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Monday, November 21, 2011

The Illusion of Fiscal Discipline Part 2

    As this illusion is very widespread it requires a part 2. In part 1 I looked at a proposal for "tax reform" from the Newsday editorial page. This was flawed because at the outset it presumed that we are
"deep in debt." It also had some tax proposals that are not much to my taste in principle: why does every tax proposal we hear about in the mainstream press have to be about "tax simplicity and broadening the tax base" along with cutting corporate and high income tax rates in exchange for eliminating "loopholes"? (many like the mortgage interest deduction and the Earned Income Credit actually benefit the middle class and poor respectively rather than the rich.)

     For this first post please see http://diaryofarepublicanhater.blogspot.com/2011/11/illusion-of-fiscal-discipline-part-1.html

    Today I looked at the top editorial on the Wall Street Journal and had the opportunity to quote Reagan after reading its headline:  "Bailout of First Resort: Europe's central banks can't save spendthrift governments"-"There they go again!"

   The Euro crisis is not the result of spendthrift governments. As much as the WSJ editorial page would love to make it about that it isn't. That this is so is shown ironically enough by an article in the very same Wall St. Journal though not in the editorial section. WSJ editorial page let me quote from your very own front page on the same day: "Political turmoil has triggered a dangerous new phase of the region's sovereign-debt crisis, sending borrowing costs soaring for even the most highly rated countries like the Netherlands, and France."

    If it is hitting high and low rated countries alike how is it a question of fiscal discipline? Indeed, the idea that this crisis has been caused by spendthrift Greeks is belied by the fact that countries like Spain and Ireland which had budget surpluses before the crisis hit have also been hit. Bear in mind that currently France's debt as a percentage of GDP is even lower than Germany's-82.3 percent to 83.2 respectively. Yet France has seen its yields rise sharply relative to Germany's. Spain's even now is only 61.0 percent, the Netherlands is 62.9 percent.

   Then again, Germany is of course the gold standard of credit worthiness and it has one of the most generous welfare states in the world.

    The WSJ is crying for poor Mario Draghi: "Only weeks into his new job as president of the European  Central Bank, the Italian is being portrayed along with German Chancellor Angela Merkel as the main-the only-obstacle to saving the Euro zone. If only the ECB would print a few trillion euros to buy the debt of spendthrift European countries, all would be well."

    "Hang in there, Mr. Draghi, and you too, Chancellor. Don't let the French, the British, and the Yanks, the euro-pundits and other blabbering bullies for bailouts get you down. Someone needs to defend the principle of central bank independence and price stability. The ECB has been by far the most effective part of the euro system since its founding. It shouldn't squander that legacy now by taking on the debts of spendthrift governments that are the real cause of the crisis."

    "So the ECB must do like the Federal Reserve, buy four trillion euros or so, and the sheer financial firepower will crush bond spreads and end the euro crisis."

    "This assumes that the Fed's experiment has been successful, though it's more accurate to say the verdict is still out. The U.S. housing market still hasn't recovered, despite nearly $1 trillion in Fed mortgage-backed security purchases, and the economy remains in low gear despite nearly three years of near-zero interest rates."

    It's not open to debate that in late 2008 we saw Libor spreads exhibiting the kind of action we see today in Euro nation debt and that the massive financial firepower was successful at least in this regard.

   "Europe's real problem now... is that the currency zone lacks a mechanism for enforcing fiscal discipline."

    Wrong again, fiscal discipline is not the solution, it is, well, the problem. Again, austerity is self-defeating. The more a country cuts the lower national GDP which only increases debt ratios. This is why the spreads don't ever narrow no matter how many measures are passed.

 

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