la gran siete said:
The intellectual justification for austerity lies in ruins. It turns out that Harvard economists Carmen Reinhart and Ken Rogoff, who originally framed the argument that too high a "debt-to-GDP ratio" will always, necessarily, lead to economic contraction – and who had aggressively promoted it during Rogoff's tenure as chief economist for the IMF –, had based their entire argument on a spreadsheet error. The premise behind the cuts turns out to be faulty. There is now no definite proof that high levels of debt necessarily lead to recession.
http://www.guardian.co.uk/commentisfree/2013/apr/21/no-need-for-economic-sadomasochism
Of course they don't. They are a symptom and not the cause. What causes the recession is the bubbles created by cheap money. These bubbles are the result of Government economic policies to keep interest rates as low as possible, for as long as possible. In an attempt to create strong economic growth, they do create growth but they also cause malinvestment.
Individuals invest badly because the market is signalling that money is plentiful. In fact money isn't plentiful, its fiat currency that is plentiful. Its like a farmer who goes into his field and reaps a bumper crop. He borrows money and buys a barn, builds a new house, takes a holiday. When he goes back to look at his bumper crop he sees that most of it was actually grass seed. He has no way to pay for the barn, the house or the holiday. It was all an illusion.
When that happens across a country, it effects the global economy. The bigger the GDP of the country that created it, the greater the inter connectivity, the greater will be the global effect.
This looks like debt, but it isn't. Its just bad investment that needs washing out of the economy. Once it has been removed, the economy will begin to grow again. The problem is that no one wants to accept this bad investment. They don't want to lose their businesses, houses, cars etc. the Government knows it won't be popular if it does that. Its only option then is to find a way of re inflating the economy through exactly the same mechanism which caused the problem and will subsequently kick the can down the road to another disaster in a few years time.
Meanwhile the state has made bad investments on behalf of its voters. It has also spent what it didn't really have. This high spending steals production and capital from the private sector. The private sector are meanwhile paying down their loans, selling off their bad investments, closing their businesses. What they don't need at that point is the state trying to get them to pay for its continuing excesses in order to satisfy public opinion. It needs the state to get off their backs because they are having a hard time anyway. When the state then tries to cut its own debt by raising tax through inflation, it makes things worse. When it tries taxing more heavily it adds to the burden. When it stifles the banks with wrong thinking regulations it dries up the one area in which capital for new growth can be obtained. When it keeps interest rates low it prevents the savings necessary to help banks build up a good deposit ration for healthy lending.
The Austerity is all in the private sector in the UK. The public sector remains largely untouched and is now killing the economy.