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Monday, 23 October 2017

Wishful search for austerity's alternatives

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I concluded on the drive in this morning that I am either a genius or a fool or, of course, I might be a goodly mix of both or neither. Why the conclusion? I was listening to a chappy – I neither caught his name nor the name of his firm who blithely declared that he was positive on equities and commodities and that austerity was a busted flush because it didn’t work.

Anthony Peters, SwissInvest Strategist

He was then followed by some chappy who equally blithely declared that a failure of Greece would cost “trillions”, and that bailing it out again for “a few billion” was the simplest and therefore the only solution.

I don’t get anyone who suggests that “austerity doesn’t work”. What the blithering blazes is that muppet on about? Is he one of those flat earth believers who is of the opinion that we can enjoy economic growth during a period of public sector austerity?

Unless I was living and experiencing the consumption and housing boom of the years between 2001 and 2007 on a different astral plain, I’d have to conclude that the economy grew to whatever size it had achieved on a large bubble of private debt which was then whipped into hyperdrive by a public sector which assumed that the growth in fiscal revenues would continue on the existing trajectory ad infinitum. As fiscal revenues began to decline with the bursting of the credit bubble, government cranked up spending in order to maintain, to the best of its ability, a level of economic output which had already been unsustainable.

The institution of austerity policies is the acknowledgement that the Keynesian approach to smoothing the economic cycle was not going to work and that the economy was going to have to shrink to fit. When the credit card is maxed out, you not only have to stop spending but you have to begin to repay some of the debts too. You don’t need a Nobel Prize or even a PhD to work that one out or at least I don’t think you do. And yet, five years in to the crisis which was the result of excess leverage in both banks and government, I hear so called “experts” telling Joe Soap on the wireless that “austerity isn’t working”.

Am I to suppose that he assumes that “austerity working” means cutting the deficits or even generating a fiscal surplus, cutting debt and by doing so generating 4% annual GDP growth with 1%–2% CPI and creating lots of highly skilled but also low skilled jobs in the process?

It isn’t my fault that I am of an age at which I benefited from free university education and that I ended up in banking – when I entered the profession, you did it because you couldn’t get a “proper” job – but it has treated me quite well, nevertheless. I kept leverage to a minimum, was never rich during the boom but am now, thankfully, not poor during the bust.

When I have to hear people talking of voters rejecting austerity or, as the chap mentioned above, telling us that austerity isn’t working, I have to ask myself what part of Liam Byrne’s “I’m afraid to tell you there’s no money left” they don’t understand. Apropos that quote which I yesterday defensively reported as a possible urban myth – one of my chums at Thomson Reuters checked with his brother at HM Treasury and kindly confirmed that this is a fact and not a myth.

Although born more bearish than bullish, I have always hoped that a good reality check might shake things up a bit

As far as the fellow with the theory that a departure of Greece will cost trillions but that it can be bailed out again for “only a few billion” – where is all this money supposed to come from? Steve Beck at Citigroup coined the phrase that whatever money is used has to be found on this planet alone.

Authorities are pledging this and pledging that, but in the same way in which the structured credit market, especially the sub-prime mortgage market, worked on correlation assumptions which proved to be wrong in a crisis, so I fear that if push came to shove, they would never be able to physically raise the cash they have so liberally pledged.

In other words, the more they need it, the less they will get it. One day we will have the first sovereign default within the eurozone – or at least one which is not sprayed pink and renamed a “bail-in” or a “voluntary haircut” – and by that time we risk the supranational leverage having reached levels from which it cannot recover.

Although born more bearish than bullish, I have always hoped that a good reality check might shake things up a bit. I am now beginning to understand Jonny Baker in Paris who is convinced that there is no way back. Meanwhile, dream on that if voters in France and Greece reject what Alexis Tsipras termed “barbarous austerity”, that it will go away and never come back. I’d love to be asked to vote for a three-day week on full pay too.   

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