Results 1 to 10 of 17

Thread: Keynes Was Right

Hybrid View

  1. #1
    Havakasha is offline

    Keynes Was Right

    Keynes Was Right
    By PAUL KRUGMAN
    Published: December 29, 2011 686 Comments

    “The boom, not the slump, is the right time for austerity at the Treasury.” So declared John Maynard Keynes in 1937, even as F.D.R. was about to prove him right by trying to balance the budget too soon, sending the United States economy — which had been steadily recovering up to that point — into a severe recession. Slashing government spending in a depressed economy depresses the economy further; austerity should wait until a strong recovery is well under way.

    Unfortunately, in late 2010 and early 2011, politicians and policy makers in much of the Western world believed that they knew better, that we should focus on deficits, not jobs, even though our economies had barely begun to recover from the slump that followed the financial crisis. And by acting on that anti-Keynesian belief, they ended up proving Keynes right all over again.

    In declaring Keynesian economics vindicated I am, of course, at odds with conventional wisdom. In Washington, in particular, the failure of the Obama stimulus package to produce an employment boom is generally seen as having proved that government spending can’t create jobs. But those of us who did the math realized, right from the beginning, that the Recovery and Reinvestment Act of 2009 (more than a third of which, by the way, took the relatively ineffective form of tax cuts) was much too small given the depth of the slump. And we also predicted the resulting political backlash.

    So the real test of Keynesian economics hasn’t come from the half-hearted efforts of the U.S. federal government to boost the economy, which were largely offset by cuts at the state and local levels. It has, instead, come from European nations like Greece and Ireland that had to impose savage fiscal austerity as a condition for receiving emergency loans — and have suffered Depression-level economic slumps, with real G.D.P. in both countries down by double digits.

    This wasn’t supposed to happen, according to the ideology that dominates much of our political discourse. In March 2011, the Republican staff of Congress’s Joint Economic Committee released a report titled “Spend Less, Owe Less, Grow the Economy.” It ridiculed concerns that cutting spending in a slump would worsen that slump, arguing that spending cuts would improve consumer and business confidence, and that this might well lead to faster, not slower, growth.

    They should have known better even at the time: the alleged historical examples of “expansionary austerity” they used to make their case had already been thoroughly debunked. And there was also the embarrassing fact that many on the right had prematurely declared Ireland a success story, demonstrating the virtues of spending cuts, in mid-2010, only to see the Irish slump deepen and whatever confidence investors might have felt evaporate.

    Amazingly, by the way, it happened all over again this year. There were widespread proclamations that Ireland had turned the corner, proving that austerity works — and then the numbers came in, and they were as dismal as before.

    Yet the insistence on immediate spending cuts continued to dominate the political landscape, with malign effects on the U.S. economy. True, there weren’t major new austerity measures at the federal level, but there was a lot of “passive” austerity as the Obama stimulus faded out and cash-strapped state and local governments continued to cut.

    Now, you could argue that Greece and Ireland had no choice about imposing austerity, or, at any rate, no choices other than defaulting on their debts and leaving the euro. But another lesson of 2011 was that America did and does have a choice; Washington may be obsessed with the deficit, but financial markets are, if anything, signaling that we should borrow more.

    Again, this wasn’t supposed to happen. We entered 2011 amid dire warnings about a Greek-style debt crisis that would happen as soon as the Federal Reserve stopped buying bonds, or the rating agencies ended our triple-A status, or the superdupercommittee failed to reach a deal, or something. But the Fed ended its bond-purchase program in June; Standard & Poor’s downgraded America in August; the supercommittee deadlocked in November; and U.S. borrowing costs just kept falling. In fact, at this point, inflation-protected U.S. bonds pay negative interest: investors are willing to pay America to hold their money.

    The bottom line is that 2011 was a year in which our political elite obsessed over short-term deficits that aren’t actually a problem and, in the process, made the real problem — a depressed economy and mass unemployment — worse.

    The good news, such as it is, is that President Obama has finally gone back to fighting against premature austerity — and he seems to be winning the political battle. And one of these years we might actually end up taking Keynes’s advice, which is every bit as valid now as it was 75 years ago.

  2. #2
    Havakasha is offline
    05-14-2012, 12:10 AM #6

    Across the Atlantic in Europe, a different type of haircut has been debated. The Greek debt crisis is a catastrophic confluence of events. Internal mismanagement and external economic forces have resulted in a recession the depths of which a modern country has never seen. Private creditors (mainly banks) have grudgingly agreed to take a haircut of up to 78% of their debt, but only after they secured a recapitalization plan and only after an agreement was made to use bailout funds almost exclusively to shore up European banks instead of for assistance for the Greek people (read more about that tragedy here and here).

