The US implemented economic stimulus to deal with the economic crisis. UK and Germany decided to implement austerity measures to cut down their deficits. These countries have top economic advisers. Why does one country decided to adopt stimulus while two others decided to take the opposite measures?
Economics is an imperfect science. Expert economists have two views. They said, "one the one hand, we have to do this. On the other hand, we have to do that". Some government leaders are so tired of this type of talk that they are now looking for economic experts with one hand (just a joke!).
What is the correct action? Nobody knows. Each person, economic expert or non-expert, can have his view. I prefer the US approach. I do not see how the economy can get better if more people are unemployed due to austerity measures.
Unlike the US where their sovereign debts are still well absorbed, the Europeans do not have the same luxury. Hence, they are keeping their sovereign debts to manageable level as a percentage of GDP. UK intends to bring their debts from over 10% to below 1.5% in 5 years. They have seen what the market place has done to the Greeks where the risk premium is so wide that many are still doubtful the Greeks can service the interest, let alone bring down the debts.
ReplyDeleteCountries are more concern with their economic survival than the rest of the world. So, this is not a case of economics being not an exact science. They are looking after their own interest first.
Whether it is fiscal and monetary policy, what everyone appears to have forgotten is the need for financial reform, to the glee of the industry naturally.
ReplyDeleteEven with the US approach, unemployment is still high and not improving. Only the stock market is improving.
ReplyDeleteIn Singapore we also follow something like the US approach. Our resident unemployment rate may be much lower but this may be due to underemployment, contract jobs, low wages and large numbers of PRs, who are also considered as residents. And the govt never publish unemployment figures for citizens but citizens and PRs lumped together.
And in Singapore, not only stock market but property and COEs are also up.
By the way, getting PR status in Singapore is relatively fast and easy and even granted to low skills, low education foreigners, unlike Western countries.
The US approach is to:
ReplyDeleteBail out
Pump more $$
and wait for all this to run its course..
I think the austerity way is a better choice.
The reasons for this crisis in the first place was caused by excessive consumption with poor debt management and the creation of products that multiplied the debt even further.
Austerity forces everyone to pull up their socks, reign in the excessive spending and start afresh.
Yes, there will be more unemployment, more business failures.. but this is termed as natural consequence from actions that was irresponsible, and that is the price that must be paid.
Agreed, it was through no fault of the average consumer, and they should not suffer.
Nonetheless, it is industry with their social obligations that must seek ways to prevent massive failures in the first place.
I also disagree with the concept of big banks, and the arguement of "too big to fail".. it was precisely this that we are stuck between the devil and the sea.
If there were smaller entities, their failures would cause less damage and less people will be jobless and we could easily asborb them into other businesses.
I support austerity and accept that more people will be jobless..
yet it is not the end.
Cut wages from fat CEO and all excess and divert the funds to help jobless people with jobs that have true production.. not the creation of paper with promises of IOU.
Back to basics 101
Austerity will lead to more hardship for the majority who through no fault of theirs are made to suffer the most. Those who are responsible for the mess in the first place will still be better off and unscathed. Throughout history war and unrest will soon follow. And who will profit most from war? Again the Capitalists and so-called Free Market advocates. The system is broken and we see history keep repeating itself.
ReplyDeleteSigh! And I thot we already went through this experience/debate in 1929-1932. And the solution implemented then was successful.
ReplyDeleteCan't believe we (the whole world) are having this discussion again.
Men who do not learn from history are doomed to repeat it.
"stimulus" is just another way of describing an act to spend or give away free $$.. just like our Job Credits, SPUR.. business laugh all the way to the bank!!.. get $$ and yet keep employees on a short leash!
ReplyDeletebusiness that over stretch their borrowings and cannot pay the interest should be allowed to fail..
Its my tax dollar that has gone into the pockets of companies.
Will they "save" me when I get into trouble with my finances?
