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I think part of the problem is the popular perception that a nation's economy is just like a household economy: i.e. in a household if credit card debt is high,

by acabal 14y ago

I think part of the problem is the popular perception that a nation's economy is just like a household economy: i.e. in a household if credit card debt is high, you gotta pay that off before you can spend more; or if you're earning $1000 per month but spending $2000, you gotta cut down on your cable bill and nights out. That's a tantalizingly simple and intuitive comparison that everyone can understand and relate to. Unfortunately a nation's economy is so utterly unlike a household economy that the comparison is downright dangerous, because it leads to harmful false assumptions like "national debt is always a bad thing", "a nation must always 'earn' more than it spends at all times", and "an economy can never grow in a nation with debt". I'm no economic wizard but it really surprised me that how everyone in Europe and many in the States are prescribing austerity, when basic history from this very century frequently demonstrates that austerity can lead to economic damage. Yes you can always find programs that can and should be cut back in any developed society, but considering debt to be the central and only problem in a situation where the debtor defines the very money it "owes" seems a little shortsighted to me.

dageshi 14y ago
Austerity in europe is essentially the only politically viable option at the moment. On one side you have Germany and a bunch of nations who refuse point blank to essentially write a blank check for the nations who need it, on the other you've got public opinion which is in no way ready to take the quantum leap of political integration necessary to make fiscal transfers meaningfully possible within the eurozone. So the default action is austerity, the IMF signed off on it because they feared that the euro's breakup would be catastrophically worse than almost any amount of austerity in europe.
- arrrg 14y ago
  Politically viable, sure – but it’s also the wrong way to go. It’s not sustainable since it won’t lead to forward progress. It only delays the catastrophe, while at the same time options do exist (as outlined in your first paragraph) – but the European leadership cowardly refuses to fight for them. Making something that is not politically viable is a politician’s job – and they refuse to do it.
- gameshot911 14y ago
  >So the default action is austerity, the IMF signed off on it because they feared that the euro's breakup would be catastrophically worse than almost any amount of austerity in europe. Additionally, a 3rd option worth consideration: letting individual countries default.
  - marvin 14y ago
    Does Greece really need anyone's permission to default? Iceland didn't. Defaulting on the national debt is almost an act of war, but there is historical precedent.
- ucee054 14y ago
  No, Greece could have defaulted completely on its bonds - which were held by the German banks. Then Greece would be OK, and the German banks about to fall like dominoes. Then the Germans might have become more reasonable about a bailout. After all, they would really be bailing out not the Greek people, but German banks that shouldn't have bought bonds from crooked Greek politicians and Goldman Sachs. I don't see how any of that is the Greek people's fault, and in the mythical "free market" said German banks would have been allowed to go bust years ago.
jpatokal 14y ago
I'm not sure where you're pulling those harmful false assumptions from, but surely a nation should at least occasionally earn more than it spends? Because the US has only managed that trick 8 times since 1931, of which only one time was since 1960. http://whereistheoutrage.net/domestic-issues/budget/budget-deficits-since-1931/ http://whereistheoutrage.net/domestic-issues/budget/budget-d... And sure, unlike households, nations have the option of printing more money to pay off their debts. Unfortunately that doesn't generally work too well (see also: Zimbabwe, Weimar Germany).
- rayiner 14y ago
  As a pure logical matter, just because hyper inflation is possible does not mean it's the inevitable result of an inflationary monetary policy. Zimbabwe and Wiemar Germany are extreme examples. Both had their infrastructure devastated by war, and Wiemar Germany was subject to crushing, externally-imposed war indemnities.
  - Kynlyn 14y ago
    Zimbabwe's war ended in the 70's. Horrific mismanagement by Mugabe and his cronies is the biggest culprit of the hyper-inflation now affecting the country.
- gph1 14y ago
  If you look, you'll notice that a recession followed nearly every reported government budget surplus. This is not surprising: a surplus means that the government is removing more money from the economy than it's adding, something which is rarely warranted absent a large current account surplus and/or an economy operating at full capacity. You need to understand the sector financial balances.
- acabal 14y ago
  It sounds like you're suggesting that America should more often earn more than it spends. (Correct me if I'm wrong.) Again I'm not a student of economics, but the fact that America in the 80 years since has become the most powerful economy in the world's history, while only being in the black 8 times, suggests to me that earning more than you spend isn't really as important as many think. Rather, it's the flow of money in and out of the economy and other factors that really matter. That's why my original comment is about: Assuming that a nation is like a household--i.e., that at some point it obviously should earn more than it spends, because that's how a household operates--leads to conclusions that aren't always supported by history. Weimar Germany's situation partly mirrors the one today. To deal with hyperinflation and a collapsing economy, in '31 Chancellor Brüning cut spending by 30%. It eventually led to a budget surplus but at the cost of 30% unemployment. Those events helped set the stage for what followed in WW2. Obviously the comparison is tangential, but it's interesting to think about nonetheless. See: http://www.guardian.co.uk/global/2011/nov/24/debt-crisis-germany-1931 http://www.guardian.co.uk/global/2011/nov/24/debt-crisis-ger... http://en.wikipedia.org/wiki/Hyperinflation_in_the_Weimar_Republic#Outcome http://en.wikipedia.org/wiki/Hyperinflation_in_the_Weimar_Re...