    While the Greek government was used essentially as a pass-through to shore up the European banking system against a sovereign Greek default, Greek citizens watched as their social safety net was set on fire:

    Greece, one of three eurozone nations to need an international bailout, has cut spending on just about everything it can — public sector salaries, pensions, education, health care and defense. As a result, unemployment has soared to over 21 percent, fueling social unrest that has sometimes turned deadly. In the last two years, riots have erupted frequently and the country's near-daily strikes and demonstrations have shut down schools, airports, train stations, ferries and harmed medical services.
    If you ever wondered what Social Darwinism looks like, that's it.

  3. #3
    Havakasha is offline
    Soros on Austerity in Europe

    http://www.marketwatch.com/story/sor...me_latest_news

    Jan. 25, 2012, 9:51 a.m. EST
    Soros: Austerity fomenting Europe tensions
    Germans have been traumatized by inflation, billionaire says
    By Polya Lesova, MarketWatch



    DAVOS, Switzerland (MarketWatch) — Billionaire investor George Soros warned on Wednesday that the austerity Germany wants to impose on other euro-zone nations “will push Europe into a deflationary debt spiral.”

    Germans “have been traumatized by inflation and they don’t understand the threat that deflation can cause,” Soros told reporters at the annual meeting of the World Economic Forum in Davos. “There’s a shift in German thinking recognizing this isn’t working, but we’re quite far yet from abandoning this emphasis on inflation as the only threat to stability.”


    The euro zone’s sovereign-debt crisis is a major topic this year, with German Chancellor Angela Merkel due to give the opening address this evening and European Central Bank President Mario Draghi set to speak later in the week.

    Investors are closely watching talks between debt-laden Greece and private-sector creditors in which the two sides are trying to agree on a writedown of Greek debt that will be voluntary.

    “The big issue is how does the euro cope with the danger of a Greek default,” Soros said. “Because that is something that is looming — it may or may not be avoided.”

    Soros, an outspoken billionaire and philanthropist, gave a speech on the euro crisis and then took questions from reporters on a wide range of subjects, including China, the U.S., Russia, the Swiss franc and oil prices.

    Soros, who has written a new book on financial turmoil in Europe and the U.S., said that measures taken by the European Central Bank in December have relieved the liquidity problems of European banks, but “they did not cure the financing disadvantage from which the highly indebted member states suffer.”

    High risk premiums on Italian and Spanish bonds threaten the capital adequacy of banks and leave weaker euro-area nations “relegated to the status of third-world countries that became highly indebted in a foreign currency,” he said.


    Instead of the International Monetary Fund, “Germany is acting as the taskmaster imposing tough fiscal discipline,” Soros said. “This will generate both economic and political tensions that could destroy the European Union.”

    The billionaire investor said that fiscal discipline alone isn’t enough to solve the crisis and that the EU will have to provide stimulus to get out of the deflationary spiral. “This will require euro bonds in one guise or another,” he said.


    Click on link at top of page to read whole article.

  4. #4
    Havakasha is offline
    Soros on Austerity in Europe

    http://www.marketwatch.com/story/sor...me_latest_news

    Jan. 25, 2012, 9:51 a.m. EST
    Soros: Austerity fomenting Europe tensions
    Germans have been traumatized by inflation, billionaire says
    By Polya Lesova, MarketWatch



    DAVOS, Switzerland (MarketWatch) — Billionaire investor George Soros warned on Wednesday that the austerity Germany wants to impose on other euro-zone nations “will push Europe into a deflationary debt spiral.”

    Germans “have been traumatized by inflation and they don’t understand the threat that deflation can cause,” Soros told reporters at the annual meeting of the World Economic Forum in Davos. “There’s a shift in German thinking recognizing this isn’t working, but we’re quite far yet from abandoning this emphasis on inflation as the only threat to stability.”


    The euro zone’s sovereign-debt crisis is a major topic this year, with German Chancellor Angela Merkel due to give the opening address this evening and European Central Bank President Mario Draghi set to speak later in the week.

    Investors are closely watching talks between debt-laden Greece and private-sector creditors in which the two sides are trying to agree on a writedown of Greek debt that will be voluntary.

    “The big issue is how does the euro cope with the danger of a Greek default,” Soros said. “Because that is something that is looming — it may or may not be avoided.”

    Soros, an outspoken billionaire and philanthropist, gave a speech on the euro crisis and then took questions from reporters on a wide range of subjects, including China, the U.S., Russia, the Swiss franc and oil prices.

    Soros, who has written a new book on financial turmoil in Europe and the U.S., said that measures taken by the European Central Bank in December have relieved the liquidity problems of European banks, but “they did not cure the financing disadvantage from which the highly indebted member states suffer.”

    High risk premiums on Italian and Spanish bonds threaten the capital adequacy of banks and leave weaker euro-area nations “relegated to the status of third-world countries that became highly indebted in a foreign currency,” he said.


