Welcome to the Vitus Capital Blog!
Notes to myself, possibly of interest to others.
-- Bill Northlich

Tuesday, May 29, 2012

Rosenberg: We need Austerity Now. Now!

Rosenberg's missive today, reproduced in miniature below, is a tour de force as is typical of Rosie frequently. There are tons of charts and statistics supporting his views that
  • We are in a depression with no end in sight
  • The government spent massively in recent years to forestall an even bigger depression, but, thusly we have unprecedented debt, so
  • Our only hope is to cut government spending now soas to get our fiscal house in order for the long term.
Does this sound familiar?  Paul Ryan?  Tea Party?  Romney?  (Wait... Romney is a Keynesian now...).

At Vitus, we are huge fans of Rosenberg - when he sticks to the data and what to do about it investment-wise.  However, he sometimes lets his, to us inexplicable, inner Hayek out for all to clearly see.  Strange.  But when he is brought to heel, he invariably "does" Keynes - he was teamed with, of all people, Paul Krugman in a November 2011 debate.

What are we talking about?  In the below, after top-lining all the truly, at this point, systemic problems with the economy, he starts in with the deficit and Austerity.

We guess everyone has their internal demons, mostly hidden.  We at Vitus, of course, have no such.
Rosenberg 5/29:
This goes down as the weakest recovery on record. with real GDP growth averagingjust 2.4% at an annual rate (and one­third of that growth was the arithmetic contribution from inventory restocking). Nearly three years into a recovery, the economy is usually growingjust below a 5% annual pace...

The headwinds are three-fold. First. we are still in the throes of a consumer debt paydown cycle which is unprecedented and inherently deflationary. The researchers at McKinsey had done historical research on past cycles and on average it takes six to seven years before the deleveraging cycles fully run their course. So we are not even yet at the halfway point and that merely assumes what happens on average - the past credit bubble took on an asymptotrc shape in lts last seven years...

The seoond headwind is housing- perhaps activity has bottomed, but once again. the total vacancy rate nationwide is still undergoing a secular meanreversion phase in which it could take years before the excess inventory is sufficiently absorbed to therefore establish a floor under residential real estate prices...

The third headwmd relates to chronic unemployment and underemployment which has triggered never­before­seen wage disinflation. especially for an economy deemed to be out of a recession.
So far, so good. But,
[Now] the culprit is not U.S. banks or mortgages. [It is] public sector finance. The total OECD government debt/GDP ratio has shot up more than 30 percentage points in the span of five years as public sector policymakers did their utmost to ensure that the Great Recession did not turn into something even more sinister. Deficit finance in this cycle went into overdrive, to the point where debt/GDP ratios in aggregate exceed 100%. It is at 90% that most academic studies have shown there to be a fraying-at-the-edges in terms of fiscal sustainability and impairment to the private sector capital stock.
Yes! The debt runup was to fight the Recession. But let's whack this dead horse more...
This [is] a very slippery fiscal slope. If left unchecked, even under an assumption of low yields. the power of compound interest off mammoth deficits will ensure that debt-servicing costs absorb 20% of the revenue base in coming years, which will severely impair fiscal flexibility, especially given the implications for the escalating demographic-related spending pressures (entitlements), This is why it is extremely important for the U.S, policymakers to act now no more ktcking-the~can­down-the-road for the next generation to bear the burden. Short term pain for long-term gain. But do politicians in Washington have the resolve? (Vitus emphasus)
Austerity! Keynes, Shmeynes. Forget the banksters, the criminally fraudulent lenders, the even more criminal "investment" banking practices of uber-leverage, the Koch wannabe Rentiers, all the cowboy capitalism (or, as Dylan Ratigan calls it Corproate Comunism), the Free Market religionistas. Let's just gut the evil government (except the military) until the middle class is on the street. Are there no prisions?
[If] left unchecked. the fiscal squeeze next year in terms of spending cuts and the expiry of all the tax goodies introduced over the past decade will conspire to take roughly four percentage points out of real GDP growth, There have only been two instances in the past when we experienced such fiscal restrarnt and recessions ensured both times. It pays to note that wrth the baselrne trend ln real GDP little better than 1%, even if half of the expected restralnt manages to get kicked down the road, the economy will at best stagnate in 2013. That may not be a recession in a techn|caI sense, but it would sure feel luke one for a whole bunch of people.
So... Austerity! No teachers, no roads, no NASA, no Research Universities...

Well, so, smart guy, what should be done, if not Austerity? We actually did a pretty good post on this issue a while back. If we do say so.

No comments:

Post a Comment