All citizens should come together and create a co-operative that borrows money with empty promises to pay.. redistribute it and ask for more money because we have become "too big to fail".
Damn good business model.. guaranteed to continue!
The people who prefer austerity emasures tend to be those who are in stable jobs (as they face low risk of unemployment) or those who are well off.
ReplyDeleteWhen there is austerity, and the price of assets drop due to the economic recession, they will be better off, relative to those who lose their jobs.
However, their views will change when they become unemployed. At that time, it will be bad luck for them, and things will not change in their favour.
If we look at the situation in totality, it it better to have an economic system thta is fairer to all, including those who are unfortunate to be unemployed.
This is why I prefer stimulus, to avoid a recession that will hurt 10% to 20% of people, although the remaining 80% to 90% will still be fairly okay.
I think the economy will not get any better!
ReplyDeleteThere was an observation by Kondratieff, a Russian economist of Kwave.
This wave is a 54 year cycle which is separated into
1.Spring
2.Summer
3.Fall
4.Winter
Going by his calculation, we should already be at the winter stage. (excess capacity worked off by massive debt repudiation, commodity deflation & economic depression).
First Alan Greenspan and then Ben Bernanke manage to stave off this winter process by lowering interest rates.
How long this stalemate process will go on is anybody's guess?
By delaying winter, we will never be able to get to Spring (a new factor of production, good economic times, rising inflation).
A bust has to come before good economic times arrive again. That is a natural law.
Yes, Mr Tan, you are correct to say that the well off and those who are employed in stable jobs will not be adversely affected by austerity measures.
ReplyDeleteWe should not help the well off, they can look after themselves.
All around the world, Governments are the single largest employer. Instead of channeling money directly to business that are supposed to have collasped, the Governement should initiate programmes to absorb the unemployed.
The commissioning of large infrastructure projects would be able to absorb some of these people
Embarking a programme for education will keep people off the streets and give them a stipend to spend which in turn keeps the money flowing.
What Singapore did by introducing absentee payrolls is great. Though there seems to be some leakage and false claims.
This can be done successfully.
Like one poster said " too big to fail" is a concept that we must not allow.. I like OCBC, UOB and DBS to remain as they are: separate entities.. if one goes.. it will not freeze us.. nimbleness in numbers.. not a lumbering giant that some leaders suggest.
I go for austerity.. but with Governments fully engaged and supportive. It is possible.
A) Raise interest rates
B) Gov must spend on infrastructure
C) Tighten credit regulation
D) Regulate currency flows
Bring those who promote and sell bad financial products to task. This the key.
Stimulus vs Austerity.
ReplyDeleteBulls vs Bears.
Borrowers vs Creditors.
Black vs White.
Darkness vs Light.
Yin vs Yang.
Foolishness vs Understanding.
Evil vs Good.
Satan vs God.
Did you have the wisdom to see the TRUE picture? Only those with hearts of Gold receive knowledge and understanding.
Stimulus are artificial injections into the economy, like a dose of strong drugs for the terminally-ill patient.
It is another form of debt, kicking the can further down the road, delaying its day of reckoning. Money spent on stimulus are not money already earned, and needs to be funded by future tax increases like GST hikes to 10%~15%, as well as greater inflation down the road.
A great man gains at the expense of his country. Pharaoh is an example, Saddam is another. Japan is the ultimate example of stimulus spending and Keynesian economics gone bad. After almost two decades, Japanese have yet to see a sustainable economic recovery. The truth is, a stimulus is less painful for the politicians, and not the population.
As pointed out in my first posting on 27 Jun at 3.07pm, the choice between austerity and stimulant is not a black and white matter.
ReplyDeleteMany countries have funded their expenditure through sovereign debts to keep the world economies buzzing along. Many of these debts are owned by SWFs, institutional investors and investors outside of their own countries. These investors are demanding more spread for the risk (if they are still interested in investing). This puts additional burden on the borrowers to service the high interest and the debt repayment schedule. Unless their economies grow fast, they will not be able to repay their debts. In order that they continue to have access to the debts market, they have no choice but to be austere.