    Instead of the International Monetary Fund, “Germany is acting as the taskmaster imposing tough fiscal discipline,” Soros said. “This will generate both economic and political tensions that could destroy the European Union.”

    The billionaire investor said that fiscal discipline alone isn’t enough to solve the crisis and that the EU will have to provide stimulus to get out of the deflationary spiral. “This will require euro bonds in one guise or another,” he said.


    Click on link at top of page to read whole article.

  5. #5
    Havakasha is offline
    Austerity backfires in Ireland and Europe - Sinn Fein rise up in polls


    Sinn Fein's President Gerry Adams
    Photo by AFP/Getty


    Sinn Fein’s rapid rise in the polls in Ireland is a clear response to a massive austerity agenda that is backfiring on the current government there.

    In an Irish Times poll last week the Sinn Fein vote vaulted into the low 20s, making them the second most popular party in Ireland after the major government party, Fine Gael.

    The rapid rise in the Sinn Fein vote is due in the main to the continuing economic tsunami of bad debt and bad news that continues in Ireland.

    New rates and water charges have been introduced and the average citizen, already beleaguered by the property collapse and the tight credit, is deeply feeling the effects of the crisis.

    Sinn Fein, with a cadre of young front bench spokespersons and a clear attitude of deep skepticism towards Europe, is gaining heavily as a result.

    The other main opposition party Fianna Fail, whose profligate policies got the country into the total mess, is understandably receiving very little uptick.

    Events elsewhere in Europe will begin to impact on Ireland too. The likely outcome of the French election and the Dutch government collapse are all related to the same reality that the austerity measures enacted by the European Union are proving deeply unpopular and destructive.

    Ireland has dutifully followed the German prescription that austerity and more austerity will lead it back to financial stability.

    However, cutting wages and raising taxes while creating more unemployment is not the way to build out of a recession.

    Deflation is a much more likely outcome of such policies as consumers have less and less to spend and economic growth is impossible to sustain.

    The message from Ireland and elsewhere to German Chancellor Angela Merkel is that austerity as a long-term plan is not helping and that stimulus, not cutbacks, are the best way to address the problem.

    It is a lesson Germany of all countries should certainly have learned from its own disastrous depression after the Treaty of Versailles which led them into massive debt and eventually led to the rise of Hitler.

    There are many such rough beasts out there these days, even here in America, demanding deeper and deeper cuts to spending at the time when the exact opposite is needed in order to survive.

    Ireland has remained remarkably calm, with none of the riots that have wracked Greece and Portugal and other countries.

    That is to be welcomed, and the hope is that whatever issues arise in the next year or two will be dealt with in a physically non–confrontational way.

    A major sea change may be about to take place in Europe over how the entire crisis is dealt with there. Ireland could well be at the forefront of that, a battle over the survival of the Euro and how long-term debt is paid back.

    There is much at stake in the months ahead.



    Read more: http://www.irishcentral.com/news/Aus...#ixzz1vFLSecOa

  6. #6
    Havakasha is offline
    http://www.zerohedge.com/article/gre...end-game-appro


    Greek Bonds Slump As Austerity Backfires, Country Enters "Death Spiral", And The Violent End Game Approaches
    Submitted by Tyler Durden on 08/18/2010 12:58 -0400

    Budget Deficit CDS China Germany Greece Gross Domestic Product International Monetary Fund Newspaper Purchasing Power Tax Revenue Turkey Unemployment


    Those patiently following the Greek Bond-Bund spread to its inevitable conclusion have been fully aware that the plan that Europe is betting its entire future on, is patently flawed: namely that austerity, by its definition does not, and will not work. In fact, instead of bringing stability, austerity will slowly but surely eat away at the economy of whatever country it is instituted in - in some cases slowly, in others, like Greece, very rapidly. Indeed, the Greek spread has now risen to levels last seen during the early May near-revolution in Athens, at well over 800 bps. And for the specific consequences of austerity, Germany's Spiegel has done a terrific summary of what it defines as a "death spiral" for the Mediterranean country: "Stores are closing, tax revenues are falling and unemployment has hit an unbelievable 70 percent in some places. Frustrated workers are threatening to strike back. A mixture of fear, hopelessness and anger is brewing in Greek society." Spiegel quotes a atypical Greek: ""If you take away my family's bread, I'll take you down -- the government needs to know that. And don't call us anarchists if that happens! We're heads of our families and we're desperate." All those who think violent strikes in the PIIGS are a thing of the past, we have news for you. The (pseudo) vacation season is over, and millions of workers are coming back. They may not have money, but they have lots of free time, lots of unemployment, and even more pent up anger. Things are about to get very heated once again, first in Greece, and soon after, everywhere else.

  7. #7
    Havakasha is offline
    Keynes was right.

  8. #8
    Havakasha is offline
    He was right. lol

Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
  •