Best of the Week
Most Popular
1. Climate Change Mass Extinction - Birds, Bees and Bugs: Going Going Gone - Richard_Mills
2.A Purrrfect Gold Price Setup! - Peter_Degraaf
3.Who Finances America's Borrowing? Recession Indicator for Independent Thinkers Part 2 - F_F_Wiley
4.America’s One-sided Domestic Financial War - Raymond_Matison
5.Gold Price Summer Doldrums - Zeal_LLC
6.Two Key Events Will Unleash Gold - Jim_Willie_CB
7.Billionaire Schools Teacher in NAFTA Trade Talks - Richard_Mills
8.Get Out Of Crypto Cannabis Bubble Before It Pops and Move Into Bargain Basement Miners - Jeb_Handwerger
9.Stock Market Could Pullback for 1-2 weeks, But Medium Term Bullish - Troy_Bombardia
10.G7 Chaos, Central Banks and US Fed Will Drive Stock Prices This Week - Chris_Vermeulen
Last 7 days
Warning All Investors: Global Stock Market Are Shifting Away From US Price Correlation - 20th Jun 18
Gold GLD ETF Update… Breakdown ? - 20th Jun 18
Short-term Turnaround in Bitcoin Might Not Be What You Think - 19th Jun 18
Stock Market’s Short Term Downside Will be Limited - 19th Jun 18
Natural Gas Setup for 32% Move in UGAZ Fund - 19th Jun 18
Magnus Collective To Empower Automation And Artificial Intelligence - 19th Jun 18
Trump A Bull in a China Shop - 19th Jun 18
Minor Car Accident! What Happens After You Report Your Accident to Your Insurer - 19th Jun 18
US Majors Flush Out A Major Pivot Low and What’s Next - 18th Jun 18
Cocoa Commodities Trading Analysis - 18th Jun 18
Stock Market Consolidating in an Uptrend - 18th Jun 18
Russell Has Gone Up 7 Weeks in a Row. EXTREMELY Bullish for Stocks - 18th Jun 18
What Happens Next to Stocks when Tech Massively Outperforms Utilities and Consumer Staples - 18th Jun 18
The Trillion Dollar Market You’ve Never Heard Of - 18th Jun 18
The Corruption of Capitalism - 17th Jun 18
North Korea, Trade Wars, Precious Metals and Bitcoin - 17th Jun 18
Climate Change and Fish Stocks – Burning Oxygen! - 17th Jun 18
A $1,180 Ticket to NEW Trading Opportunities, FREE! - 16th Jun 18
Gold Bullish on Fed Interest Rate Hike - 16th Jun 18
Respite for Bitcoin Traders Might Be Deceptive - 16th Jun 18
The Euro Crashed Yesterday. Bearish for Euro and Bullish for USD - 15th Jun 18
Inflation Trade, in Progress Since Gold Kicked it Off - 15th Jun 18
Can Saudi Arabia Prevent The Next Oil Shock? - 15th Jun 18
The Biggest Online Gambling Companies - 15th Jun 18
Powell's Excess Reserve Change and Gold - 15th Jun 18
Is This a Big Sign of a Big Stock Market Turn? - 15th Jun 18
Will Italy Sink the EU and Boost Gold? - 15th Jun 18
Bumper Crash! Land Rover Discovery Sport vs Audi - 15th Jun 18
Stock Market Topping Pattern or Just Pause Before Going Higher? - 14th Jun 18
Is the ECB Ending QE a Good Thing? Markets Think So - 14th Jun 18
Yield Curve Continues to Flatten. A Bullish Sign for the Stock Market - 14th Jun 18
How Online Gambling has Impacted the Economy - 14th Jun 18
Crude Oil Price Targeting $58 ppb Before Finding Support - 14th Jun 18
Stock Market Near Another Top? - 14th Jun 18
Thorpe Park REAL Walking Dead Living Nightmare Zombie Car Park Ride Experience! - 14th Jun 18

Market Oracle FREE Newsletter

5 "Tells" that the Stock Markets Are About to Reverse

Investor Silver Lining to the Age of Austerity

Economics / Economic Austerity Jul 02, 2010 - 03:04 AM GMT

By: Hans_Wagner


Best Financial Markets Analysis ArticleAccording to some analysts and David Cameron, the new prime minister of the United Kingdom, the “Age of Austerity” is upon us. If the cuts promised by many European countries actually take place, investors fear it will lead to another recession in several of those countries. The age of austerity is what has worried the markets in the last month causing anxiety as volatility ruled the days.

A closer look shows these cuts might not be as severe as originally thought. With the right approach, the austerity programs might achieve some of the government’s goals and contribute to economic growth. If true, the sell off in the market is an over reaction.

