Charts of the Day: Europe’s Phony “Austerity”

“Austerity” has become a very controversial political term. Politicians, bureaucrats and academics have been brawling over semantics and statistics. 

We are made to believe that "austerity" has all been about controlling and managing debts through fiscal deficits, or of reining government spending coupled by raising taxes and of more regulations.

Let us see from the mainstream perspective the state of “Austerity” in the Eurozone. 

Note: reference point matters. The period below covers 2007 or at the advent of the US crisis until 2012

The Zero Hedge gives us the following wonderful bar charts of the real state of “Austerity” in the Eurozone

Since 2007, government spending has ballooned over the Eurozone except for Iceland and Hungary.  Austerity, where?

Over the same period, public debt has also been expanding. Austerity where?

Even from the mainstream framework, the Eurozone has hardly implemented “Austerity”. No fiscal discipline enforced, debt has ballooned. Yet blaming phony austerity for economic woes represents nothing more than strawman.

The reality is that media, politicians and mainstream has fudged the essence of austerity. 

Austerity is not only about fiscal discipline, but more importantly about economic freedom or allowing the marketplace to direct resources from low value uses to higher value uses. This should go at the expense of government’s access on these limited resources. 

In other words, austerity is about productivity growth from economic freedom.

This Time is Different: Fiscal Discipline Not Required

This time is different. Each time a literature or study proposes to show that government discipline is required to avert a crisis, some rejoinder will be issued to justify the opposite.

From Bloomberg,

A paper by Harvard University economists Carmen Reinhart and Kenneth Rogoff that has been cited by Republican lawmakers to justify eliminating the budget deficit contains “serious errors,” according to a study by a group of University of Massachusetts academics.

The Reinhart-Rogoff paper, “Growth in a Time of Debt,” argued that countries with public debt in excess of 90 percent of gross domestic product suffered measurably slower economic growth.

The new study -- by economists Thomas Herndon, Michael Ash and Robert Pollin -- says that the Harvard economists excluded some data and unconventionally weighted the statistics they included to reach their conclusions.

This led to “serious errors that inaccurately represent the relationship between public debt and growth,” Herndon, Ash and Pollin said in the paper published yesterday.

In an e-mail, Reinhart and Rogoff defended the conclusions of their 2010 paper and said that “on a cursory look” the new study also finds growth slowing in nations with excessive debt. “We literally just received this draft comment, and will review it in due course,” they said.

Ash said in a telephone interview that his paper does show “a modest diminishment of growth” in countries with big debts yet nothing like “the stagnation or decline” seen in the study by Reinhart and Rogoff.

Note: The kernel of the paper’s objection to Rogoff-Reinhart’s study: “modest diminishment” versus “stagnation”.

More of Reinhart-Rogoff response at the Wall Street Journal Blog, they rebut,

cumulative effects of small growth differences are potentially quite large. It is utterly misleading to speak of a 1% growth differential that lasts 10-25 years as small.

Based on the Bloomberg article, the critique is an example of the silly quibbling over statistics while ignoring of the real human effects of a debt laden economy (mostly hobbled by higher taxes, financial repression, byzantine regulations and politicization of markets--all of which diminishes growth and whose economic losses will never be captured by data). 

While I am no big fan of Professors Reinhart and Rogoff, for what I see as their skewed views of capital flows and their advocacy of inflationism as means to reduce debt, at least they recognize of the hazards or of the perils of a leveraged economy from their chronicles of 8 centuries of crises.

As Carmen Reinhart and Kenneth Rogoff writes in their book This time is different Part I Financial Crisis: An Operational Primer (bold mine)

The essence of this-time-is-different syndrome is simple. It is rooted in the firmly held belief that financial crises are things that happen to other people in other countries at other times; crises do not happen to us here and now. We are doing things better, we are smarter, we have learned from our past mistakes. The old rules of valuation no longer apply. Unfortunately, a highly leveraged economy can unwittingly be sitting with its back at the edge of a financial cliff for many years before chance and circumstance provokes a crisis of confidence that pushes it off.

For the mainstream: This time is different. Yes, this is mania at its finest.

