Friday, December 14, 2012

Ponzinomics

Quote of the day from the Boston Consulting Group:
The second-biggest Ponzi scheme in recent history—organized by the New York hedge-fund manager Bernard Madoff—led to losses of approximately $20 billion in 2008. The biggest, however, is still ongoing: the Ponzi scheme of the developed economies. It is not simply that the developed world has borrowed significantly from future wealth to fund today’s consumption, leading to huge burdens for the next generation. It has also reduced the potential for future economic growth, making it more difficult for the next generation to deal with this legacy.
We'll be borrowing a billion euro a month next year as part of our 'austerity' programme here in Ireland. I hope all our migrating youth will come back to make the repayments...


6 comments:

  1. Latvia and Estonia tackled their own indebtedness by cutting from the centre, slashing public sector pay by 30% and reducing the tax burden on productive business. The reason we are on the hook for massive borrowing by the government is not just the banks (although that tells its own story of political dependency), but because we have a reprise of the 1980's approach: circle the wagons around the vested interests and rely on tax rises and emigration for a slow, painful recovery and eventual reduction in unemployment.

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  2. It would be nice to tie down in fact where we are actually borrowing this wealth. Are we borrowing it from future generations or are we borrowing it from future inflation? In my view it is inconceivable that it goes on the account of future generations. Not only is it immoral, but it is impractical as we are currently seeing. ie. deleveraging is at the end of the road, with decimated economies on account of austerity, growing civil unrest, and drastically reduced growth forecasts in economies like Germany... A nice steady rate of inflation of around 5-6% is just the panacea to make the debt manageable. Anyway, it is the only realistic alternative at this stage, not just in economic terms, but more to the point, in political terms.

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  3. Hugh, do you really think we should emulate Latvia?

    As one commentator said, surely Latvia represents a veritable Protestant morality play.

    But I think it is important to count the real costs of the kind of action taken by Latvia. There are severe social problems and high emigration there, argubably on account of the Thatcheresque policies promoted there.

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  4. @roc. I doubt Latvia wanted to pursue these policies, let alone us, but with few other options they chose the 'front-loaded' austerity that our own politicians eschewed. According to 'realtime world economic watch' the result has been:

    'Latvia’s economy continues to recover strongly. Following real GDP growth of 5.5 percent in 2011, growth is expected to exceed 5 percent again this year despite recession in the euro area. Labor market conditions are improving. The unemployment rate fell from 16.3 percent at the beginning of the year to 13.5 percent at the end of the third quarter, despite an increase in participation rates. Real wage growth remains restrained. Consumer price inflation has declined sharply, easing to 1.6 percent at end-October after peaking at 4¾ percent in mid-2011. Robust export growth is expected to keep the current account deficit at about 2 percent despite recovering import demand.'

    Sometimes a country in deep trouble has no choice but to bite the bullet. It's arguable whether Ireland is in as much trouble as Latvia was, but we have definitely turned our backs on anything that could be described as a "quick-fix".

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  5. @Hugh - Just that (a) there is usually a "middle road" to be followed that inevitably turns out to be the wisest one, (b) it is important to prioritise human-beings over the "economic machine"... Margaret Thatcher under the influence of Hayek and Mises used to say, "there is no society". But you know what? There is. There is human conscience, decency and sense of responsibility to the public and those less well off than you. When you thrown these out of the window in the name of an ideology, you reap what you sow. Personally, I believe that today, we are reaping the legacy of the ideology promoted by Thatcher and Reagan (who were under the influence of the kind of ideology that has risen its head again today, and is even promoted on this blog). I really find it strange that there are calls to do it all over again with even greater force. Yes, take steps to try and repair economic imbalances. But let's strive to do it with care for collateral damage on the human substance of society. Latvia did not take this care. (It is not the first time that particular demon has lived there either). Their immediate problems may appear to be getting better, but let's see how they get on...

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