Proposed Cuts

In addition to Greece, Spain, Portugal and Ireland have cut spending to meet demands of investors and to obtain interim funding. Germany, the strongest European Union member, announced they intend to save 80 billion euros by 2014, setting an example of budgetary discipline according to Chancellor Angela Merkel. France indicated they would cut their deficit by reducing tax exemptions and freezing much of the government’s spending starting next year. Italy committed to cuts of 25 billion euros from its budget by 2012.

Investors, especially those in the U.S. worry that these budget cuts, while necessary, will cause much of Europe to experience little or no growth, and maybe another recession. With the recovery struggling to survive, higher taxes and cuts in government spending could weaken the recovery, they believe. On the other hand, long-term sustainable growth will be worse if their budget problems are not resolved.

Take a more in-depth look and we find the outlook is better than many believe. The worry these new austerity programs will cause a major economic blow to the global economy is overstated. Yes, Greece’s budget cuts amount to 7 percent of GDP for this year. They expect their cuts to be 4 percent next year. Yet, Greece is a small country of 11 million people and their affect on the global economy is minor.

Spain, Portugal and Ireland intend to cut their government budgets by 2 to 3 percent over the next two years. While important, these are not drastic cuts. The GDP of these five countries amounts to one-fifth of the entire euro zone.

Germany is the economic engine for The European Union. Their 80 billion in cuts take place over a four-year period, with most of the savings coming in 2013 and 2014. The net affect on Germany’s GDP is less than 0.5 percent. Hardly a severe cut.

Another positive, the fear of higher government budget deficits tends to encourage higher consumer saving. Higher private savings, according to Christiane Nickel and Isabel Vansteenkiste of the European Central Bank, accompany rising budget deficits in countries with high debt levels. For the record, U.S. consumers are saving more as they see their government incur record deficits and they are paying down their debts. While a higher savings rate lowers consumer spending, an important driver of any economy, it provides private investment capital.

Least and Most Harmful Cuts

The type of austerity measures a government undertakes can make an important difference to its economic future. Cuts in welfare payments or government wages are more likely to deliver better long-term results than those based on tax increases or cuts in public investment according to a study for the National Bureau of Economic Research by Alberto Alesina of Harvard University and Roberto Perotti of Milan’s Bocconi University. Taxes on company profits or consumer spending were the least harmful taxes.

Most of the austerity programs announced by European countries include salary cuts and lower entitlements, the type of cuts Alesina and Perotti found were the least harmful. Smaller cuts in public investment are in the works as well. This indicates that cuts by these European nations will not be as hurtful as many investors and analysts expect. If true, the dire consequences many expect from Europe may not be real. For example, the French government announced they intend to raise the retirement age from 60 to 62 by 2018.

In the U.S., the government stimulus program has spent more on payments to state and local governments to help them maintain their level of service and to keep teachers employed. At the federal level, salary increases continue and many agencies are hiring additional people, expanding salaries paid to government employees, the opposite of the best way to proceed. Payments for unemployment insurance keep expanding as do payments for other social welfare programs including Medicaid and the new healthcare program. 2010 and 2011 will see more spending on infrastructure projects.

The underlying strength of the U.S. economy remains positive, though it must overcome the negative consequences of the high deficit.

The Bottom Line

The Age of Austerity has spawned significant budget cuts by many European governments. Investors fear the economic recovery that is just underway will fail. A slow down by the European economies threatens the global economic recovery as we are all connected. If the austerity programs focus on lower entitlements and cuts in government pay, they have a greater chance of reducing their deficit and encouraging economic growth. So far, most of the European programs fit this model.

Investors need to look deeper into the European austerity programs that are underway. When they do, they will find that the proposed cuts are better than originally thought. This silver lining indicates the markets overreacted when they sold off in May. There are some good opportunities in the market and we might see a rally, once Mr. Market understands the situation.

By Hans Wagner

My Name is Hans Wagner and as a long time investor, I was fortunate to retire at 55. I believe you can employ simple investment principles to find and evaluate companies before committing one's hard earned money. Recently, after my children and their friends graduated from college, I found my self helping them to learn about the stock market and investing in stocks. As a result I created a website that provides a growing set of information on many investing topics along with sample portfolios that consistently beat the market at

Copyright © 2010 Hans Wagner

If you wish to learn more on evaluating the market cycles, I suggest you read:

Ahead of the Curve: A Commonsense Guide to Forecasting Business and Market Cycles by Joe Ellis is an excellent book on how to predict macro moves of the market.

Unexpected Returns: Understanding Secular Stock Market Cycles by Ed Easterling.  One of the best, easy-to-read, study of stock market cycles of which I know.

The Disciplined Trader: Developing Winning Attitudes by Mark Douglas.  Controlling ones attitudes and emotions are crucial if you are to be a successful trader.

© 2005-2018 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules