Europe’s depression deepens


Not that it should be a surprise to most MB readers, but the economic data coming out of nations within the Eurozone is once again “worse than expected”. Last night it started with Italy:

Italy’s economy contracted more than expected in the first quarter of 2013, shrinking 0.5% from the previous three months as activity fell in all sectors except farming, national statistics institute Istat said Wednesday.
Gross domestic product in the euro zone’s third-largest economy has now contracted for seven consecutive quarters, the longest recession since Istat began compiling comparable data in 1990.

The preliminary figure, adjusted for seasonal factors and the number of working days, was markedly worse than the average forecast of a 0.3% quarterly contraction in a Dow Jones Newswire poll of 19 economists.
Italy’s GDP shrank 2.3% from the fourth quarter of 2012, Istat said, slightly worse than the average forecast of a 2.2% annual decline.

While dismal, Italy’s economy didn’t decline as sharply as it did in the final three months of 2012, when it shrank 0.9% from the previous quarter.

I’ve spoken about Italy a number of times previously, what the country needs is growth, it isn’t coming. From January 2012:

Italy does have the advantage that over 75% of its public debt is long term with an average maturity of approximately 7 years and only about 12% of that is variable interest rate. This means that even though Italian yields are high now ( 10yr @ 7.11) the flow-on effect to the overall deficit is relatively limited.

The real problem in Italy is that its economy has been stagnate for nearly the entire decade. According to the IMF between in 2000-2010 among all countries of the world Italy only grew faster than Haiti and Zimbabwe. In 2010, Italian GDP was only 2.5% higher than in 2000. This problem is actually made worse by the fact that this is such a long term trend. Italy’s per-capita GDP growth was 5.4% in the 1950s, 5.1% in the 1960s, 3.1% in the 1970s, 2.2% in the 1980s and 1.4% in the 1990s. Since the new millennium the country has hardly moved forward and if we extrapolate out that trend Italy will spend the next decade in contraction.

On top of stalling growth, Italy has a demographics issue. With a debt to GDP ratio at 120% along with a population with a median age of approximately 45 Italy really does look like the Japan of Europe. The only problem is Japan is competitive, runs a trade surplus and is sovereign in its own currency. Italy has none of these things.

Given all of these problems it will be interesting to see what Mario Monti can come up with to get the country back onto a path to growth while staying in the Euro and meeting the countries existing obligations. It would appear to be a monumental task.

And we can now see, even with the steerage of Mario Monti, nothing has changed. The long term trend of shrinking rates of GDP growth continues and, given current EZ policies, its hard to see that changing in the coming year. We’ve seen over the last month that the economic retrenchment is slowly seeping into the banking system through bad loans as unemployment remains over 10%. On top of that the latest PMI data continues to show that manufacturing is in contraction and forward looking data suggests it will stay there for the coming year at least.

But Italy certainly isn’t alone. France too, is back into recession:

France has entered its second recession in four years after the economy shrank by 0.2% in the first quarter of the year, official figures show.

Its economy shrank by the same amount in the last quarter of 2012.
President Francois Hollande has said he expects zero growth in 2013, lower than a 0.1% growth forecast by the French government.

Separate figures showed that the recession across the 17-nation eurozone has continued into a sixth quarter.
A recession is defined as two consecutive quarters of negative growth.

The economy of the 17-nation bloc shrank by 0.2% in the January to March period, according to the EU’s statistics office Eurostat, with nine of its members now in recession. Within the zone, France has record unemployment and low business and consumer confidence.

Again this should come as no surprise, I’ve been speaking about France for nearly 2 years. The structure of its economy at present is based on internal consumption which requires external capital. Attempted austerity in the government sector was always going to slow the economy, the issue now, as it is with many European nations, is exactly what is the credible plan to make the transition from this model to one of export-led growth in an environment of non-floating currency and while major trading partners are all trying the same trick. The most likely outcome, unfortunately, is a deflationary spiral across the zone leading to much higher unemployment, large loss of private sector wealth and eventually political and social unrest.

I’ve discussed previously that monetary policy of the kind being implemented by the ECB can only do so much and is very unlikely to be able to offset the fiscal policy being implemented across Europe, no matter what Mr Draghi says about it every month, and that continues to show in the data.

France now joins Greece, Spain, Italy, Cyprus, Portugal, the Czech Republic, Hungary, Belgium, Finland and the Netherlands into recession, but there will be more to come.

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  1. Why the euro stays so high with these conditions ?
    A good 40% devaluation would help them tremendously

    • Dam

      I’m not sure what the current position is but pre GFC the Eurozone as a whole ran a close to balance external account.
      Stuck in the middle of it you have massive exporting powerhouse, Germany, which tends to hold the Euro up.

  2. France’s problems ” a country relying on internal consumption financed by external capital” looks like it could be a case of looking in the mirror.

    • “it could be a case of looking in the mirror.”

      Too few people recognise ‘us’ in the mirror!

  3. Have spent only a little time in Italy but moreso in France.

    ” the issue now, as it is with many European nations, is exactly what is the credible plan to make the transition from this model to one of export-led growth in an environment of non-floating currency and while major trading partners are all trying the same trick”

    You correctly pose THE question UE. The impression I get is that in both economies, much moreso in Italy, the cash or black economy is significant and getting bigger in the case of Italy. One reason for that is the onerous tax rates imposed on earners. Seeing as how many different attempts have not produced fruit, maybe it’s time for some radical action? Somehow , more disposable income needs to be circulating.

    One good place to start IMO is to dramatically reduce Govts participation in the economy , currently in the vicinity of 50% of GDP or therebouts. That needs a lot of tax to be taken. I see also Sweden is reducing taxes;

    Sure , lower tax may not improve present Debt levels but with some sensible spending cuts too the economies of France and Italy may actually grow putting more confidence back and lifting GDP. It surely is worth a try.

    • but with some sensible spending cuts too the economies of France and Italy may actually grow putting more confidence back

      This is where austerity economics (indeed most schools of economics) descends into pop psychology.

      Why should people and corporations (but I repeat myself) feel more confident because there are spending cuts?

      Where is the hard empirical evidence linking spending cuts with increased business/consumer “confidence” ?

      • Mav that’s the myopic view.

        Where is the evidence that exponentially expanding debt with more and more people employed to inhibit production and raise the costs of the productive works? It’s not working now so what will change to make that model work?

      • There may be empirical evidence out there for Keynesian stimulus, but to me, I need no evidence other than that the stimulus gives the unemployed that much time away from idling away into destitution, hunger and starvation.

        To paraphrase a line from “Invictus” – it is not a political or economic calculation, it is a human calculation.

        Debt is a man-made, virtual construct written on a piece of paper or computer, that can be wiped away by sovereign decree and is generally owed to people who are well off and can still live comfortably after the loss. On the other hand, the hunger and starvation are real, suffered by real human beings for no fault of their own.

      • Wiping away debt does not solve the problem. I understand that modern economics, and our favourite economist, believes that fiddling around bits of paper throwing them here and there is the solution to the problems.

        The debt is the mirror of the underlying mis-allocations and distortions. You can wipe away the debt, but if you stop any further debt arising, you still have a whole poplutation that is non-productive and contributes nothing. Our societies have been distorted by the cheap, in fact negative, cost of debt. It has allowed non-productive sectors to wreck productive sectors. There-in lies the problem. As I’ve banged on about, more than often enough if you like, we have to re-build our societies starting with ourselves and our expectations, through our primary schools and upward through universities and colleges. We have to then be able to provide the workplaces for people we have now trained for productive work. All that will require capital. We cannot just print this sort of capital. It requires resources, scarce materials, machinery etc.

        Forgive me one other comment but ther ehas been so much stupidity directed at me these last couple of days on this subject.
        You want that no one suffers. So it’s alright we wreck teh kids futures so more of them suffer more severeley?

        The hole we have dug for our societies over 50 years of this economic insanity cannot be solved without dislocation. I’m starting to feel fortunate that I’m headed towards the autumn of my existence. However I’m starting to get really out of my tree when people start arguing that my grand-kids should suffer because we all want to sit around in air-conditioned offices, contemplating our navels, rather than do any actual work or alter our self-indulgent over consuming lifestyles.

        That’s the proposition I’ve been given by this anti-austerity drivel of the past few days.It’s the prevailing economic wisdom it seems.
        Fanbloodytastic! The world will be a great place!

        P.S. As I’ve pointed out often enough the forgiveness of debt also involves the wiping out of savings. Who the hell will ever save again? Where will all the funds we need for investment come from? Debt is free! No cost to over-consumption! God help our ecological world!

      • “Invictus” – it is not a political or economic calculation, it is a human calculation.