by acabal 14y ago

dageshi 14y ago

Austerity in europe is essentially the only politically viable option at the moment. On one side you have Germany and a bunch of nations who refuse point blank to essentially write a blank check for the nations who need it, on the other you've got public opinion which is in no way ready to take the quantum leap of political integration necessary to make fiscal transfers meaningfully possible within the eurozone. So the default action is austerity, the IMF signed off on it because they feared that the euro's breakup would be catastrophically worse than almost any amount of austerity in europe.

arrrg 14y ago
Politically viable, sure – but it’s also the wrong way to go. It’s not sustainable since it won’t lead to forward progress. It only delays the catastrophe, while at the same time options do exist (as outlined in your first paragraph) – but the European leadership cowardly refuses to fight for them. Making something that is not politically viable is a politician’s job – and they refuse to do it.
gameshot911 14y ago
>So the default action is austerity, the IMF signed off on it because they feared that the euro's breakup would be catastrophically worse than almost any amount of austerity in europe. Additionally, a 3rd option worth consideration: letting individual countries default.
- marvin 14y ago
  Does Greece really need anyone's permission to default? Iceland didn't. Defaulting on the national debt is almost an act of war, but there is historical precedent.
ucee054 14y ago
No, Greece could have defaulted completely on its bonds - which were held by the German banks. Then Greece would be OK, and the German banks about to fall like dominoes. Then the Germans might have become more reasonable about a bailout. After all, they would really be bailing out not the Greek people, but German banks that shouldn't have bought bonds from crooked Greek politicians and Goldman Sachs. I don't see how any of that is the Greek people's fault, and in the mythical "free market" said German banks would have been allowed to go bust years ago.

jpatokal 14y ago

I'm not sure where you're pulling those harmful false assumptions from, but surely a nation should at least occasionally earn more than it spends? Because the US has only managed that trick 8 times since 1931, of which only one time was since 1960. http://whereistheoutrage.net/domestic-issues/budget/budget-deficits-since-1931/ http://whereistheoutrage.net/domestic-issues/budget/budget-d... And sure, unlike households, nations have the option of printing more money to pay off their debts. Unfortunately that doesn't generally work too well (see also: Zimbabwe, Weimar Germany).

rayiner 14y ago
As a pure logical matter, just because hyper inflation is possible does not mean it's the inevitable result of an inflationary monetary policy. Zimbabwe and Wiemar Germany are extreme examples. Both had their infrastructure devastated by war, and Wiemar Germany was subject to crushing, externally-imposed war indemnities.
- Kynlyn 14y ago
  Zimbabwe's war ended in the 70's. Horrific mismanagement by Mugabe and his cronies is the biggest culprit of the hyper-inflation now affecting the country.
gph1 14y ago
If you look, you'll notice that a recession followed nearly every reported government budget surplus. This is not surprising: a surplus means that the government is removing more money from the economy than it's adding, something which is rarely warranted absent a large current account surplus and/or an economy operating at full capacity. You need to understand the sector financial balances.
acabal 14y ago
It sounds like you're suggesting that America should more often earn more than it spends. (Correct me if I'm wrong.) Again I'm not a student of economics, but the fact that America in the 80 years since has become the most powerful economy in the world's history, while only being in the black 8 times, suggests to me that earning more than you spend isn't really as important as many think. Rather, it's the flow of money in and out of the economy and other factors that really matter. That's why my original comment is about: Assuming that a nation is like a household--i.e., that at some point it obviously should earn more than it spends, because that's how a household operates--leads to conclusions that aren't always supported by history. Weimar Germany's situation partly mirrors the one today. To deal with hyperinflation and a collapsing economy, in '31 Chancellor Brüning cut spending by 30%. It eventually led to a budget surplus but at the cost of 30% unemployment. Those events helped set the stage for what followed in WW2. Obviously the comparison is tangential, but it's interesting to think about nonetheless. See: http://www.guardian.co.uk/global/2011/nov/24/debt-crisis-germany-1931 http://www.guardian.co.uk/global/2011/nov/24/debt-crisis-ger... http://en.wikipedia.org/wiki/Hyperinflation_in_the_Weimar_Republic#Outcome http://en.wikipedia.org/wiki/Hyperinflation_in_the_Weimar_Re...