed. As the article’s title suggests, the author thinks this is very bad, and he continues:
You get the point- he is warning that repeating the mistakes of the past will lead to the results of the past, namely another Depression.
My feeling is that top leaders who propose/apply austerity know where that will lead. Am I wrong in thinking that world leaders are familiar with economic history?
If they know what they are doing and are purposefully leading us into another Depression, ITSM they must be motivated by that being of benefit to somebody. Who benefits from another Depression? Or are they simply unfazed by the prospect of another Depression? What explains their behavior?
The idea that Hoover was some kind of budget-conscious conservative is also rather nuts. He embarked on a rather ambitious welfare scheme - a large and very fast expansion of the budget. Never was clear where that myth came from.
The rich for one. It hurts them relatively much less, while increasing their power. People desperate for a job will put up with less pay, worse treatment, worse conditions. And since money largely equates to political power, them being the only ones with a significant amount left increases their power relative to those who have none left to spare.
Another group that would benefit would be the “starve the beast” anti-government fanatics, who have been pushing for many years for massive debt and economic disaster in order to starve the government of revenue and force it to drastically shrink. They don’t care about the suffering involved or the other consequences; that’s what makes them fanatics.
The evangelical Christians who think that suffering and despair are good things because they promote faith.
It would hurt the country. The rich have ways to survive. The rest of us don’t.
An austerity program would be an economic death spiral. There is no bottom and no up once gutting starts. The tax base shrinks with every job cut and every home lost.
We need demand. More people paying taxes will balance the budget. Cutting will shrink the economy, result in more jobs slashed and a steady drop in America’s economy. It will cut demand and the impetus to hire. That in turn will cut more demand. An austerity program would be a disaster taking millions of Americans down. It would keep the rich ensconced in their gated communities, safe , for a while.
This could end the American experiment.
Anyone with liquidity who wants to buy distressed assets benefit during a Depression.
The Fox Theatre in Atlanta cost $2.75 million to build and opened in 1929. After the owners declared bankruptcy in 1932 it was auctioned. The winning bid was $75,000.
The Fed exacerbated the Depression then with a tight monetary policy. Interest rates were raised to over 5%.
I can’t find the entire article online, and am not subscribed to the new republic. But I would guess it is just short sightedness on the part of politicians and the public who elect them. We ignore climate change for the same reason.
Plus is there a unanimous consensus among economists that the concept of austerity will lead to more depression? Seeing how most didn’t seem to see the current depression coming (if there were alarm bells coming from economists before 2007, I don’t remember hearing them en masse), it makes them seem less credible.
Plus there are serious risks to constantly spending and borrowing. Where is all the borrowed money going to come from (ie, can you continue to borrow trillions year after year? Eventually people will realize you won’t pay it back and raise interest rates). I am not an economist, but if the US is borrowing 1.6 trillion a year, Europe is running deficits of roughly 10% of GDP too. If a country gets too deep in debt that does have serious problems in and of itself.
But who wins? Whoever has cash to buy resources that are being sold off cheap. Around now is probably a good time to invest in real estate. China used its cash reserves to buy up a lot of natural resources back in 2008 and 2009, since nations were desperate for money. I don’t remember the details, but they cut some pretty good deals with nations like Russia where in exchange for money now, China would get oil at a discount for decades.
So the only people who win are those with liquid assets who want to invest and hold onto the investments for when the economy recovers.
Who benefits from a depression? The individuals and companies with a low debt load and strong cash position going in. People who are holding durable assets and are able to hang onto them for the duration. A depression drives down labor costs and lowers the purchase price of long-term investment items such as real estate, and drives out weaker competitors - and those who are able to take advantage of lower investment costs and hold out until the inevitable turnaround will ultimately be in a far better position.
One surprising thing about the current recession is that the agricultural sector has stayed very strong. Commodity prices have remained relatively high, demand, especially for exports, has stayed strong, labor costs have not increased for several years, and the value of agricultural real estate has stayed at pre-recession levels (unlike, say, residential property). Those farmers and rural landowners who have kept their debt low and reinvested in their operation stand to do very well indeed.
The people who can afford to buy low during a recession/depression, then hold their assets and eventually sell high will come out of the current situation stronger and richer than ever.
SS
Also, some specialized investors make a lot of money trading in “negative numbers.” I remember, some years ago, people making millions of dollars (of real money!) in swapping around Brazilian debt futures. It’s a little like making a bet on which race-horse comes in last in a specific race: the owner, trainer, and jockey are in a world of hurt…but they guy making the bet comes out smiling.
“Specialized”? Anyone can do it, for any equity (or option, or futures contract) you can go either short or long. And any investor with any degree of sophistication goes short at least once in a while to hedge his gains. There is nothing wrong with that. Of course, if you decide to go naked short, and there is a sudden rally, you can get wiped out - but that’s the market for you.
While it’s true that the use of options, both puts and calls, can and is used by a wide variety of people and investors it would be at least a bit over the top to say anyone can do it. There are generally certain requirements to quality for a broker dealer certification on margin accounts. They are not terrible stringent but there are some.
That’s the Keynesian view. It appears Romney/The GOP would prevent such returns on taxpayers’ money since gains for the public don’t always translate to gains for the top.
Has someone got a decimal place wrong? It looks to me as if the cost of $1 of economic impact is $0.43 ($640 bn divided by $1.5 trillion).
And why use a 2% interest rate for 30 year bonds? I am not sure that yields have ever been that low. Even in the current very low interest rate era, the yield on 30-year bonds is 3.36% Strangely, when I calculate the cost of borrowing $400bn over 30 years at 3.36%, I get $640bn - exactly the amount quoted for a 2% rate.
That’s a good question too. Maybe they meant to suggest borrowing at the Fed’s rate. Or maybe they are talking about ‘real rates’- in the section before these charts the author points out:
Look, is there really a subset of the PTB sitting in a boardroom somewhere saying, “A Depression would be good for our interests, how do we bring it about?”