The Great Depression (II)
Introduction
This first article will cover a very interesting topic that will certainly have a major impact on our future and the one of the new generation to come : the debt crisis. I enjoyed watching this video because of Schwartz demonstration and the courage and eloquence he has shown during the entire speech. Deconstructing a Nobel prize laureate's book in front of a whole crowd is no easy task, but despite the likeliness of the crowd embracing Krugman's ideas, he developed his arguments very calmly and in an organised manner.
It appears to me that the debt crisis (2010 - now) was caused by many factors, but mainly those two : an "unsustainable" level of debt (or at least unsustainable with regards to markets' criterias) and declining economic growth expectations in southern european countries in the first place and thereafter northern european countries. It is quite simple to comprehend that, as economic growth expectations of european countries worsened , their overall capacity to generate income through tax and other levies decreased. At the same time, their spending remained stable and the deficit created by this situation (the European average deficit in 2011 was 4.5% - due to cyclical deficit for a certain part) affected the credit situation of public governments. This situation spooked markets, creating a massive sell-off of sovereign bonds (investors were more and more afraid that government would be unable to service debt and therefore they have been keen to sell governments bonds) hence increasing bond yields & therefore the interest countries borrow at, and eventually putting heavy pressure on governments' ability to generate income.
Interestingly enough, the main focus of the financial market since 2010 is Europe - others political leaders of the world blame those 17 countries of the euro zone for not solving the crisis fast enough (Obama, Hu Jintao..) and if bonds yield increased massively in Southern Europe (Spain's bond yield was around 3.5% on in 2005/6 , it is now close to 7.6%), they remained very low in other international markets (Japan,US..). It is then legitimate to ask ourselves the following question : are those following countries in any better economic shape?
GDP Growth - 2011 US 1.7% , Japan - 0.9% , Euro Zone 1.5%
Public Deficit - 2011 US 9.8% , Japan 10%, Euro Zone 4.5%
Even if those figures do not represent effectively the overall situation (more data would have to be taken in consideration), my point is that those countries in particular and others "western" economies do not have any healthier financial situations. If Japan is so far sort of protected by the fact that its debt is mainly held domestically and therefore bonds sell-offs are unlikely - the US is in a much more complex situation, with a fiscal cliff threatening to trigger the low growth miraculously obtained from then. The markets are focusing on the most recent news and the most dreadful investment area- thus lower yields on bonds markets in France/Germany/US/Japan..etc is not necessarily a sign of a lower expected risk but a sign of a lower expected risk as compared to other economies. When those other economies will have either defaulted or sorted out their debt issue, I believe the same kind of surge in bond yield and difficulties in repaying debt is likely to happen in those countries if no public policy change is taken on.
At the same time, we have seen the failure of deep austerity in Greece/Spain : the cut in governments spending eventually led to lower economic growth and the government is failing to decrease its deficit & debt. Obviously balancing the government budget of countries where the debt accumulated during decades, with a public sector topping up 40% in the span of a few months seems barely conceivable... If Keynesian economics have been applied to increase debt during crises to artificially increase demand and restore confidence and economic growth, governments have failed to recognize the importance of government surpluses during expansionary phases. The reason? It seems like it is a "bit" easier to get re-elected if you publicly announce that the country will grow in the future, that it will create job, and that the public sector will help everybody (even if taxpayers will eventually have to pay for it, the cost is quite low in the short term so who really cares?..). In the face of such a debt crisis where medias blame no one but the financial industry (which is far from being exempt of scandals ie: GM sachs, Libor, the GFC..), it is quite surprising that nobody questions the sustainability of our growth that has been accumulated for decades. Which part of our debt has been used for sustained long term growth (infrastructure, education, projects..etc) that will drive us for many years ahead?
Unfortunately, the rules of economics always apply : if the increased income generated by debt (we can consider it as an investment) is lower than its interests, then debt did not generate any wealth in the long-run. When interests are low (gov.bond yields), many loans can be taken on to balance high unemployment with extra public employment/consumption. But when the debt is too high and private investors show worries... Things slightly change.
This is mainly what happened for many years - our policy makers seem to have always favoured short-term interests as Mr.Schwartz (demand) depicted rather than long investments that would not show up before years.
This is mainly what happened for many years - our policy makers seem to have always favoured short-term interests as Mr.Schwartz (demand) depicted rather than long investments that would not show up before years.
Our ever more creative policy makers will have to face a very depressing conclusion : what we do so far does not work. Our countries entered a phase of de-leveraging - and it is very likely that people will realize that growth is not permanent and that the whole economic system needs deeper reforms. Schwartz makes a point - demand side economics are flawed in the long term - credit boosted demand can not be sustained and appears as a way to restore confidence only. Many economists pointed out that high levels of government debts (above 80%) are jeopardizing growth. Likewise, some of the fastest growing economies at the moment have very low government debts (China,Australia,Brazil,India,South Korea and South Africa..). Our countries should realize that savings and long term investments are not opposed to consumption and are key to economic development as well.
Putting in place austerity measures is necessary but is definitely not the solution in the long-run : European reforms to share debt, monetary policy (and in the long term economical structure) and eventually a whole new capitalism taking in consideration the fact that growth is not indefinite will need to emerge...When is enough "enough"?
Putting in place austerity measures is necessary but is definitely not the solution in the long-run : European reforms to share debt, monetary policy (and in the long term economical structure) and eventually a whole new capitalism taking in consideration the fact that growth is not indefinite will need to emerge...When is enough "enough"?
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