The US Government Budget Smoke and Mirrors Sequestration

The world of politics is really about smoke and mirrors.

Take the supposed deadlock over the “sequestration” deal or as per CNN “series of automatic, across-the-board cuts to government agencies, totaling $1.2 trillion over 10 years. The cuts would be split 50-50 between defense and domestic discretionary spending”, which officials peddle as cataclysmic to the economy.

The debate is over this…

…a “$44 billion reduction in actual federal outlays for 2013” according to Cato’s Tad DeHaven, or a niggardly 1.2% of total spending.

Or from another perspective, spending cuts means that “that the US government budget will grow by “only” $2.4 trillion over the next 10 years” according to Cato’s Dan Mitchell

Which hardly means any cut at all, the conservative Heritage Foundation further explains, (italics original)

Federal spending is projected to grow from $3.6 trillion in 2013 to more than $6 trillion by 2023, a 69 percent increase without sequestration. Even with sequestration, federal spending would still grow by 67 percent. Sequestration barely even slows the growth in spending, let alone cuts any spending out of the overall budget.

The bottom line is that the sequestration is about the reduction of rate of growth of government spending. There will be no real spending cuts at all.

Nonetheless, all the ruckus about spending cuts, ironically, has been offset by one day of acquired debt.

From the Zero Hedge, (bold and italics original)

if one listens to Obama whose idea it was in the first place, an unprecedented $85 billion spending cuts will be sequestered, unleashing famine, pestilence, the apocalypse and grizzly bears (as all park rangers will be dead from starvation). Which is why we applaud the administration's desire to preempt this tragic for the nation outcome, by issuing, in one day alone: February 28, $80 billion in Treasurys sending debt to (obviously) what is a new all time high $16,687,289,180,215.37.

In other words, the entire apocalyptic impact of the sequester for 2013 was offset by one day's debt issuance…

From Debt To The Penny:

As the great libertarian H.L. Mencken lucidly expressed (In Defense of Women)

Civilization, in fact, grows more and more maudlin and hysterical; especially under democracy it tends to degenerate into a mere combat of crazes; the whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by an endless series of hobgoblins, most of them imaginary. 

Politics wantonly make a fool out of the public.

Canadians Have Overtaken Americans in Wealth

From the USNews.com

For the first time in recent history, the average Canadian is richer than the average American, according to a report cited in Toronto's Globe and Mail.

And not just by a little. Currently, the average Canadian household is more than $40,000 richer than the average American household. The net worth of the average Canadian household in 2011 was $363,202, compared to around $320,000 for Americans.

If you're thinking the Canadian advantage must be due to exchange rates, think again. The Canadian dollar has actually caught up to the U.S. dollar in recent years.

"These are not 60-cent dollars, but Canadian dollars more or less at par with the U.S. greenback," Globe and Mail's Michael Adams writes.

To add insult to injury, not only are Canadians comparatively better-off than Americans, they're also more likely to be employed. The unemployment rate is 7.2 percent—and dropping—in Canada, while the U.S. is stuck with a stubbornly high rate of 8.2 percent.

Besides a strengthening currency and a better labor market, experts credit the particularly savage fallout from the financial crisis on the U.S. economy and housing market, which torpedoed home values and gutted household wealth. According to the report, real estate held by Canadians is worth more than $140,000 more on average and they have almost four times as much equity in their real estate investments.

In contrast to most of mainstream reporting, Canada’s strong currency has been imputed as manifestation of a relatively “superior” performing economy than the US.

Of course commodity exports have been partly responsible for the this but has barely been an indication of the resource course: the Dutch Disease.

Canada’s strength, according to the report, has been founded on two aspects: one relatively “better” labor market, and two, America’s boom bust cycles which has “torpedoed home values and gutted household wealth”.

While there are many other factors to consider for comparison, I would focus on three;

One, Canadian banks has outperformed the US. Like in the great depression, the US financial crisis of 2008 barely dinted on Canada’s banking system.

Two, Canada tops the US in Economic Freedom…

Canada ranks 6th in the Heritage Foundation’s world’s country ranking of economic freedom index compared to the US…

The economic freedom in the US has been in a steady descent.

Finally, Canada’s government has been relatively fiscal prudent than her neighbor.

As Cato’s Chris Edwards writes

The spending reforms of the 1990s allowed the Canadian federal government to balance its budget every year between 1998 and 2008. The government's debt plunged from 68 percent of GDP in 1995 to just 34 percent today. In the United States federal debt held by the public fell during the 1990s, reaching a low of 33 percent of GDP in 2001, but debt has soared since then to reach more than 70 percent today.

Bottom line: Economic freedom and fiscal prudence are once again depicted as key to economic prosperity.

Escalating European Crisis Weighs on Global Financial Markets

I don’t think last night’s selloff at Wall Street was mainly about the stalemate or the failure by the special debt-reduction committee to come into an agreement over budget cuts as portrayed by media.

Although I’d say that the extant gloomy sentiment may have been partly aggravated by the above events.

I would further add that the developments at the MF Global Holdings, where shortfall in U.S. segregated customer accounts may exceed $1.2 billion, more than double what was previously expected appears to be more of an influence considering the sharp declines in prices of the commodities.

Although I would reckon that last night’s semi-crash mostly reflected on European debt crisis, which according to reports, have been spreading to the core

From Reuters,

ECB policymaker Juergen Stark warned on Monday the sovereign debt crisis had spread from the euro zone's periphery to its core economies and was affecting economies outside of Europe.

"These are very challenging times... The sovereign debt crisis has re-intensified and is now spreading over to other countries including so-called core countries. This is a new phenomenon," Stark said in a speech to Ireland's Institute of International and European Affairs in Dublin.

"The sovereign debt crisis is not only concentrated in Europe, most advanced economies are facing serious problems with their public debt."

And growing evidence of the banking stress in Europe has been the fund flows (capital flight) to the US Federal Reserve

From Bloomberg

Foreign bank deposits at the Federal Reserve have more than doubled to $715 billion from $350 billion since the end of 2010 amid Europe’s debt turmoil, buttressing the dollar’s status as the world’s reserve currency.

Forty-seven non-U.S. banks held balances of more than $1 billion at the New York Fed as of Sept. 30, up from 22 at the end of 2010, according to a survey of 80 financial institutions by ICAP Plc, the world’s largest inter-dealer broker. The dollar has appreciated 7.2 percent since Standard & Poor’s cut the nation’s AAA credit rating Aug. 5, the second-best performance after the yen among developed-nation peers, according to Bloomberg Correlation-Weighted Currency Indexes.

In what appears to be a choice between two seemingly ‘toxic’ assets, investors have been exiting the EU and has flocked to the US, which alternatively means that US dollar has been winning this round so far.

Politically captive financial markets will remain highly volatile.

Debt Ceiling Bill: Where are the Spending Cuts?

I correctly argued that the so-called debt deal impasse was only a theatrical display meant to pander to voters (and the tea party movement) that there has been a standing opposition.

In truth, politicians from both camps had no desire to enact fiscal discipline. Instead, they colluded to use market hobgoblins to arrive at the 11^th hour deal.

Now that the debt ceiling deal had been passed at the Congress, we ask; where are the spending cuts?

Cato’s Chris Edwards says there’s none

More from Mr. Edwards,

the budget deal doesn’t cut federal spending at all.

House Speaker John Boehner’s bullet points on the deal say that it cuts discretionary spending by $917 billion over 10 years, as “certified by CBO.” These discretionary “cuts” appear to be the same as those in Boehner’s plan from last week. The chart shows CBO’s scoring of those spending cuts.

Wait a minute, those bars are rising! Spending isn’t being cut at all. The “cuts” in the deal are only cuts from the CBO “baseline,” which is a Washington construct of ever-rising spending. And even these “cuts” from the baseline include $156 billion of interest savings, which are imaginary because the underlying cuts are imaginary.

No program or agency terminations are identified in the deal. None of the vast armada of federal subsidies are targeted for elimination. Old folks will continue to gorge themselves on inflated benefits paid for by young families and future generations. None of Senator Tom Coburn’s or Senator Rand Paul’s specific cuts were included.