        Cheesh Mav! That’s a BS statement attempting demonise any of us who are interested in the problems our children will face as a result of our over-indulgence.
        There’s too much of this crap floating around MB lately. Surely we are capable of a better standard of economic thinking!

      • Nicely stated Mav.

        Only problem is, nearly all those who support the belief system of debt-financed “countercyclical” government spending — to reduce suffering, purportedly — fail to recognise that in the long run, nothing good is achieved by simply substituting private debt-at-usury growth, with “government” debt-at-usury growth. In the long run, the “economy” (ie, the workers/taxpayers) stretching forward into future generations will be forced to repay the unpayable. Hence the quite valid arguments against what is seen as “kicking the can down the road”.

        I would argue that, in the Big Picture, simply substituting private debt-at-usury growth with public debt-at-usury growth really achieves only one thing: an ever more complete enslavement – a “selling out”, indeed – of the whole nation to the best interests (pun intended) of the usurer class.

        EDIT: Flawse my good man, for more, see my belated comment in the Forum, in response to your observations on the now-closed Carbon Economy post.

      • Alex, one month’s worth of data? I was hoping for a more longer term empirical example where austerity has led to increased job creation and economic growth. At the moment, there are 50 million US citizens who rely on food stamps, some of them with 2 jobs working for Walmart, but still can’t earn enough to eat!!

        Flawse, you are going into historical aspects of the problem. We agree on what caused the problem. But reversing the steps that led to the problem isn’t necessarily going to give us a solution where vast number of people don’t simply wither away into a permanent state of unemployment. A myopic, short-term solution is exactly what is needed because if you can’t keep the parents employed, what’s the point in worrying about debt that may or may not impede future generations!

        Note: when I say Keynesian, I don’t mean the gold-plated perversions of keynesian stimulus preached and practised by pollies and crude Keynesian economists like Krugman. I literally mean what Keynes himself said and wrote.

      • Flawse, I am not demonising anyone, just stating my opinion/belief on what drove economic thinking of Keynes. You can take it or ignore it.

      • Mav

        Re Keynes sure you are right. however we are now at the end of 50 years of BS Keynesianism. It’s way past time for the other part of the cycle to swing in!

        The point is that applying interest rates that ae even more RAT negative, applying more Govt, having more people sitting around in offices whose job it is to impede productive activity, is not making anything better. All the proposed measures I’ve seen so far involve creating more debt and making the problem worse. Even those thinking along the lines of infrastructure are thinking in terms of spending money on infrastructure to promote non-productive expansion.

        Further it all depends on our being able to borrow from foreigners who are saving. If we don’t decrease consumption then any investment we make involves expansion of debt. So what happens to the model as the Chinese alter their society to a more consumption based one and no longer send their savings?
        What’s the end game?

      • Alex Heyworth

        Mav, the problem with referring to what Keynes said and wrote is that he said and wrote a lot of things that are contradictory. Sometimes in the same work. You need to be specific about which particular things he said and wrote that you are referring to.

      • Mav,

        As a Gov’t, I will cut your income tax by 25%.

        With that extra money in your pocket what would YOU do and how would YOU and your family feel about it, respond?

        Mortgage paydown?
        Education changes?
        Healthcare options?
        A vehicle or perhaps holiday?
        Consumer articles- clothes, entertainment etc?

        What spending changes would YOUR family make with a 25% cut in income tax?

        Now, YOU are a Business owner and you have received a 25% reduction in your tax bill.

        Bank more profits as Cash Flow improves?
        Invest in better equipment, which will need Training etc?
        Expand ? Added employees?
        Diversify? Added employees?

        I think you can see multitudes of positive influences for an economy. With a higher transaction rate comes more GST and with higher GDP comes higher income and Company tax receipts.

        If you want the cash cow to give more milk, you wont get there by starving it or milking it to death. The fundamental problem with much of Europe is that the right or favorable Business and Consumer climate does not exist or is in a poor condition.

        They should stop f&^cking around and get Big Govt well out of the picture because Big Govt IS the problem.

      • Alex, re the first paper – moving directly to the conclusion (Page 12-13):

        * Tax cuts != Austerity or spending cut. Tax cut is obviously a cut on the govt revenue. It does not mean spending has been cut. Obama stimulus had 1/3rd of it in the form of tax cuts. So is that austerity or Keynesian stimulus or both?

        * On the spending cuts, it tries to argue the counter-factual, without actually being conclusive or providing evidence where spending cut led to increased consumer confidence – “they may have negative (long-run) indirect effects on private demand, as they reduce both consumer and business confidence.”

        Edit: GSM, please refer to point 1. A tax cut is not austerity. It is merely substitution of revenue financing with deficit financing.

      • Mav,

        “Where is the hard empirical evidence linking spending cuts with increased business/consumer “confidence” ?”

        Show us the empirical evidence that ever increasing levels of National Debt , that finances sometimes obsene Govt spending, is beneficial and free of negative consequence?

        Here is an analysis over 8 centuries which includes the subject of National Debt and defaults. Debt is NOT working.

      • drsmithyMEMBER

        As a Gov’t, I will cut your income tax by 25%
        Why 25% ? Why not 50%, 75%, or 100% ?

        They should stop f&^cking around and get Big Govt well out of the picture because Big Govt IS the problem.
        Define “Big Govt”.

        Show us the empirical evidence that ever increasing levels of National Debt , that finances sometimes obsene Govt spending, is beneficial and free of negative consequence?
        This is a straw man.

      • doc,

        “Why 25% ? ” Because it’s a good start.

        “Define “Big Govt”.”

        ALP Govt Australia, Socialist France.

        “Big” meaning too big to afford ie NOT living within it’s means.

      • The kind of stimulus I would look at is FDR’s New Deal Work Progress Administration., not the gold-plated BER or China’s bridges-to-nowhere FAI stimulus (of which GSM is an indirect beneficiary, whether he accepts it or not).

        It is ironic that FDR’s new deal was replaced by German austerity induced WWII “stimulus”.

      • drsmithyMEMBER

        Because it’s a good start.
        Why ? Why is it better than 10%, 20% or 40% ?

        ALP Govt Australia, Socialist France.
        Those are examples, not definitions.

        “Big” meaning too big to afford ie NOT living within it’s means.
        Our current Government could be “living within its means” by eliminating negative gearing and middle class welfare. Or by rolling back to pre-Howard income taxes.

        Your “metric” (to use the term loosely) is meaningless.

      • Ronin8317MEMBER

        Before people claim ‘Keynesian economics’ is wrong, it may be a good idea to read his work, rather than what dissenters CLAIM his work is about. His ‘General Theory’ accurately describes the event during the Great Depression in regard to the deflationary debt spiral. ‘Debt doesn’t matter’ comes from Modern Monetary Theory, not Keynesian.

        Ignore the mathematics abstractions, and go back to fundamental principle. An unemployed person doesn’t make anything, so the priority is to put people back into work that ‘makes stuff’. However, you need a demand for the ‘stuff’, so either the Government takes over and buys, or you need make your stuff cheaper and sell it overseas.

        In the case of Europe, the common currency prevents countries like Italy from devaluation to boost export. Cutting government spending will makes things worse. Increasing government spending however won’t make things better, because the extra debt is used to import goods and services. The only solution is to default, exit the Euro, introduce a new currency and make production in the country competitive again. Until this is accepted, they’ll continue to suffer.

      • doc,
        What is meaningless is your pointless demands for metrics. They don’t matter. What matters is the trajectory of Debt , Tax and Govt expenditures at present. That and changing the pathetic entitlement mentality and drivel being pushed by nanny statists and the Left.

      • drsmithyMEMBER

        What is meaningless is your pointless demands for metrics. They don’t matter. What matters is the trajectory of Debt , Tax and Govt expenditures at present.
        Can you explain how you are measuring the “trajectory” without metrics ?

        That and changing the pathetic entitlement mentality and drivel being pushed by nanny statists and the Left.
        The responsibility for creating the massive entitlement culture in middle- and upper-class Australia lies almost entirely at the feet of the Howard and Costello governments.

      • That and changing the pathetic entitlement mentality and drivel being pushed by nanny statists and the Left.

        $51 billion on the old aged pension

        $80% of the $24 billion ($19 billion) on medicare is spent on baby boomers.

        The $30 billion of foregone tax receipts on negative gearing, and around 57% is for baby boomers – $17 billion.

        $86 billion, or around 1/3 of ALL government spending is to baby boomers on 3 policies.

        We can compulsory euthanise all baby boomers can cut total tax tax receipts by 33%, or if just isolated to income tax receipts, it would be around 55%. Much more than the 25% you offer.

        This ONCE again is why you are a proven idiot. Your idiocy is deomnstratable by your betters every day, and you keep coming back to peddle this BS, you must have a serious learning disability.

        There are massive strucutural inbalances in revenue and spending, but it isn’t favouring welfare dependents or ‘leftists’.

        We do have an ovearchig bureaucracy, a big government. It was put theer to protect the interest of the already well off.

      • Mav…sorry! I wasn’t actually accusing you of demonising. I thought the ‘invictus’ was. It had no other possible intent. I just thought you’d chosen a bad quotation.

      • Alex Heyworth

        Mav, I agree that infrastructure spending along the lines of FDR’s New Deal is among the more worthwhile forms of government spending. In fact, the US could do with quite a lot of spending refurbishing that infrastructure right now.

        That type of spending, with a (relatively) fixed time frame and outlay, is generally greatly preferable to recurrent spending in terms of its effect on the economy, although of course it is better if the expenditure is structured to ensure value for money and is based on rigorous cost benefit analysis.

        The problem is that recurrent spending is much favoured by those who receive it, and they each get one vote. Thus democracy contains within it the seeds of its own destruction. It is no accident that nations which have been virtually destroyed, such as Germany and Japan after WWII, are such economic powerhouses for a substantial period afterwards. All the sclerotic regulation and cozy relationships between government and interest groups built up over generations have been swept away, enabling a fresh start.

        Almost makes me hanker for a revolution.

  4. I’m amazed Italy’s economy has only shrunken by 0.5% given overall unemployment has been above 10% for the past 12 months and 36% for under 24s. I guess its because their economy has been running at trough levels for so long that there is little room to shrink further, or these unemployed people were marginal ‘producers’.

  5. reusachtigeMEMBER

    There is only one solution. These failed Euro states need to leave the EU and go bust. Sure, it will bring down the international banking system but … meh. They made the mistakes and have to take the hit. “Debts that cannot be repaid will not be repaid!”

    • That’s exactly right. People like to poo-poo Steve Keen, but his suggestion of a wholesale debt jubilee is going to be needed at some point. Countries are running up debts like it’s monopoly money. Some people argue that the debts can be inflated away over time. Yes, but at what level of inflation? And over what timeframe? Are we talking about 5%+ inflation for the forseeable future? Are we talking about Zimbabwe-like inflation levels? And who’s to say that more debt won’t be accumulated in that time period, thereby lessening any reduction in debt anyway?

      It’s hard to see how any country anywhere on the planet has the courage to pay off it’s debt in any reasonable timeframe. Nor will they let the TBTF banks take the hit and therefore bring down the international financial system. The only other alternative is wholesale debt forgiveness. It’s very unfair and the devil will most certainly be in the detail. But it’s hard to see how it could ultimately end any other way.

      • Ralph

        As per my post how does debt forgiveness (or inflation) help at all….are we resetting everything so we can just go on another round of debt but this time at a faster pace! So we can use up our world at a faster and faster pace? So more and more of us can sit around doing nothing ?

      • Ralph, the debt jubilee is absolute madness. People would then just load up and expect more bail outs.

        Whilst I don’t support the Austrian version of austerity, it’s clear that government spending has to be targeted at providing the greatest stimulus to the economy and not just used to buy votes amongst the party faithful.

        It’s not so much about spending or not spending, it’s appropriate efficient spending that moves money into the economy that gets used and not just into the pockets of those who don’t need it. Stimulate business activity so that people get employed building infrastructure and projects we actually need.

      • Alex Heyworth

        It’s hard to see how any country anywhere on the planet has the courage to pay off it’s debt in any reasonable timeframe.

        With current interest rates, most of them don’t have the incentive.

        It’s only when the market gets jumpy and starts demanding higher interest that the incentive exists. By which time, of course, it’s too late.

      • I agree with both PF and flawse that debt forgiveness has serious issues and should not be entered into lightly. I absolutely agree that everyone should be responsible for every dollar of debt they incur, with interest of course. Personally, I’m in favour of banks taking large losses or going bankrupt for irresponsible lending or bad management. Just as any other business does. There should be no TBTF.

        My only point is that the world is what it is, TBTF is here and some countries have debts (e.g. US, Japan, much of Europe) that are so large that it is difficult to see how they will ever be paid back. Much of Europe is now chasing its own tail embarking on austerity but then having to borrow, print and spend because the modern economy has forgotten how to exist without credit. I truly hope there never is a debt jubilee or reset. I see it as fundamentally wrong and unfair. But as a realist, I just point out that it is probably going to happen at some point in the future.

      • JohnsonMMEMBER

        A debt jubilee only works with the end of a fractional reserve lending system. You can’t forgive the debt and keep the system the same or the problem will be worse in no time flat.

        But if money were not something that banks could create… if i put my money in the bank and they just held it and actually charged me a fee for keeping it safe – they didnt photocopy it and give it to some mortgagee.. if getting a loan meant that someone actually GAVE you their money and they didnt have it any more, so it was *expensive* and your lender would only do it if they saw prospects for a return on investment…. and if banks were nothing more than middle-men with big vaults that facilitated the market of bringing borrowers to lenders…

        well yeah I suppose that could work. and it would move us away from the series of specufested debt-driven bubbles we have fallen into.

        Tbh, I’m not sure of all the ramifications of this (I mean who with any sense of honesty or humility is?). But I suspect there would be downsides too, like you may find startup capital for firms harder to access for instance. I think the dialogue may eventually go here, but probably not for a few decades (till the system is well and truly broken).

        You may also be able to allow governments to create new currency as population changes, that would allow them to run at a modest perpetual deficit without any associated debt. But effectively you’d be aiming for a stable money supply relative to your population, and ending the perpetual expansion of debt that our livelihood has become tied to.

      • Actually the debt jubilee was used historically by many cultures as a way of surviving usury. As the economy became paralyzed by debt and indentured service the monarch would declare a jubilee and allow useful work to resume.
        There are side effects and complications but it worked. The alternative is horrible recessions or something like Japans lost decade.

      • If you have a modern banking system you have to accept risk, if you don’t have a modern banking system everyone will have to accept a much lower standard of living.

        Even Sharia finance has the same issues for all intents and purposes. They get around the religious aspect by using different terminology such as calling interest “rent” – but it’s still the same.

        You either give up risk or hope, which one is the least compelling?

      • JohnsonMMEMBER

        Not convinced that we really would have lower living standards, but I’d be interested in hearing more facts, evidence and well developed considerations and analysis about it.

        I think its just such a scary and radical idea no one wants to even think about it.

        The down side of what we have is not just risk though. Risk is sometimes things pay off and sometimes you lose. What we have is a decay of our system without any plan for an endgame – just add another $t to the debt pool and let the next guy worry about it (well I’m sure the plutocrats have their plans but there aren’t any for the rest of us).

      • JohnsonM – do you think we would have this level of technology, sophisticated markets for everything from grain to highways and Jumbo Jets without people and companies being able to borrower what they don’t have to achieve what they need to achieve, without credit and a banking system.

        Look at the countries that don’t provide accessible credit to their people and what do you see?

      • Alex Heyworth

        PF, it’s not so much the accessibility of credit that is causing problems so much as its price. Cheap credit enables speculative bubbles, encourages spending on worthless consumer tat and allows governments to take a mañana attitude to fiscal responsibility.

      • JohnsonMMEMBER

        People could still borrow, but there would be much less capital available making it more expensive. Inevitably you’d miss out on quality investments (and a lot more malinvestments as capital would tend to only go where it is most productive). So yes I think you’d probably find things would change at a slower pace. That’s not to say we owe all our technological progress to the banking system though..

        Idk why but that doesn’t seem to bother me. Maybe my IPAD 2.0 didnt make me happy enough and the 3.0 will finally fix my life and give it meaning!

        I jest, but I suppose it’s all a question of how we measure living standards. I’m now looking at either 30 years of debt to pay off a shitty 3 bedroom house that my family has already outgrown, or we could follow suit with the world and have a crashing property market that would probably end up leaving me and a lot of my family and friends unemployed. Yay!

        I’d rather trade in the ipad, but I suppose that’s cause I’m young and not already entrenched in a system that favours me.

      • dumb_non_economist


        Even Sharia finance has the same issues for all intents and purposes. They get around the religious aspect by using different terminology such as calling interest “rent” – but it’s still the same.

        I’m sorry, but that is not correct. It isn’t as simple as changing the name, the lender becomes part owner of whatever it is and is not simply lending money, but becomes involved in the asset. See the link below and go to Principles.

