Austerity and growth

Source: Martin Wolf

The graph shows that the widespread belief that austerity measures do not bring about negative growth effects is not supported by empirical evidence. In fact, the countries with the most dramatic budget cuts have suffered the biggest fall in economic growth so far. With Spain, Portugal and Italy under severe pressure to continue on the path of restrictive fiscal policy, the bigger picture is likely to get worse rather than better.

April 2012: "The month the confidence fairy died"

Paul Krugman, who has been advocating expansionary monetary and fiscal policy for years, weighs into the austerity debate (again):

This was the month the confidence fairy died. For the past two years most policy makers in Europe and many politicians and pundits in America have been in thrall to a destructive economic doctrine. According to this doctrine, governments should respond to a severely depressed economy not the way the textbooks say they should — by spending more to offset falling private demand — but with fiscal austerity, slashing spending in an effort to balance their budgets. [...]
The good news is that many influential people are finally admitting that the confidence fairy was a myth.

 Source: NYTimes

We'll see if the confidence fairy evolves into another dead idea of zombie economics.

See also: Time to shift the austerity debate in Europe

Time to shift the austerity debate in Europe

With political allies weakened or ousted, Chancellor Angela Merkel’s seat at the head of the European table has become much less comfortable, as a reckoning with Germany’s insistence on lock-step austerity appears to have begun.

“The formula is not working, and everyone is now talking about whether austerity is the only solution,” said Jordi Vaquer i Fanés, a political scientist and director of the Barcelona Center for International Affairs in Spain. “Does this mean that Merkel has lost completely? No. But it does mean that the very nature of the debate about the euro-zone crisis is changing.”

[...]

From trading floors to polling stations to the streets of cities across Europe, the message appears increasingly to be that countries cannot cut their way to fiscal health. They need growth, too. In recent months, powerful voices have joined the chorus, including those of the managing director of the International Monetary Fund, Christine Lagarde, and Italy’s prime minister, Mario Monti. Treasury Secretary Timothy F. Geithner has called repeatedly for Europe to defer budget cutting in favor of some form of stimulus spending.

Source: Business Insider

There are signs of growing dissatisfaction in Europe over the austerity measures pushed by Germany and other countries to solve the euro-zone debt crisis. But German editorialists bristle on Thursday at calls to stimulate growth and a proposal to let the ECB lend directly to banks in trouble.



Leaders across Europe continued to struggle Thursday with backlash against the largely German-driven austerity measures imposed as a result of the ongoing euro zone debt crisis.

Source: Spiegel

The problem with Spain’s banks

The graph above shows a high correlation of bad loans and unemployment. More experts than ever expect a bailout of Spain’s banks and government to be inevitable.

The problem with weak growth, charted

In the NYT, Teresa Tritch writes about this graph:

(T)he recovery has been a climb toward the rim of the crater left by the Great Recession, not an ascent to new economic heights.

Besides from that quote, the graph pretty much speaks for itself.

The newest US jobs report

Two non-random blog-posts about the latest numbers with regard to the employment situation in the US:

Calculated Risk

Felix Salmon

The bottom line is that despite the fact that the last few months have provided hope when it comes to improvements in the US labor markets, the economic woes in the US are still not over yet. Unemployment remains at a level which is going to spur the political discussion about what the government can do in order to further improve the employment situation. This is obviously going to be an import campaign topic for the upcoming presidential election.

What's the role of an independent central bank in a liquidity trap?

The following quote is from the introduction to a new paper by Paul Culley and Zoltan Poczsar with the title "Does Central Bank Independence Frustrate The Optimal Fiscal-Monetary Policy Mix in a Liquidity Trap?":

The United States and much of the developed world are in a liquidity trap. However, policymakers still have not embraced this diagnosis which is a problem as solutions to a liquidity trap require specific sets of policies. There are policies that will work, and there are policies that will not work. Correct diagnosis is necessary to prescribe the right policy medication.

A liquidity trap is a circumstance in which the private sector is deleveraging in the wake of enduring negative animal spirits caused by the bursting of joint asset price and credit bubbles that leave private sector balance sheets severely damaged. In a liquidity trap the animal spirits of the private sector cannot be revived by a reduction in short-term interest rates because there is no demand for credit. This effectively means that conventional monetary policy does not work in a liquidity trap. (...)

The importance of fiscal expansion and the impotence of conventional monetary policy measures in a liquidity trap have profound implications for the conduct of central banks. This is because in a liquidity trap, the fat tail risk of inflation is replaced by the fat tail risk of deflation. In turn, the fatness of the deflation tail is a function of the government’s willingness and ability to pump-prime, i.e. to borrow and spend.

For central banks, this is a game changer. (...)

In a liquidity trap the central bank’s role changes from one of policing the government to keep it from borrowing too much, to one of helping it to borrow and invest by targeting to keep long-term interest rates low by monetizing debt, with the aim of killing the fat tail risks of deflation and depression.

Go read the whole paper.