Austerity V/s Stimulus, Government Spending and Greece

Sometimes it is worth repeating something that is actually right. Let me say this again:

Stimulus works best when you need to push-start the demand engine. Note that it implies that stimulus won't do the work of engine - it will only push-start it. The engine must be in working condition otherwise. 


Austerity works best when Government borrowing is crowding out private investment. Usually Government is borrowing too much because it is spending too much. New investment is required to put a new engine in place.


In Greece's case - their engine is not working and their Government is spending a bit more than required. A combination is required when economy stalls - i.e. Government must reallocate/realign the spending targeting it into essential things. It also needs to increase spending once the new "engines" are set up. 

In a nutshell - neither Austerity nor stimulus alone will work in Greece's case. A combination of sane reforms and practical stimulus is required. Till such time...

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Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms".

Why deflationary forces are so unrelenting?

Despite good GDP numbers and PMI data the deflation does seem to give up. Here are the reasons:

1. Incomes have fallen and are not rising again: Since 2009 there has been a fall in incomes resulting from retrenchment and layoffs and consequent oversupply. While employment numbers have improved (unemployment is falling), incomes are not rising. In fact they have settled well below their previous highs.
2. Consumption goods prices continue to fall: The fall came from two sources - improved productivity (from about 1990 to about 2000) and thereafter from combination of productivity gains and exchange rate dynamics. The QE era flooded the world with low-cost  capital leading to reduced interest rates across the world. This low-cost debt is transposing low-capital-cost-but-high-running-cost human employment with high-capital-cost-but-very-low-running-cost robots. Today the US consumption good prices are still at the mercy productivity gains and exchange rate dynamics but the pressures are more aggravated. The new productivity gain mechanisms are putting exceptional pressure on employment and wages. Further the exchange rate dynamics have morphed into all out currency wars.
3. Investment goods prices are deflating too:When you reduce the interest rate, you increase the prices of assets usually by setting the yield or return scale lower thereby pushing risk-averse investors into risky assets thereby inflating asset prices. Secondly, we coupled lower interest rates with ingenious financial engineering leading to improved credit availability which also advances demand from decades ahead and packs it into short timeframes. The converse is that there is prolonged period of lacklustre demand phase. I believe we are in that phase or may be entering that phase.

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Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms".