Is it a debt crisis or a growth crisis?

Voltex

Just looking at the recent news out of the US and there seems to be a pretty good chance that GDP growth may come in at 2% for 2012. We are seeing life coming back into the housing market (given todays data) and although still far higher than the Fed or Washington would like unemployment to be, we saw a big drop in the jobless rates last month.

I have been thinking for a couple of months that the whole European debt crisis is more a crisis of low or no growth. Its as clear as day the divergence in strategy between the US and Europe in how to deal with the after effects of the great recession of 08...the US has focused on stimulus and generating growth, where as Europe on austerity, and I think its clear at this stage which strategy is working.

So should Europe abandon austerity in favour of stimulus like the Us has done?

hmmm

The Keynesian model say yes, the German model says no. I can see arguments for both sides, unfortunately we are part of a live economic experiment which will take a few years to play out.

The flipside of US growth is that it may again be a mirage driven by massive injections of liquidity.

Personally I'm with the Germans for now. The countries in Europe could not continue along their current path of borrowing to pay current spending while facing aging populations, declining competitiveness and bloated social welfare states. If we don't use this opportunity to fix the underlying problems we'll be heading for a far bigger crisis in the future.

Suryavarman

In my opinion the most important problem for Europe to tackle is the large deficits Governments are running and the large amount of debt that they have accumulated. Lower growth should be tolerated if necessary in order to tackle this problem.

Austerity hasn't failed in Europe either for the simple fact it has not been tried. One place it has been tried is in the Baltic states and while things got a lot worse the recovery in those states is stronger.

It is also important to note that fiscal stimulus in the US has failed. Any recovery that is happening in America is down to monetary stimulus. Most of the recent fall in unemployment is due to people leaving the workforce as opposed to people actually finding jobs. Inflation is also a problem going forward. The following graphs from Shadow Government Statistics show the unemployment and inflation in America at the moment:





Not the rosiest of pictures. So no Europe should not adopt the stimulus path that America has adopted. It should deal with it's deficits and debts.

ardmacha

All the same there is evidence that economics has failed. There are quite a few people in Ireland who have debts, but who would be happy to work to pay off those debts. High unemployment makes it difficult for them to do so. Likewise Ireland inc is inclined to trade out of its difficulties, but with 15% unemployed its public finances are in bits, if 10% of these people were paying in to the kitty instead of drawing out there would be much less of a problem.

All in all the present austerity is a rather simplistic and unsuccessful approach to the problem.

Scofflaw

ardmacha wrote: »

All the same there is evidence that economics has failed. There are quite a few people in Ireland who have debts, but who would be happy to work to pay off those debts. High unemployment makes it difficult for them to do so. Likewise Ireland inc is inclined to trade out of its difficulties, but with 15% unemployed its public finances are in bits, if 10% of these people were paying in to the kitty instead of drawing out there would be much less of a problem.

All in all the present austerity is a rather simplistic and unsuccessful approach to the problem.

One point there is that the current Irish unemployment pre-dates the austerity. A fiscal stimulus could reduce unemployment, but given we're already in deficit territory, for how long? What amount of fiscal stimulus would replace a construction sector that had reached 22.6% of GNP and 19% of employment before collapsing catastrophically? And given the reliance of the pre-crisis tax revenue on the property sector bubble, how can we increase the tax take again in the absence of the property bubble without new taxes?

There are times when the only quick fix is not to have got to where you are - like other quick fixes, that's only theoretical, but unlike them it at least doesn't pretend not to be.

cordially,
Scofflaw

ardmacha

There are times when the only quick fix is not to have got to where you are

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I can only agree. The construction bust was always going to do this, even if it proved worse than most expected.

However, the problem for Ireland is that the whole thinking in the Euro zone is in terms of "bailing out" and austerity rather than allowing Ireland or other places in difficulties work out of their difficulty. Hence after some green shoots in 2011 projections for 2012 are being revised down.

Scofflaw

ardmacha wrote: »

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I can only agree. The construction bust was always going to do this, even if it proved worse than most expected.

