Austerity Mania Sweeps the Globe

Posted by Michael A. Kamperman on May 12, 2010

As predicted the ECB caved and has started to print money to buy up European Government bonds (Greek, etc.).  They never really had a choice and should have acted much sooner to the avert the crisis.  However, quantitative easing should be pared with a long term glide path to fiscal sanity.  Instead, the Europeans in their clear lack of wisdom have embraced a combination of buying just enough government debt to keep the “Wolves” at bay.  Meanwhile, they are trying to combine this strategy with demands for fiscal discipline requiring significant short term cuts in budget deficits.  On the surface it sounds great to require people to retire later in life and to cut wages and to cut jobs.  In reality this will only deepen the debt-induced depression and delay the inevitable.  The Fed, the ECB, the Bank of Japan, and the Bank of England need to coordinate an all out monetization of government debts.  This will hit the reset button and buy time for nations and economies to adjust holding societies together. By both cutting jobs and requiring people to work longer we are killing job opportunities for people in their 20′s.  Is this what we really want?  Younger workers without seniority will take the brunt of the axe to be swung.  And, they will be out of luck a long time as retirements are delayed keeping existing jobs closed to newcomers for a long time.  The austerity religion sweeping the globe is utter madness.  The riots in Greece could be a harbinger of all of our futures.  Today Spain announced it will cut another 6 billion euro form its current budget to show solidarity with the austerity mania.  This in a country with official unemployment rates already over 20%.

The U.S. shares in the austerity mania as exemplified by the Tea Party.  These well intentioned but misguided people believe they are saving society.  In fact, they are most likely causing the fabric of our society to disintegrate.  In my state of Texas the legislature is facing a projected $11 billion budget shortfall.  One solution gaining popularity is to raise the student teacher ration in elementary schools.  The current cap  is 22 pupils per teacher.  They want to save money by cutting teachers and forcing more kids into the classroom.  They also are considering shortening the school week from 5 days to 4.   Young teachers will be cut loose and elementary education graduates will find no room at the inn.  Texas is in the best shape of all the large states in the U.S.

What the peddlers of austerity fail to grasp is many innocent hard working individuals will find themselves out in the cold through no fault of their own.  Why?  So those who were irresponsible will be punished?  So those who are afraid of hyper-inflation will be pacified?  Inflation occurs when too much money is chasing too few goods.  There is no shortage of almost anything in the world.   Furthermore, with global unemployment well above 10% it is doubtful demand will overtake supply even if all federal debt is monetized globally.  Yes gold will go up in the short term.  Probably a few other commodities too.  But it will not lead to shortages.  It will however push capital further out on the risk curve which could perhaps lead to global unemployment falling back below 10%.  What most people miss is a large portion of global government debt is held by banks and hedge funds.  The real money, capital, backing these bonds is not nearly as high as the outstanding amount of the bonds.  Most banks and hedge funds are allowed to mark government debt at par and are allowed to leverage this debt with little capital.  When they move out on the risk curve the leverage will greatly diminish.  In the meantime young teachers could teach and young children could learn.