Excellent article. He finally clarified the point of austerity for me: depressed prices of assets that can be privatized on the cheap. Duh.
http://www.counterpunch.org/whitney05212010.html
Global markets have plunged for more than a month, wiping out more than $5.3 trillion in total market value. Ostensibly, the catalyst was Greece's large deficits, but that's only part of the story. Under the terms of the Maastricht Treaty, (aka--the Treaty on European Union) EU countries are not allowed to exceed the treaty's 3 per cent ceiling on fiscal deficits. The nonsensical treaty basically repeals the business cycle by edict. Are recessions forbidden, too?
Sanctimonious German bureaucrats and heads-of-state have taken up the cause of fiscal probity and turned a thoroughly-manageable matter into a full-blown crisis that could break up the EU and drag the world back into deep recession. Keep in mind, Germany has been the main beneficiary of Greek deficits as reflected in their bulging surpluses. One does not exist without the other; and as Keynes pointed out, surplus countries increase global instability by exerting "negative externality". That hasn't stopped German media from finger-wagging at their "spendthrift" neighbors to the south.
Now markets are in a frenzy; volatility has skyrocketed and gauges of market stress (Libor) are steadily rising. Interbank lending has begun to slow. Greek deficits have uncovered the systemic-rot in the EU banking system which is overloaded with garbage assets and non performing loans, only the EU does not have the fiscal/political infrastructure in place to guarantee the dodgy paper. So the pressure on the banks continues to grow and the prospect of another Lehman crash looms larger by the day.
Meanwhile, in Berlin, embattled politicians--who are 100 per cent certain that the "everyone else is to blame"--are sticking to their Hooverian economics plan; balanced budgets, austerity programs, fiscal straight-jackets all around. This is the deficit hawks remedy, too, the Hoover Solution. Take a good look; this is what the U.S. will look like if the Keynes-bashers, the belt-tighteners, and the deficit gloomsters get their way. Great Depression 2.0. Bet on it.
Deficits create demand. Demand generates spending. Spending generates economic activity. Economic activity generates growth. Growth generates jobs, increases government revenues, reduces deficits and ends recessions.
Simple, right?
When consumers have too much debt, they will not spend no matter how low interest rates are. This is not theory, this is fact.
If the government cuts spending at the same time as consumers, then overall spending declines and the economy slips into recession. This is what the deficit hawks want--a return to recession. This is politics, not economics.
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