Over My Shoulder

Why austerity alone risks a disaster

June 29, 2011

This is from Martin Wolf, who has been consistent in insisting that reducing government spending (fiscal tightening) will result in a very real recession/depression. I made it clear in my book that reducing government spending will soften the economy over the near term but is necessary for long-term survival, so I am somewhat on the opposite side when it comes to policy prescriptions. But Wolf is bang on about the consequences. Note: when Wolf talks about external balances, he means trade balances. It is part and parcel, but someone must be a net buyer – tot everyone can export their way to prosperity. He really highlights the debate going on in high-level circles. We must pay attention. "The BIS is right: normalisation of monetary and fiscal policy is needed. But it is impossible to eliminate structural fiscal deficits until either the private sector structural adjustment is complete or we see big shifts in the external balances. It is impossible, finally, for this external adjustment to occur without big changes in the surplus economies. The BIS boldly calls for simultaneous private and public deleveraging. But what are to be the offsets? That is the question. The BIS provides no convincing answer."

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