However, the problem for Ireland is that the whole thinking in the Euro zone is in terms of "bailing out" and austerity rather than allowing Ireland or other places in difficulties work out of their difficulty. Hence after some green shoots in 2011 projections for 2012 are being revised down.

OK, but how would we "work out of our difficulties" in some other way?

Look at it like this: probably the biggest threat hanging over the heads of the European countries is the pension timebomb - the greying of Europe. Pensions are provided either by building up a store of capital or by taxing current production, which depresses production - and the European countries are already committed to the latter anyway, because there's insufficient wealth to provide for all pensions.

Now, the only ways we can produce a fiscal stimulus in Europe at the moment is either by borrowing, by printing money, or by massive debt forgiveness. The former increases the debt burden that's a major part of the problem - and the markets are unhappy as it stands - while the latter both either erode (inflation) or destroy (debt forgiveness) the stored capital for pensions, insurance, etc.

Something of a catch-22. The alternative is the long, slow, and painful path of doing a bit of all three.

cordially,
Scofflaw

The Outside Agency

Growth crisis.

The financial system is built on the expectation of infinite economic growth which is impossible on a planet with finite resources.

All economic growth requires resources, the most important being energy (oil, gas, coal) but these are finite resources, becoming more expensive to extract from the earth.

The current financial collapse was not about too much debt but rather insufficient resources to ensure the debt would be repaid..while it is also becoming more challenging and expensive to obtain... (think of Shale/Offshore and Arctic exploration for oil, all expensive and challenging, not to mention invasions into hostile countries, Libya, Iraq, Afghanistan)

We've been here before in the last 100 years but this time it's different.

air

I would have to say growth also. All economic and pension policy to date has been a giant ponzi scheme that has to come to an end eventually. We have a great economy, however our public finances are a disgrace. The average person is also completely deluded as regards the standard of living that they "deserve".
If people travelled a bit - even within the EU, they would realise how good we have it.

liammur

Voltex wrote: »

Just looking at the recent news out of the US and there seems to be a pretty good chance that GDP growth may come in at 2% for 2012. We are seeing life coming back into the housing market (given todays data) and although still far higher than the Fed or Washington would like unemployment to be, we saw a big drop in the jobless rates last month.

I have been thinking for a couple of months that the whole European debt crisis is more a crisis of low or no growth. Its as clear as day the divergence in strategy between the US and Europe in how to deal with the after effects of the great recession of 08...the US has focused on stimulus and generating growth, where as Europe on austerity, and I think its clear at this stage which strategy is working.

So should Europe abandon austerity in favour of stimulus like the Us has done?

Too simplistic a summary. It's a debt and a growth crisis in Europe. The debt crisis being made worse by the lack of growth. The US economy is far from healthy imo.

Well if we look at the great depression, we see that the massive injections of money into the economy surely did shore-up unemployment to an extent but that it wouldn't be until 1943 that the US would reach full employment.

Now this tells us a couple of things:

1 - this will last a long time - 10+ years
2 - government spending may cover up the loss of growth but doesn't end unemployment
3 - it could take a massive event: A new technology, perhaps nano-tech, to break through and allow for an area of massive growth.


I might argue that we would be better off positioning ourselves to rise from the ashes so to speak through the use of austerity - competitiveness should be the Irish slogan right now.

liammur

Rojomcdojo wrote: »

Well if we look at the great depression, we see that the massive injections of money into the economy surely did shore-up unemployment to an extent but that it wouldn't be until 1943 that the US would reach full employment.

Now this tells us a couple of things:

1 - this will last a long time - 10+ years
2 - government spending may cover up the loss of growth but doesn't end unemployment
3 - it could take a massive event: A new technology, perhaps nano-tech, to break through and allow for an area of massive growth.


I might argue that we would be better off positioning ourselves to rise from the ashes so to speak through the use of austerity - competitiveness should be the Irish slogan right now.

I would agree fully. Furthermore, even though the US growth figures don't look as bad as the Eurozone, the levels of debt they have built up to achieve this is truly shocking.
The poster who mentioned pensions earlier, something badly needs to be done about this, particularly the PS sector ones.

