Regarding the Myth that Austerity promotes Fiscal Expansion
Professor Bill Mitchell's site is something that should be on your daily reading list. His latest post is another in a long theme of posts dispelling the idea that austerity leads to 'fiscal contraction expansion'. If that were the case, then Great Britian's economy would be growing strongly right now based on their austerity implementation last year. If the theory was correct, then their GDP should have been increasing signficantly and Gilt yields should be going up (prices going down as investors want to put safe haven money into postively correlated economic assets). However, the exact opposite has been happening as has been evident for quite some time.
This line in his conclusion is a perfect summary: The evidence mounts – day by day – that the mainstream economic position is deeply flawed and incapable of resolving the economic disaster that its application caused.
Day by day the evidence mounts
Posted on Thursday, August 4, 2011 by bill
I was looking at yields today and you cannot help noticing that bond markets are become more attracted to government debt each day. So much for the arguments we have been hearing ad nauseum over the last few years that governments were about to feel the cold hand of the markets who would punish them by dumping their debt unless they imposed harsh austerity. The problem is that the attraction of government debt does not signify that markets are rewarding governments for their fiscal austerity efforts. In fact, it is exactly the opposite. The markets are realising that austerity is now undermining economic growth and the claims by politicians and economists that we would enjoy a “fiscal contraction expansion” if only the government got off the backs of the private sector are now being revealed as lies. The world economy is tanking. Day by day the evidence mounts. The safest place to be when the economy heads south is in cash or government bonds.
Consider the following graphs which show the UK and US benchmark yield curve for today, yesterday and 1 month ago.
Then consider Japan’s yield curve – they are after all 2.5 times at least over the so-called default threshold public debt ratio that gets bandied around by commentators. Compare the vertical scale to that of the UK and the US.
Pause for a moment and reflect on what these graphs are telling us.
They are not telling us that the bond markets are happy that the British government is pursuing a harsh austerity program which is what George Osborne (British Chancellor) would like you to believe.
They are not telling you that the farcical debt ceiling debate in the US has destabilised bond markets who feared the US government would default.
They are not telling you that the bond markets expect galloping inflation to result from the higher than usual budget deficits that these governments are running.
They are not telling you that the bond markets expect interest rates to rise because the higher than usual budget deficits are competing for scarce savings and crowding out private spending.
They are not telling you that investors are buoyed by the fiscal austerity being imposed on economies all over the world and that they think private sector confidence is about to burst forth and fill up the spending gaps left by the declining government spending.
In the British case, the 10-year gilt yield dived to a “record low” yesterday such was the strength of demand for them from the bond markets.
As each day passes, the real economic news (decline of manufacturing, construction and services etc) gets worse in Britain and growth forecasts, already abysmally low, get revised downwards.
The market talk is about an “intensifying flight-to-quality flows supporting gilts”.
The same pattern is occurring in all the major government bond markets and has been consistent over the last month or more.
While the IMF and other right-wing think tanks control idiot politicians like ventriloquists and have them parrot mantras like “fiscal contraction expansion” … “austerity is pro-growth” etc the money boys and girls know otherwise.