SUNDAY, DECEMBER 5, 2010
More Evidence That the Deficit Hysteria is Misguided and Destructive (Naked Capitalism)
The drumbeat of press in favor of visibly failed austerity programs is simply astonishing. We have compelling evidence that they backfire in countries with heavy debt load, with Ireland and Latvia the poster children. By contrast, Iceland, with the mind-numbing debt to GDP ratio of 900% (some have put it at even higher levels at its peak), stiffed many of its foreign creditors (who should have taken notice that things were a wee bit out of balance, although glowing reports from the likes of Fredrick Mishkin may have blinded them to that fact). It also depreciated its currency and its voters turned down an IMF rescue which would have required Iceland to repay the foreign creditors of bust Icelandic private banks, to the tune of €12,000 per citizen.
Loans are also risk capital, but modern bondholders have rewritten the rules: “Heads I take a risk premium, tails I get taxpayers to eat my losses.”
As John Mauldin points out, forcing creditors to take their lumps is the right course of action. Iceland is already showing GDP growth, while Ireland, which is following the austerity playbook to perfection, is imploding.
But as Joseph Stlglitz points out, the advocates of austerity have a lot in common with medieval bloodletters. When it’s pointed out that their programs made matters worse, their response is that they simply weren’t implemented aggressively enough.
That is not to say we don’t have a lot of spending that could and should be redirected in the US. America spends more on its military, broadly defined, than the rest of the world combined. We have a heavily subsidized agricultural sector. We also subsidize banking heavily, when by any rational calculus we should either tax it aggressively or regulate the hell out of it. But in the austerity debate, these favored sectors (well, ex the sacred cow of banks) are being included on the theoretical whackage list, along with a whole bunch of other stuff, most notably Social Security, which the phony branding of the necessity of shared sacrifice.
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