AUSTRIAN ECONOMICS ADDICT

English: Members of the Socialists and Democrats in the European Parliament protest austerity measures at the Parc du Cinquantenaire in Brussels, Belgium (Photo credit: Wikipedia)

GOVERNMENT AUSTERITY

Austerity is what they call it in Europe, it means to cut excess or luxury from, which refers to Government budgets. We have many names for it in the U.S., sequestration, fiscal cliff, debt ceiling, etc. The question is who decides what is considered excess. Excess like so many things in politics is in the eye of the beholder, and when politicians have to make these decisions, the outcries of the people who are used to living off this excess carries more political weight than the people who work to produce this excess. So the politicians only option is to try to raise revenue.

GOVERNMENT TAXING, BORROWING, AND COUNTERFEITING

Government’s three options for raising revenue are taxing, borrowing, or counterfeiting money. But at some point there is a diminishing return from taxing and borrowing, both economically and politically, as taking away what producers produce starts to shrink economic activity, on the one hand, and political push back from producers starts to ratchet up on the other hand. So European and American politicians will pull out the printing press ace, that is up their sleeve, before the political and economic fall out reaches the boiling point. ( Read- Keynes Was Correct In 1919!) The printing press allows the politicians to put off dealing with actual cuts, not just cuts in the rate of growth, for a longer period of time than they would have had to, if they only had taxing and borrowing as their options. States like California, and cities like Stockton do not have this ace up their sleeves, which means they have to deal with this economic reality much sooner than our Federal Government. State-run pension systems are a big problem for States like California and cities like Stockton, because more has been promised than has been produced and saved. Allowing people to consume from a pool of savings that isn’t big enough to fund this consumption is a recipe for disaster, especially if you can’t counterfeit more savings. It’s like promising a group of people they would be fed grain for a year, but, the amount of grain stored in the grain bin will only feed them for six months. If they never look into the grain bin, they will consume grain right up to the day the last bushel is consumed, and have no idea that the bin will not provide grain for tomorrow’s consumption.

CONCLUSION

The fact that these States and Cities have to stop consuming so much is a good thing. This painful economic medicine is better if taken sooner, because the consequences of allowing the problem to linger on, will eventually lead to a more painful, costly, and potentially deadly economic procedure being used for treatment. If these States and Cities had the printing press they would have been able to keep the economic illusion of abundance going much longer.

Unfortunately our Federal Government is trying to put off the day of reckoning with the printing press, but all they are doing is misallocating more and more scarce resources into areas that are not sustainable. These activities are being artificially propped up because of the Fed’s endless counterfeiting. The day of reckoning is going to painful and costly, but hopefully not deadly.

Here are some excerpts from the article “Europe Is In Worse Shape Than Everyone Thinks“, by Alasdair Macleod at zerohedge.com. Remember the European Central Bank can counterfeit money.

“Unfortunately, governments have gotten themselves stuck into this position where they are not prepared to cut their spending enough. They think they can get taxes by taxing the rich, ratcheting up the taxes on anyone who you think has got any money — but then people avoid it. Like in France, they just go abroad. It is that bad.”

 “We are not seeing any recovery. The burden on private sector is far too great for that recovery to occur. Not only that, but the economies in the Eurozone are angled towards the wrong production. It is a huge great burden of malinvestment that needs to be addressed. You are not going to get any meaningful economic recovery without that slump happening.”

 “Given that the slump is going to happen, you’ve got a choice: Either you get it over and done with and get it done quickly, or you have financial repression in the hope that over a long period of time something will turn up. Really, they are going for the latter rather than the former. But I don’t think they have got that much time. One of the things which Europe really does have a problem with is pension costs and the cost of health care”

Read this article “Muni Bankruptcies set Up War Between Pensioners And Bond Holders“. by Danial Fisher at Forbes.com. Here are some quotes, remember Stockton can’t counterfeit money.

“Stockton is just the latest example of what may become a wave of municipalities driven into bankruptcy  by a combination of uncontrolled spending and shrinking tax revenue”

“Much of the city’s trouble was self-inflicted, however…. city’s leaders had allowed rampant “spiking” of pensions, where public employees used a variety of tactics to inflate their last year of pay in order to earn pensions that often exceeded their base salaries. The city also extended lifetime healthcare benefits to workers, and their spouses, who’d been on the city payroll for as little as a month.”

Related article, “We are Reaching the Tipping Point”, at austrianaddict.com

Related article, “Economic Ignorance on Parade!” , at austrianaddict.com

This entry was posted on April 10, 2013 at 12:32 am and is filed under Econ. 201. You can subscribe via RSS 2.0 feed to this post's comments.

Tags: Austerity, California, European Central Bank, Federal Government, Federal Reserve System, State Pension Systems Bankrupt, Stockton California