Following up
this earlier post by Chris in Paris, it's starting to look like an important week coming up. This weekend we have the G-20 meeting in Toronto, with a divided group. Some call for tightening; others oppose it.
Adrian Pabst at the Guardian puts it this way (my emphasis):
Most European governments claim that slashing public spending now is essential to avoid a Greek-style meltdown and sustain the fragile recovery, otherwise financial market pressure will downgrade national bonds. That, in turn, would raise the costs of public borrowing and also increase long-term interest rates, thereby crowding out private-sector investment, which alone can create sustainable jobs.
That's essentially the argument underpinning Germany's recent austerity package of €80bn (£66bn) in spending reductions and tax increases until 2016 and also this week's Con-Lib emergency budget with 25% cuts by 2015. Across the EU, George Osborne's neo-Thatcherite approach has tipped the balance in favour of the deficit hawks who advocate swingeing cuts.
By contrast, the US, China, Russia and Brazil are adamant that cutting government spending too fast too furiously will jeopardise growth and could lead to long-term stagnation or a double-dip recession. They argue that the global credit crunch caused an economic slump that has bequeathed a deficiency of demand – a lack of total investment and consumption spending, compared with total economic capacity and full employment.
He continues (again, my emphasis):
Economically, "shock-and-awe" fiscal austerity has a strongly deflationary effect that cannot be offset by expansionary monetary policy, with baseline interest rates near 0%. Politically, austerity undermines the social bonds of trust and reciprocal help on which free, democratic societies rely. Mass unemployment and social unrest raise the spectre of nationalism and endanger the very foundations of democracy.
I'd like to underscore just for a moment those twin arguments. The first — with interest rates at the zero boundary, you
can't offset deflation (a disastrous falling-price spiral) with expansionary interest rates. This argument should sound familiar — Krugman and others have been making it for a while now.
The second argument — austerity
undermines the social contract. And when social groups are at each other's throats,
little good can occur.
So what's a market to do? Literally — what will the markets do in this environment? On the one hand, Big Money loves squeezing the "
small people". But if the small people can't buy groceries, they certainly won't buy big screens, and earnings will tank for all those big people who own most of the stock in the world.
So once more the Dow is hovering down at the magic
10,000 point. We're told this is due to
fears of a double-dip recession:
Retail stocks fell Thursday as investors worried that the economy, which had been showing some signs of life, may be making a U-turn.
J.C. Penney, Bed, Bath & Beyond, Macy's and Red Lobster and Olive Garden owner Darden Restaurants were among the top decliners in the Standard & Poor's 500 index — each falling at least 5 percent. [my emphasis]
But if the Deficit Hawks get their way — at the G-20 and here at home — a double-dip is almost assured. And don't think of the Deficit Hawks as just the Germans; they're everywhere you turn over here.
So watch the news out of Toronto — and then watch the Dow this week. Big Money is in a quandary, torn between two goals — squeezing the smalls, or lining its pockets? Which will it choose?
Gaius
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