Austerity - Coming to a Country Near You!
AUTHOR: Satyajit Das
Debates about the shape of the recovery – "V", "U", "W", "L" (note the slight turn up at the end) – assume the inevitable return to robust economic growth.
The dirty secret is that recent economic growth and the wealth created relied on financialisation - the world of Extreme Money, is merely borrowed money and speculation. Since 2001, borrowing against the rising value of houses contributed to around half the recorded economic growth in the U.S. By 2008, $4 to $5 of debt was required to create $1 of growth. China now needs $6 to $8 of credit to generate $1 of growth; an increase from around $1 to $2 of credit for every $1 of growth. Global trade is built on a financing model where sellers of goods and services, such as China, Japan and Germany, indirectly finance the purchase by lending foreign exchange reserves to countries like the US.
The ability to maintain high rates of economic growth through additional debt is now questionable.
The global financial crisis may mark the end of an unprecedented period of growth and expansion. It was Ponzi Prosperity where the wealth was based on either borrowing from or pushing problems further into the future.
The world is now being forced to "delever" – a fancy term for reducing debt. Initially, following the onset of the global financial crisis, individuals and companies began the long slow process of reducing debt. The resulting shortfall in demand was filled by governments who borrowed heavily to prevent the "Great Recession" turning into another Depression. Now, governments have become the problem as they are forced to embrace austerity in the face of attention on their national finances, calling time on the wishful thinking of markets.
Government intervention can cushion some of the costs of the crisis but cannot solve the fundamental problems. If government deficit spending could solve all problems, Japan’s economic problems would have been solved many years ago. It is not clear how if, at all, printing money or financial games can create real ongoing growth and wealth.
People want to believe that a return to a world of strong growth is inevitable. But as philosopher Michel de Montaigne asked: "How many things we regarded yesterday as articles of faith that seem to us only fables today?"