The federal government will still run a deficit of $1 trillion next year. This deal will “cut” the 2012 budget of $3.6 trillion by just $22 billion, or less than 1 percent.

The legislation does create a “Joint Committee” to design a second round of at least $1.2 trillion in spending cuts by November. Presumably, interest savings will be included in those “cuts” as well, reducing the amount of actual program cuts needed to about $1 trillion.

The debt ceiling bill looks more like legal skulduggery or prestidigitation

As Cato’s David Boaz neatly puts its

most of which promise to cut spending some day—not this year, not next year, but swear to God some time in the next ten years. As the White Queen said to Alice, ”Jam to-morrow and jam yesterday—but never jam to-day.” Cuts tomorrow and cuts in the out-years—but never cuts today.

Now that debt ceiling has been raised, expect the next round of asset purchase program from the US Federal Reserve

Financial Success is a Function of Common Sense and Self Discipline

Some have this misbegotten notion/belief that attaining wealth and fame translates to a state of permanence.

Well it’s not.

This should be a noteworthy example, from yahoo.com (bold emphasis mine)

Patricia Kluge was once known as "the wealthiest divorcee in history." Those days are over. Kluge, who had formerly been married to the late billionaire Paul Kluge, recently filed for bankruptcy protection, citing debts somewhere between $10 million and $50 million and assets between $1 million and $10 million….

We doubt the couple will be out on the street selling pencils anytime soon. Still, Patricia Kluge's present straits represent a remarkable reversal for a woman who, at one time, was one of America's richest and most extravagant socialites. A buzzy article from the AP explains that the Kluges once hosted parties for "royalty, corporate chieftains, celebrities, and literary figures." She lived in a 23,500-square-foot mansion, owned a winery and, by all accounts, lived the good life.

A little too good, as it turned out. Her financial troubles began to pile up during the economic downturn and creditors started seizing her assets in earnest earlier this year. Kluge and her husband had attempted to renegotiate their loans with various banks, but failed. In April, Donald Trump bought most of Kluge's winery and vineyard from Farm Credit Bank for $6.21 million.

As I always tell my wonderful kids, financial success depends on a simple equation:

Income – Expense = deficit or surplus

If spending is greater than income where constant excess spending is financed by drawing from future income (debt), one ends up consuming wealth.

So has been the case of Patricia Kluge. And so will be the case for all the rest who fail to heed or realize on this simple lesson.

[Yes, local boxing legend Manny Pacquiao, despite his newfound riches, won’t be spared from this basic rule]

And so has this predicament befallen on governments, whom mistakenly believe that they can spend their way to prosperity.

Bottom line: It would need or take only common sense and self-discipline to observe this rule, which unfortunately many people especially those in the governments and their apologists don’t have (many live under the delusion that they are beyond or immune to the laws of economics. Also the idea that they are equipped with or backed by the printing presses can do them magical stuffs).

S&P Cuts U.S. Ratings To Negative: A Prelude To The Return Of The Bond Vigilantes?

I occasionally come across some myopic commentators who ask “where are the bond vigilantes?”

Bond vigilante are investors, who according to Wikipedia.org, "protests monetary or fiscal policies they consider inflationary by selling bonds, thus increasing yields". The term “Bond Vigilante” was coined in 1984 by economist Ed Yardeni.

The implication is—the absence of bond vigilantes seem to justify reckless government ‘spending’ policies, which for mainstream ideologues, imposes little adverse side effects on the economy or on the markets.

Yet this view hardly incorporates the impact of the massive interventionism applied by the world governments on the international bond markets, as well as the impact of financial globalization.

For them, because interest rates remain low, then governments are justified to keep running a spending binge.

Anyway the same camp, characterized by their reverence to government interventions on the market to thwart ‘deflation’ had earlier been insisting about “where is inflation?”

Well, the downgrade on the outlook of US debt by the credit rating agency S & P 500 seem to presage the return of the bond vigilantes.

The Bloomberg reports, (bold emphasis mine)

Standard & Poor’s put a “negative” outlook on the U.S. AAA credit rating, citing rising budget deficits and debt.

“We believe there is a material risk that U.S. policy makers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013,” New York-based S&P said in a report today. “If an agreement is not reached and meaningful implementation does not begin by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer ‘AAA’ sovereigns.”

