Tags: Growth | Austerity | Debate | Nonsense

The Growth Vs. Austerity Debate Is Nonsense

By    |   Friday, 13 July 2012 01:04 PM

There is really only one course. Austerity or MUCH MORE austerity later. If you don’t reduce your borrowing now, borrowing more will only increase the amount you owe, not decrease it.

Sure, that may make life easier now, but it only will make for much more demanding austerity later when you can’t borrow more money.

By borrowing more now, you are not promoting fundamental growth, you are promoting growth based on borrowing. That won’t work long term.

Editor's Note: Economist Warns: 50% Unemployment, 100% Inflation Possible

Sure, if you make a lot of changes to solve the fundamental causes of the massive borrowing, then maybe you could argue that more borrowing now makes sense. And, that is an argument many economists use. But, in practice, there is really very little attempt at fundamental change. Just the opposite, more borrowing is usually just a way to AVOID fundamental change.

Although this debate is a bit more out of the news after the Greek and French elections it is still a huge issue. Spain is facing austerity and so are many other countries. All will be facing tremendous pressures not to cut spending.

The counterargument is that austerity will force the economy in to a downward spiral by discouraging consumer spending. That is true. But, that’s not austerity’s fault. If your economy is so dependent upon government borrowing to grow or maintain itself then your economy has a much bigger and more fundamental problem.

The underlying fundamental problem is that much of their growth wasn’t based on real economic growth, but bubble economic growth. In Spain, it was a massive housing bubble.

In Greece, it was a massive government spending bubble and private borrowing bubble. Many other countries, both publicly and privately, have also borrowed much more than they can pay back. Yes, that has boosted growth in the past decade but it is bubble growth and stops as soon as the bubble pops.

So, in imposing austerity, you are exposing the bubble nature of these economies. Their growth is not based on fundamental productivity improvement; it is based on public credit, private credit, real estate and other bubble growth. So, imposing austerity will pop these bubbles. That’s bad.

But, pumping up the bubbles even more is even worse.

Editor's Note: Economist Warns: 50% Unemployment, 100% Inflation Possible

Yes, these countries can simply deny that bubble growth was driving them and borrow more, or make the more difficult choice to pop the bubbles and focus on improving productivity to get real economic growth. Determining which is the correct choice is easy — pop the bubbles and focus on improving productivity growth.

However, making that choice is not easy. In fact, it’s pretty clear those countries will not make that choice. Instead, they will likely choose to support “growth,” which in their context is another word for more borrowing, more money printing and no fundamental changes.

Ultimately, that means they are choosing to hit the wall in some way. The borrowing and money printing can’t go on forever but, at least in the short term, it’s a lot easier and more popular in those countries than popping the bubbles and getting down to the hard work of improving productivity

About the Author: Robert Wiedemer
Robert Wiedemer is a managing director of Absolute Investment Management, an investment-advisory firm for individuals with more than $200 million under management. He is a regular contributor to Financial Intelligence Report, the flagship investment newsletter of Newsmax Media. Click Here to read more of his articles. Discover more about his latest book, "Aftershock," by Clicking Here Now.

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Friday, 13 July 2012 01:04 PM
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