More seriously, the anti-austerity advocates appear to have no real concern for the longer-term consequences of indebtedness. At a certain point, fiscal deficits and sovereign debt become structural (the deficits and debts cannot be eliminated without profound alterations to the structure of public spending, borrowing, the balance of payments and the taxation base).
Which means governments can choose:
(1) Austerity via fiscal spending cuts;
(2) Tax hikes for you, the over-burdened citizen; or
(3) Both.
Whichever way you cut it, your children, your grandchildren – in fact everybody, except Gérard Depardieu, obviously – will be paying more tax and receiving less publicly-funded welfare as governments pursue aggressive debt-reduction strategies.
A return to first principles
A cornerstone of good governance should be a commitment to sound fiscal outcomes. But something happened on the road to sound credit and responsible fiscal policy. Does anyone seriously argue that increasing fiscal deficits and ballooning sovereign debt is not the road to serfdom? By maxing out your credit cards, you are merely postponing the inevitable day of reckoning (yes, I know Washington does nothing but debt, but the US is in a unique position).
True, there is clearly a role for governments to intervene to boost demand via deficit spending during periods of recession. That’s long been the Keynesian prescription.
But most governments ignore the other half of Keynes’ sage advice: namely, saving fiscal surpluses during periods of prosperity to ensure fiscal stability during recession, even as the public sector borrowing requirement increases. And not squandering precious surpluses on pink batt programs (Australia), moat-cleaning (Britain), Facebook-addicted civil servants (“Facebook: it’s French for Work”), and middle-class welfare, corporate welfare, farm welfare and subsidised property bubbles (everyone).
The problem is not liquidity
Austerity be damned. We are still absolutely awash with liquidity. There is more than adequate liquidity in the global financial system at present. The US Fed’s QE3 program will add another $US1 trillion to the debt coffers.
But there’s liquidity – and there’s credit. It’s just that financial institutions aren’t investing in anything other than blue chips and A-rated bonds. Global venture capital plunged 33% in 2012, a disastrous result on the back of a weak 2011. By contrast, global M&A was up in 2012.
So businesses aren’t raising seed capital; IPOs don’t happen; innovations go underfunded; R&D dries up; prospective products remain vapourware; and workers don’t get hired. There’s your lack of a multiplier effect writ large.
Forget IMF forecasts. The crux of the problem remains the vulnerability of the global financial system and its reluctance to lend freely, exacerbated by the fact that global interest rates, for the most part, remain too low to warrant risky lending.
And there’s bad news and worse news. It came out of Basel early this year, courtesy of the Bank for International Settlements (BIS). The much-trumpeted Basel III accord, which sought to place banks’ underlying cash and short-term asset base on a much firmer footing, has been watered down and delayed. Instead of blue-chip assets, financial institutions will be able to maintain or increase their leverage and fractional reserve lending using much lower-quality assets – like those dreaded mortgage-backed securities — that got us all here in the first place.
Someone at the IMF should write a paper about it.
Remy Davison is a Jean Monnet Chair in politics and economics at Monash University.
This article first appeared at The Conversation.
