Austerity

Google “austerity” and there are 33 million entries. The word was just declared the word of the year in 2010. What is austerity and why is it so controversial?

Wikipedia defines austerity, in economics, “…as referring to a policy of deficit-cutting by lowering spending often via a reduction in the amount of benefits and public services provided. Austerity policies are often used by governments to try to reduce their deficit spending and are sometimes coupled with increases in taxes to demonstrate long-term fiscal solvency to creditors.”

When a government spends too much by borrowing and couples that with promises to it’s citizens all sorts of benefits, it will eventually run out of other people’s money. Creditors will balk at loaning more money without demanding higher interest rates. Any household that lives beyond its means, will have to cut back. Not governments! They can’t cut back because the citizens will vote the politicians out or riot. They try to tax the 1% more to pay the bills, but the rich will move out of the country, just as they’ve done in New York and California.

Borrowing money is like being on crack, you need more and more. Pretty soon the interest costs alone will eat you alive. Some economists say that a country has passed the point of no return when its debt reaches 100% of GDP.

“Critics argue that, in periods of high unemployment, austerity policies are counter-productive, because deficit cutting reduces GDP (which typically means less tax revenue to pay off the debt); and that short-term stimulus is necessary to deal with deficits in the long-term.” That appears to be true, but short term stimulus, meaning borrowing more money, is the cause of the problem.

Now, countries like Greece, Spain, Ireland, Italy and Portugal and the U.S. are faced with telling their citizens the well is dry. No more food assistance, unemployment insurance, fire and police protection, no more street lights, no more social security and no more health care. The people will not sit back and accept this without protest. The governments will be forced by circumstances to call out the guards.

Like any family faced with mounting debts, the solution is bankruptcy, a repudiation of all debts and starting over. Governments don’t want to deal with the consequences of their overspending and over-promising, so they try to avoid facing the problem head on. They want to drag the solution out, but soon, very soon they will seek bankruptcy and the it will be many times worse than if they had taken their medicine early.

It’s too late for countries like Greece, Spain, Ireland, Italy and Portugal, and Japan. For the U.S., I don’t think we have a politician that will choose bankruptcy or even austerity!

One Response to “Austerity”

  1. We’re headed there.
    Watching the Walker race close in Wisconsin. If that recall fails (it will, it will), the unions will have suffered an enormous black eye and setback.

    I think then it is just a matter of time before states start electing people that need to do what needs to be done. We haven’t seen capitulation yet. As it appears we are headed toward a global recession next year, capitulation could just be around the corner. Until then, anemic growth and “housing starts are up 3000% in March” will pop in from time to time. The media is carrying this crap.

    I have not believed anything since 2008 when the printing began. All of that stimulus spending can only lead us in one direction – exactly where we are headed right now.

    We will take the medicine sooner or later. The dose of medicine will be determined by Walker in Wisconsin first and hopefully 49 others and a new POTUS shortly after.

    There are no short cuts and austerity will eventually rule the day.

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