GREED & fear, the latest report from Chris Woods of CLSA is titled ‘The “austerity” neurosis’. We get these every week but this is a great one from GREED % Fear, whether you are a Keynesian or Austrian, its a very nice read.
GREED & fear starts off stating there ‘there has been evident in continuing meetings this week in America that investors are increasingly looking for an inflection point in ECB policy as the consensus grows that the Eurozone is on the point of abandoning “austerity”, a mood which has been enhanced by the exposure of Carmen Reinhart and Kenneth Rogoff’s error in an excel spreadsheet and by Germany’s decision to cut France some slack on meeting its fiscal target.’
GREED & Fear on ECB
If this is the sentiment, the result of this week’s ECB policy meeting has made it clear that it is still early for Flexible Mario to go properly unconventional. Still GREED & fear would be surprised if the Eurozone has not made such a move before the end of this year, with the most likely time after the German federal election in September. But for it to happen earlier would surely require more market-driven pressure and, for now, the recent bounce in periphery bank stocks courtesy of the formation finally of an Italian government and the continuing decline in Eurozone periphery sovereign bond yields are sending the opposite message (see Figures 1 and 2).
The declining periphery sovereign bond yields look increasing bizarre to GREED & fear if it is assumed that the only way out of the periphery debt burden is to allow debt restructuring at the sovereign level. Still if Frau Merkel can be persuaded by Flexible Mario that the unconventional can work, hard decisions can be avoided for now as the ECB resumes balance sheet expansion via the mooted purchase of periphery SME loans and the like.
Such policies in GREED & fear’s view will ultimately not work. But they can move markets in the short term. Meanwhile, the media furore on the revelation of the Reinhart-Rogoff error has been seized on with glee by the “demand” obsessed neo-Keynesians. Still the point is not that a 90% government debt to GDP ratio is the magic number but rather that too much government debt is a burden on the dynamism of any economy since it diverts resources from the private sector. This should be blindingly obvious to anyone with any practical experience of working in or with the public sector. Meanwhile, instead of the increasingly tedious focus on “austerity” it would be far more preferable if the Eurozone, as well as the equally fiscally challenged America and Britain, focused on the really important issue of supply-side reform. In this respect, it is rather depressing to note the overt politicisation of the IMF as it has all too predictably joined the consensus chorus against “austerity”.
Meanwhile GREED & fear egards the 90% target it is also worth noting that the US is already well past the target if Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac debt is included, as it should be. Thus, federal government debt, state and local government debt and the debt of government-sponsored enterprises (GSEs) accounted for a combined 130% of GDP at the end of 2012, according to the Federal Reserve’s flow of funds data (see Figure 3).
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