Sovereign debt bubble thread

[Admiral Yi]

The mainstream argument isn't 'growth, not austerity'.

It's more growth, less austerity.  Quibble noted.

[Admiral Yi]

I think you either need to read more widely or more selectively because what you're describing is SYRIZA's view but not many other people's.

No clue who or what SYRIZA is.

[Tamas]

The people who are trying to advance the "growth, not austerity" argument all conveniently overlook the question of where the financing for growth is supposed to come from.

The mainstream argument isn't 'growth, not austerity'.

But I'd suggest Eurobonds, Euro-QE and a change to the structure of banking in Europe so that there's a lender of last resort - ie. so state's don't have to assume that role which is a big problem for Spain (and Belgium) - and inevitably a common Euro-regulator.  I'd add that I think economies within the Eurozone that can take steps to stimulate demand should.  The other side of that is ongoing structural reforms both national and I think EU wide - we should be, as Monti suggested, pressing forward with a single market in services.

Going along with all of that is austerity.  Remember Rajoy's sin wasn't that he wanted to spend a huge amount of money, he wanted to reduce the pace of deficit reduction this year.  His government proposed reducing the deficit from 8.5% of GDP to 5.3%, the EU insisted he stick to the original plan (made when the Spanish deficit was projected to be 6.6%) of cutting to 4.4%.  The UK is proceeding at a far slower pace and I think because of that our deficit reduction plan is actually far more credible.

The issue that people like me have isn't that Euro-austerity's wrong it's that it's going at an artificially fast pace and there's very little policy support elsewhere such as an expansionary monetary policy, increased demand in countries like Germany or reforms that are likely to stimulate growth in the short-term.

My position in the UK - where we need a plan B - is that the government should do pensions and welfare reform and a shift in defence budget to demonstrate medium term credibility.  But that they should also take advantage of record low gilt prices to fund a temporary VAT cut, or capital investment in public housing for example.

I agree with this, looks like things are so fucked up that barring a collapse, we need euro-bonds to flush Spain (at the very least) with lotsa' monopoly money so they can recover. In the meantime, austerity where it is possible, and a gradual switch to more sane budgets, and EU-wide financial system.

HOWEVER, you know that is not going to happen. The Spiegel article is the very latest evidence that the leaders knew the problems very well. But the train was going well then. Politicans have ZERO, and I mean ZERO incentive to institute unpopular steps (like making a budget which does not run on loans for regular spending) when the going is good. Why? Because there will be at least one asshole in the campaign saying "I think this is not necessary!!!" and win the election.

[Iormlund]

The people who are trying to advance the "growth, not austerity" argument all conveniently overlook the question of where the financing for growth is supposed to come from.

As Minsky says, there's no need to specify where that money must come from. Everyone knows perfectly well.

In order to avoid that path German leadership has plunged the Eurozone into this mess. If there is still an actual viable solution by this point, it will be extremely expensive.
What remains to be seen is in what way German citizens will pay the price: bearing the brunt of periphery rescues and subsequent defaults, transfering billions in subsidies, or watching as hundreds of billions are wiped out during the collapse of the EZ.

[Iormlund]

But that they should also take advantage of record low gilt prices to fund a temporary VAT cut, or capital investment in public housing for example.

Those are among the last things I would do with that money. I would use to fund R&D (which has been gutted) and slash the part of salaries that employers pay as tax (reducing labor costs).

[Sheilbh]

No clue who or what SYRIZA is.

SYRIZA's the Greek party that's leading the bailout rejectionists.

It's more growth, less austerity.  Quibble noted.

It's not a quibble and you're still wrong I think.  I want more growth and slower austerity.  The goal should be to get to the fiscal pact deficit limit and to reduce national debt in accordance with the pact.  As I say this isn't an extreme view as you seem to think it is.

HOWEVER, you know that is not going to happen. The Spiegel article is the very latest evidence that the leaders knew the problems very well. But the train was going well then. Politicans have ZERO, and I mean ZERO incentive to institute unpopular steps (like making a budget which does not run on loans for regular spending) when the going is good. Why?

I actually think the problems Spiegel identifies were political.  The EU couldn't envisage the Eurozone without Italy and the Germans were in a bad fiscal state so they couldn't insist on too strict application of rules.  Two other points though.

