When this financial mess began two years ago, most world sovereign bankers rushed to the rescue of their private bank brethren and counseled monetary easing. This sunk interest rates and poured taxpayer money by the trillions into insolvent private banks — particularly the large international bank variety.
From most perspectives this appears to have worked. The big banks, with a few notable exceptions, are still with us. In fact, they’re bigger than ever and making money hand over fist according to the bonus money that’s been handed out to bank executives.
Economic ships all over the world (again with notable exceptions) appear to have stopped shrinking. The largest of them all, the United States, most recently looks to have a small recovery underway. Although private companies are reluctant to hire, some hiring is being done nevertheless. Even with real unemployment at 15-16% in the US, that still leaves 85% of the population working. And based upon the number of hours being worked, employers are squeezing the most possible productivity out of the employed.
That said, a dominant theme for what to do now counsels austerity for government spending — particularly for the developed economies in Europe and the US. Because these economies weren’t sitting on large savings when the recession hit and because deficits and debt increased from the recession effects of decreased revenues and increased spending for bailouts and stimulus, political leadership now leans towards austerity for all, most particularly government spending.
Two economic philosophies are now in public combat. One believes any government dollar not spent means the private economy gains a dollar. This school of thought believes that extra dollar in private hands will better create investment and follow on jobs and income. Therefore austerity now will result in a faster recovery than otherwise would be the case.
The opposing philosophy believes that a recessionary weakened private economy cannot by itself resurrect economic growth. To withdraw government spending now will only further weaken economies and make matters worse and recovery less, not more, likely. This school of thought believes concern over short term deficits is misplaced. They point out that during the Depression of the 1930s, a strong recovery underway in the mid 1930s was derailed by such concerns and the economy then plunged right back to near Depression levels. The only way to fight the recession is to keep stimulating the private economy by forcing demand to rise.
It appears that the austerity philosophy will win the political debate, particularly in Europe and possibly in the United States.
Beezer believes the wrong side is winning, and a repeat of the 1930s experience is the likely result.
These are large economic ships, however, and difficult to turn. A merchant marine friend of Beezer said a large oil tanker takes 8 nautical miles to turn. Not all that nimble. If these economies are in recovery, then it is possible that recovery will continue. But if history is any guide, the more probable outcome of decreased demand will, in fact, turn the nascent recovery around.
At ground level, at the household level, anxiety will increase dramatically as government stimulus is withdrawn. Every one’s wallet will slam shut. Everyone will hoard as much cash as possible. This will accelerate the declines in demand. A double dip is baked in this cake, Beezer believes.
Another possible result will be a double dip in the banking sector. A continued, or even worsened, recession makes servicing debt more difficult. And debt resides on bank balance sheets worldwide. Those counseling austerity are going to be hard pressed to justify more bank support under this scenario. This problem may be most acute in Europe where, according to what serves as conventional wisdom today, big banks haven’t yet taken sufficient bad debt write downs.
Equity markets are staggering right now. Could this be because professional investors fear the double dip recession austerity might create and are withdrawing their exposure to further private recession (don’t ever forget that it is the private sector that plunged into too much debt)?
Who knows what the public thinks about all this. Polls indicate the majority concern is about jobs, either keeping the one they have or getting one to replace the one they lost. Debt matters, of course, and the public is concerned there too. But if you’re unemployed, or seeing your pay cut, you understand whatever debt you have will be harder to pay down. If not impossible.
The only hope is that politicians here in the US start to understand that come November elections, the public may realize that it’s only Uncle Sam who has the ability to spend into the winds of recession, and they’ll toss the so-called conservatives out on their behinds.
If they don’t then the most suffering will come out of those already naked to a further recession. At some point even the most dim-witted citizens will realize they’re been mislead.