  6. Key to understanding economics is to understand the difference between real resources and money/tokens/debt/promises.
    It might help to think of one person shipwrecked on an island. Once you understand that, imagine there being 2,3 or more living together.
    Could they all retire at the same time? How could this be financed? Could deficit spending enable this? Perhaps an economic stimulous could boost their aggregate demand and allow them to finance a simultaneous retirement. Perhaps their housing wealth holds the answer. Have they put enough money into their houses to feed themselves in later years?

  7. The unending Tax and Spend mentality is alive and well with many MBer’s. It’s as if Debt, the Costs of Debt, the constraints of Debt, the Obligations with Debt, the dysfunctional behaviours derived from Debt, the malinvestments accompanying Debt, the societal damage of Debt – are of no significance. No importance. As long as “hardships” or god forbid “austerity” are avoided at all costs, then Debt is OK.

    That leads me to believe that tax paid is not a big burden to many and therefore deriving benefits from greater Govt expenditure (that others will fund) may be the prime motivation at work.

  8. Thoughts on ‘big government’: Usually critics of ‘big government’ are referring to
    a) the role government plays in the lives of its people – taxation to boost health care for all, say, rather than a tax break for those who finance their own health to solve their own problems; and
    b) the literal size of the government’s departments tasked with the job of running a society.

    on b), you only have to look here to see that big government is not a Labor government exclusivity:

  9. This graph is quite interesting if out of date –

    If the debtors and creditors were matched then Germany could kick things off by paying some of the German debt owed to Italy and France and then Italy and France could use this money to pay off the debt they owe and so on.

    Mind you considering current circumstances this would most probably bring the whole house of cards down.

    • Just had a quick skim thru. I don’t have the time to go through the paper. But..

      In 2011, the International Monetary Fund identified episodes from 1980 to 2005 in which 17 developed countries had aggressively reduced deficits. The IMF classified each episode as either “expenditure-based” or “tax-based,” depending on whether the government had mainly cut spending or hiked taxes.

      …I am willing to bet those countries that cut spending ended up with huge private sector debt.

      .. and..

      Recent work by economists Carmen Reinhart and Kenneth Rogoff shows convincingly that when debt reaches about 90 percent of GDP, it becomes a burden on growth.

      ..apparently, the article will need some Version 1.1 editing.. 🙂

      • Regarding your first point, I’m not so interested in bets. I’m really more interested in evidence.

        Regarding your second point, I agree that he’ll need to address that if he ever does an update. However, this is a separate issue, and seems to me to have no effect on his main argument.

      • Alex Heyworth

        I noticed that Reinhart and Rogoff reference as well. It may actually already have been fixed in the published version of the paper. I am too cheap to spend $5 to find out.

        However, note that the team that found the error in the Reinhart and Rogoff paper also found that increasing debt led to decreasing growth, just that there was no “cliff effect” when sovereign debt reached 90% of GDP.

        And, as Jeff Keegan notes, it is something of a side issue. The question is whether growth can be kick started by cutting expenditure.

    • Ronin8317MEMBER

      It depends on where you are in the business cycle, and your monetary system. Government can and should cut spending when the private sector is expanding, and/or if the country’s export is increasing

      However, if a country’s private sector is contracting, the country doesn’t have its own currency AND the country is running a trade deficit, then cutting government spending will lead to disaster as money flow out of the economy. In the old days when the world was on the gold standard, countries with trade deficits suffered a similar problem when gold flowed out of the country literally ‘ran out of money’. Look at the money supply in Greece and Ireland when austerity was imposed, and you’ll see the picture.

      • Ronin8317MEMBER

        I did, and I disagree with the author. He totally ignored the terms of trade, private debt, or the effect of a liquidity trap. He is still stuck believing Europe is the same as Latin America in the 80s. The nature of the crisis is different.

        Take Ireland for example. A large chunk of the deficit is a result from propping up their banks rather than wanton spending. (64 billion Euro ~ 1/3 of GDP) Nevertheless, Ireland is on a path to recovery because they’re exporting more than import. Greece, on the other hand, is a total basket case. Look at their balance of trade : they will never pay anything back.

        Even if the Greek government runs a surplus, it cannot address the underlying problem : the country as a whole is consuming double what it can produce.

  10. Thanks for the reply.

    “Greece, on the other hand, is a total basket case. Look at their balance of trade : they will never pay anything back.”

    This sounds too pessimistic. Won’t the ongoing “internal devaluation” result in Greece becoming an attractive place to set up factories etc. ?