At the end of the day, what is unsustainable won’t last.

Much Ado Over Nothing On US Budget Cuts, Debt Ceiling Next

As we previously argued the brouhaha over US budget cuts signified nothing but symbolism.

From the Washington Post, (bold emphasis mine)

A new budget estimate released Wednesday shows that the spending bill negotiated between President Barack Obama and House Speaker John Boehner would produce less than 1 percent of the $38 billion in promised savings by the end of this budget year.

The Congressional Budget Office estimate shows that compared with current spending rates the spending bill due for a House vote Thursday would cut federal outlays from non-war accounts by just $352 million through Sept. 30. About $8 billion in immediate cuts to domestic programs and foreign aid are offset by nearly equal increases in defense spending.

When war funding is factored in the legislation would actually increase total federal outlays by $3.3 billion relative to current levels.

To a fair degree, the lack of immediate budget-cutting punch is because the budget year is more than half over and that cuts in new spending authority typically are slow to register on deficit tallies. And Republicans promise that when fully implemented and repeated year after year, the cuts in the measure would reduce the deficit by $315 billion over the coming decade.

So instead of cuts, we have budget increases. And prospective cuts only apply to projected spending which are decades away.

As Lew Rockwell writes, (bold emphasis mine)

In other words, this is all political play, which is obvious from the numbers and the norms. In the first place, no one is talking about actual cuts, not even the supposedly radical Republicans. These are cuts in projected spending, meaning that everyone is dealing with symbolic changes in a future that is just as symbolic. Even on paper, the only way to consider these cuts is to compare them with the GDP and the national debt -- both of which are slated to rise. Forgetting those two metrics, and looking at the actual numbers, there are no cuts at all and only increases.

Even the dating of the Republican’s balanced budget is ridiculous. So the budget will be fully balanced in 2040? That’s three decades from now. Few of the people in office will still be in office, and many will be dead. To see how viable this is, consider how many political plans of the year 1982 still survive today.

The Republican plan proposes domestic cuts in these gargantuan programs like Social Security and Medicare with nothing specific beyond the old prattle about establishing bi-partisan commissions and sending block grants to the states. There is nothing specific here beyond a numbers-laden pipe dream. No programs are abolished, no benefits are slashed or even trimmed, and although the propagandists claim to attack the culture of spending in Washington, there is not one word about taking on the money-printing machine that made the $14 trillion national debt possible in the first place.

This brings back my earlier observation where...

Stripping away control and spending other people’s money is so addictive that politicians can’t seem to do away with it and would fight heaven and hell to avoid it.

And so it has been.

The next step will be a vote FOR raising the debt ceiling.

Prediction Market Intrade suggests that the odds for raising the debt ceiling by June 2011 seem to be at 75% as of the moment.

The usual, government authorities will raise the spectre of fear of a prospective mayhem (bogeyman) to justify the actions of politicians.

From Marketwatch.com (bold highlights mine)

Treasury Secretary Timothy Geithner on Thursday said Congress will act to raise the debt ceiling because they realize the consequences for not doing so. "We're only two years from a cataclysmic financial crisis, and the huge damage to credibility and huge loss of confidence," he said before a Bertelsmann Foundation conference. "The idea that Washington would court that risk is inconceivable." Publicly and privately, Congressional Republicans have indicated they understand the implications of not raising the debt ceiling, Geithner said. Geithner added that markets have confidence that Congress will cut deficits. "The world basically believes that problems are manageable, and the system will solve it," he said

Could Mr. Geithner be utilizing the power of suggestion or is he conditioning the public?

This reminds me of General Douglas MacArthur who once said,

Our government has kept us in a perpetual state of fear -kept us in a continuous stampede of patriotic fervour -with the cry of grave national emergency. Always, there has been some terrible evil at home, or some monstrous foreign power that was going to gobble us up if we did not blindly rally behind it.

Of course, a further move will be by the US Federal Reserve who will bring forth QE 3.0 by the latter half of 2011.

Politicians (everywhere) and bureaucrats are nearly cut from the same cloth.

So far, everything seem to jibe.