The first is Spain and Ireland did have the good fiscal management during the boom years and they were reducing the national debt.  There were policy mistakes during that time.  But I think their problems - basically a credit bubble caused in part by the Eurozone - were the sorts of things that Central Banks used to try and sort out by rate rises or, in extreme cases, credit controls.  I don't think we realised that without the monetary policy lever the management of the economy on a national level is almost entirely fiscal policy based.  So they were running surpluses but they needed bigger ones and more deflationary budgets during the boom.  I think that is a lot of responsibility for politicians - it's why I think there needs to be a change to Eurozone-wide regulation.

The second is that I think it's like the bank bailouts.  They were hugely unpopular but they were the right thing to do.  As I've said before I think a big problem here is that Merkel hasn't shown the leadership that Bush and Brown (and Strauss-Kahn for that matter) did in a crisis.  My view is still that this long-drawn out crisis will end up costing the German economy far more than the alternative.

[Sheilbh]

Those are among the last things I would do with that money. I would use to fund R&D (which has been gutted) and slash the part of salaries that employers pay as tax (reducing labor costs).

I don't think we fund R&D very much anyway and there's not so much of an unemployment crisis here.  Obviously different economies have different needs.  But with temporary tax cuts I'd want them focused on consumption and investment, and the public housing is because it would help construction, boost demand and address our housing shortage.

[Iormlund]

I thought the UK had also had a bubble recently (less spectacular than ours). Don't you have millions of vacant homes over there?

[Admiral Yi]

It's not a quibble and you're still wrong I think.  I want more growth and slower austerity.  The goal should be to get to the fiscal pact deficit limit and to reduce national debt in accordance with the pact.  As I say this isn't an extreme view as you seem to think it is.

Sounds like a quibble to me.

I never claimed it was an extreme view.  If I thought it were I wouldn't be paying it much attention.

[The Larch]

Sheilbh, if the UK has housing shortage we can ship you a few thousands of our surplus ones, nobody would miss them.

[Richard Hakluyt]

I thought the UK had also had a bubble recently (less spectacular than ours). Don't you have millions of vacant homes over there?

Not really, perhaps some ancient terraced houses in a few of the more depressing Northern towns. Our housing bubble was driven by a shortage of housing; due to restrictive planning regulations it did not lead to much housebuilding, the bubble is consequently deflating very slowly.

[Gups]

I thought the UK had also had a bubble recently (less spectacular than ours). Don't you have millions of vacant homes over there?

Not really. It's a regional problem. In parts of the north there are vacant homes. In the south and especially around London there is a massive shortage. The bubble in London never really burst. Prices went down a bit for a little while but are way above their pre-Lehman Bros levels.

[Sheilbh]

I thought the UK had also had a bubble recently (less spectacular than ours). Don't you have millions of vacant homes over there?

No.  We had a credit bubble not a construction bubble, our construction hasn't even kept pace with population growth.  Generally I think housing prices are now broadly back to where they were and constant or mildly falling in most of the country.  In London prices are back and climbing.

Sounds like a quibble to me.

There's a huge difference between growth and austerity, regardless of the timeline, and growth not austerity.

I never claimed it was an extreme view.  If I thought it were I wouldn't be paying it much attention.

Ok, that it's a purely ideological position.  That description sort of does it down while implying that the the current path is rational and pragmatic and not motivated by ideology.

[The Larch]

I thought the UK had also had a bubble recently (less spectacular than ours). Don't you have millions of vacant homes over there?

Not really. It's a regional problem. In parts of the north there are vacant homes. In the south and especially around London there is a massive shortage. The bubble in London never really burst. Prices went down a bit for a little while but are way above their pre-Lehman Bros levels.

Ok then, we'll send you like half of Seseña (http://en.wikipedia.org/wiki/Sese%C3%B1a), to begin with.

[Admiral Yi]

Ok, that it's a purely ideological position.  That description sort of does it down while implying that the the current path is rational and pragmatic and not motivated by ideology.

I'm happy that it "does it down."  It's supposed to do it down.  If you propose a policy without considering the obvious repercussions you deserve to be done down.

And the implication that it implies the current path is rational (which it happens to be BTW) is very much an ideological "us vs. them" kind of argument.