Those who are use to Singapore garment style budgeting may not recognise this problem of sovereign debt.
During the 1930s, the economies of the world were facing the same problem.
ReplyDeleteThe governments of the day were also debating between austerity and stimulant.
Most of them chose austerity. The economy never recovered until World War 2. That is when spending really began for the war effort.
The governments of today are choosing stimulus in recognition of their past mistake.
But now we are entering a period where more (Europe)governments are choosing austerity again. That could be a mistake again.
We may be going into winter stage again. This stage of the K wave may be unavoidable.
Governments created this monster, I expect them to tame it.. if need be, politicians, bankers, should all contribute hard cash to solve it.. no need for war.
ReplyDeleteWhere is all the money now? where is all the printed cash? it must be somewhere.. If it is just simply book entries.. then a bold move to wipe the slate clean is required
They gave debt moratorium for African nations did they not? and even cancelled quiet a large amount too!
Cancel all debts.. start anew.. unless we behave like loan sharks and splash O$P$ at the White House and Number 10 Downing St.
Simple yah?.. lets be nice and let these people go ok?
Krugman Sees The U.S. Beginning It’s ‘Third Depression’
ReplyDeleteUsually ‘cheery’ Paul Krugman threw out one of his latest bombs by declaring the U.S. is currently beginning it’s “Third Depression”. Want a better start to the week, don’t keep reading.
In Krugman’s op-ed piece, he writes, “Recessions are common; depressions are rare. As far as I can tell, there were only two eras in economic history that were widely described as “depressions” at the time: the years of deflation and instability that followed the Panic of 1873 and the years of mass unemployment that followed the financial crisis of 1929-31.”
“We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.”
“And this third depression will be primarily a failure of policy. Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.”
Krugman goes on to say, “It’s almost as if the financial markets understand what policy makers seemingly don’t: that while long-term fiscal responsibility is important, slashing spending in the midst of a depression, which deepens that depression and paves the way for deflation, is actually self-defeating.”
And if that wasn’t enough for a Monday morning, Krugman believes that ‘tens of millions’ will pay the price, and some of those out of work, might very well never work again.
So how about that 11 hour match at Wimbledon?
http://www.thetradingreport.com/2010/06 ... epression/
Krugman believes US and the West is headed for the 3rd Depression.
ReplyDeletehttp://www.nytimes.com/2010/06/28/opinion/28krugman.html?partner=rssnyt&emc=rss
Brace yourselves folks!
Hello ex loan shark,
ReplyDeleteThe money is all in China, Japan and the Middle East.
If You can cancel all American debts.
1.The US President himself would invite you to the White House in his Air Force One.
2.You would be awarded the Honorary Citizen of the US with the Presidential Medal of Freedom and the Congressional Gold Medal awarded to you. The Highest Award in the US!
Ha Ha Ha!
You will be famous in the US and non gratia in Asia and the Middle East!
Ha Ha Ha!
Ex loan shark's idea suggests a lack of depth. Yet it is a simple idea.
ReplyDeleteAnd simplicity is required in these chaotic times.
Spending is encouraged in this crisis
but the consumer is now hapless because of job security and joblessness!
It is a cycle. Most manufacturing jobs have moved to China. Western economies have to create non-manufacturing jobs within their own borders.. this is the real challenge.
They lean too much on house construction.. and since that is broken..and lots of other economic activity too is broken..
I am afraid I have to agree with Paul Krugman on this one.
ReplyDeleteThe propsperity of Asia depended on the USA. This is due in part to the ability of the Americans to print the dollar at will and the willingness by others to accept it.
With America in a deep recession and the biggest debt in the world, Asia would head for a long recession too.
Which country can print so much money and yet their currency is accepted all over the world?