Will austerity come to the US?
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Bill Bonner Guest blogger
The financial news yesterday was dominated by alarming reports from Europe.
鈥淏acklash,鈥� said The Financial Times鈥eferring to an 鈥渁nti-austerity wave鈥� that washed over Europe in weekend voting.
If the FT doesn鈥檛 mind mixing metaphors, we don鈥檛 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 鈥� phony, half-hearted austerity measures peddled by the Euro elite 鈥� don鈥檛 work. They want an elixir with more of a kick to it. That鈥檚 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 鈥榣ost generation鈥� that must emigrate in order to find jobs.
In France, Francois Hollande promises to be reasonable. But he won the election by attacking Sarkozy鈥檚 austerity moves. He won鈥檛 make Sarkozy鈥檚 mistake. Instead, he鈥檒l go after the rich with a top marginal tax rate of 75%鈥nd promise 鈥榞rowth,鈥� not 鈥榓usterity.鈥�
The trouble with the austerity proponents is that they didn鈥檛 go far enough. Budgets were cut. But not enough. The average deficit is still about 5% 鈥� 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 rose鈥r the GDP growth rate fell鈥hey had to pay more for their borrowed money.
Real austerity 鈥� with deep cuts and balanced budgets 鈥� 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, 鈥榓usterity鈥� is coming to the US too 鈥� if Congress doesn鈥檛 stop it. Economists are calling it the 鈥渇iscal cliff.鈥� The nation is scheduled to run off the edge on Dec. 31st鈥� Mohammed El-Erian explains:
Economists are rightly starting to warn that the United States faces a worrisome 鈥渇iscal cliff鈥� at year鈥檚 end. The blunt spending cuts mandated by the 2011 compromise on the debt ceiling 鈥� and the failure of the 鈥渟upercommittee鈥� that followed 鈥� 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 鈥� 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 鈥� and this doesn鈥檛 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 economy鈥檚 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. That鈥檚 why half of Europe is in recession鈥ith 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 鈥済rowth.鈥� 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 didn鈥檛 have on too many things they didn鈥檛 need.
In America, the Fed encouraged it with low rates鈥hen 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 bloc鈥ith 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 America鈥ith a central bank that lends to government directly and 鈥渕utualization鈥� 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 other鈥檚 debt. And then he鈥檒l let the ECB print the money to buy sovereign bonds directly.
Yes, dear reader, the trend towards centralization continues鈥ith central financial planning鈥entral bank counterfeiting鈥nd everybody going broke together.
In Europe, as in America, it鈥檚 one for all鈥nd all for one鈥�
鈥nd every man for himself.
Bill Bonner
听蹿辞谤 The Daily Reckoning