Geuze

It's both.

pacquiao

Voltex wrote: »

Just looking at the recent news out of the US and there seems to be a pretty good chance that GDP growth may come in at 2% for 2012. We are seeing life coming back into the housing market (given todays data) and although still far higher than the Fed or Washington would like unemployment to be, we saw a big drop in the jobless rates last month.

I have been thinking for a couple of months that the whole European debt crisis is more a crisis of low or no growth. Its as clear as day the divergence in strategy between the US and Europe in how to deal with the after effects of the great recession of 08...the US has focused on stimulus and generating growth, where as Europe on austerity, and I think its clear at this stage which strategy is working.

So should Europe abandon austerity in favour of stimulus like the Us has done?

You clearly haven't thought much on why europe and america differ in their strategies. It's quite simple.Europe wants something. Any idiot can reach 2% GDP.

pacquiao

pacquiao wrote: »

You clearly haven't thought much on why europe and america differ in their strategies. It's quite simple.Europe wants something. Any idiot can reach 2% GDP.

Wow. Just wow.

Voltex

Scofflaw wrote: »

OK, but how would we "work out of our difficulties" in some other way?

Look at it like this: probably the biggest threat hanging over the heads of the European countries is the pension timebomb - the greying of Europe. Pensions are provided either by building up a store of capital or by taxing current production, which depresses production - and the European countries are already committed to the latter anyway, because there's insufficient wealth to provide for all pensions.

Now, the only ways we can produce a fiscal stimulus in Europe at the moment is either by borrowing, by printing money, or by massive debt forgiveness. The former increases the debt burden that's a major part of the problem - and the markets are unhappy as it stands - while the latter both either erode (inflation) or destroy (debt forgiveness) the stored capital for pensions, insurance, etc.

Something of a catch-22. The alternative is the long, slow, and painful path of doing a bit of all three.

cordially,
Scofflaw

If you look at Irelands debt profile from 1990 through to 2005 the nominal value of the National debt hardly changed. It was through growth that we erroded the burden of that debt.

The main problem I see with Ireland going into the future is that in "normal" economics there is a positive generational bequeathing of capital. But in the Irish example this is in reverse. So basically whats handed down to me will be worth less than what it was worth to my Father (in terms of wealth producing assets).

[Jackass]

They're not exactly mutually exclusive. It's a sort of chicken and egg question really.

The most important thing is how to combat it, and whilst we have done many, many things wrong (most notably pumping billions down the black hole of our financial system, rather than actually taking ownership of it - in figurative as well as literal terms - and state controlling the lending of Money into the Economy, as a direct stimulus with very strategic positioning - instead of having a situation where we give as much cash as they want, and never see a cent of it lent back out into the Economy), the solution for us now is the painful road we're on....austerity and taxation.

We're the most deluded nation on earth, I'm convinced, and the current Government approach of softly softly breaking it to us that the gravy train is over is the way to go, but they're not having much luck with getting through to people, who object to every measure as though we have a choice, and who it "targets" ...

In the short run, we'll see minimul growth, it's a longer term recovery, but once we can get Government finances under control, we'll have some stimulus options, but we must get our free fall Economy under control first, to which we've already made significant inroads.

SeanW

I think it's important to point out that the U.S. figures are massively massaged to make the picture look a lot better than it really is.

1. Their "unemployment" figures only mention people who are claiming unemployment benefits, American workers can only claim unemployment for a fixed time. Once their benefits run out they don't get any more AND are removed from the "unemployment" figures. In Europe, most people can claim benefits for as long as they don't have work, so are counted in the statistics at all times.
2. The U.S. Consumer Price Index used to include in its inflation calculations Food and Energy costs, ya know, the two things most important to the average person. But they decided to drop them in new rules because food and energy are "too volatile" ... some estimates concluded that under the old rules, inflation is running at something North of 10%.
3. The Federal Reserve "System" stopped publishing figures relating to the total dollar supply, the M3 measure of the number of dollars in circulation.

I don't like austerity at all, but I think it is necessary, because the alternative of more debt, more inflation and potentially stagflation, is far far worse.