This morning, the FT announces its week-long debate (chaired by the incomparable Martin Wolf) – the Great Debate as the Pinkun calls it – Stimulus v Austerity. It will, says the paper, ‘echo the big debates of the 1930s’.
If this debate echoes those of the 1930’s, why? In the 1930s,some absolutely key elements were missing:
– Speed of information gathering
– Hedge Funds
– High speed, dark-liquidity trading
– China the wide-awake giant.
During the last Depression, many politicians cut out of ignorance and in the face of comparatively minor debt levels.
In this one so far, cuts have only been made at all under pressure from lending sectors and central banks….despite horrendous debt levels. The past is a foreign country where they do things differently. In 2010, the cutters want to cut largely for one big reason: they are terrified of losing the TRUST of the lenders. Their argument runs thus: of course there will be pain, but better the pain now than default and insolvency later.
I share this fear, because in the light of the changes over the last decade, it makes logical sense.
In the new world of more competitors, lower Asian prices, rapid currency movements, and a global transfer of gold, the old masters are confused, defensive and somehow convinced the old ideas will cut it. To me, austerity vs stimulus is an old debate in which the either/or relationship is assumed and thus the discussion sterile.
The underlying theme of our age is the general loss of belief in governments as able to step in and solve things. But with US multinationals hoarding cash more than at any time in history, and the healthy banks posting enormous profits, I see no reason why one can’t have private stimulus alongside Government austerity. Both are a form of enlightened self-interest, and thus both should be tried.
Apologies for the length of the piece at this link, but a fuller account of my suggestions you can go to Getting the show back on the road.