Best of the Week
Most Popular
1.Are UK Savings Interest Rates Finally Starting to Rise? Best Cash ISA 2017 - Nadeem_Walayat
2.Inflation Tsunami - Supermarkets, Retail Sector Crisis 2017, EU Suicide and Burning Stocks - Nadeem_Walayat
3.Big Moves in the World Stock Markets - Big Bases - Rambus_Chartology
4.The Next Financial Implosion Is Not Going To Be About The Banks! - Gordon_T_Long
5.Why EU BrExit Single Market Access Hard line is European Union Committing Suicide - Nadeem_Walayat
6.Trump Ramps Up US Military Debt Spending In Preparations for China War - Nadeem_Walayat
7.Watch What Happens When Silver Price Hits $26...  - MoneyMetals
8.Stock Market Fake Risk, Fake Return? Market Crash? - 2nd Mar 17 - Axel_Merk
9.Global Inflation Surges, Central Banks Losing Control and Triggered the Wage Price Spiral? - Nadeem_Walayat
10.Why Gold Will Boom In 2017 - James Burgess
Last 7 days
London Terror Attack Red Herring, Real Issue is Age of Reason vs Religion - 25th Mar 17
Will Washington Risk WW3 to Block an Emerging EU-Russia Superstate - 25th Mar 17
Unaccountable Military Industrial Complex Is Destroying America and the Rest Of The World Too - 25th Mar 17
Silver Mining Stock Fundamentals - 24th Mar 17
A Walk Down the Dark Road of Bad Government - 24th Mar 17
Is Stock Market Flash Crash Postponed Until Monday? - 24th Mar 17
Stock Market Bubble and Gold - 24th Mar 17
Maps Of Past Empires That Can Tell Us About The Future - 24th Mar 17
SNP Independent Scotland's Destiny With Economic Catastrophe, the English Subsidy - IndyRef2 - 24th Mar 17
Stock Market VIX Cycles Set To Explode March/April 2017 – Part II - 23rd Mar 17
Is Now a Good Time to Invest in the US Housing Market? - 23rd Mar 17
The Stock Market Is a Present-Day Version of Pavlov’s Dog - 23rd Mar 17
US Budget - There’s Almost Nothing Left To Cut - 23rd Mar 17
Stock Market Upward Reversal Or Just Quick Rebound Before Another Leg Down? - 23rd Mar 17
Trends to Look Out For as a Modern-day Landlord - 23rd Mar 17
Here’s Why Interstate Health Insurance Won’t Fix Obamacare / Trumpcare - 23rd Mar 17
China’s Biggest Limitations Determine the Future of East Asia - 23rd Mar 17
This is About So Much More Than Trump and Brexit - 23rd Mar 17
Trump Stock Market Rally Over? 20% Bear Drop By Mid Summer? - 22nd Mar 17
Trump Added $3 Trillion in Wealth to Stock Market Participants - 22nd Mar 17
What's Next for the US Dollar, Gold and Stocks? - 22nd Mar 17
MSM Bond Market Full Nonsense Mode as ‘Trump Trades’ Unwind on Schedule - 22nd Mar 17
Peak Gold – Biggest Gold Story Not Being Reported - 22nd Mar 17
Return of Sovereign France, Europe’s Changing Landscape - 22nd Mar 17
Trump Stocks Bull Market Rolling Over? You Were Warned! - 22nd Mar 17
Stock Market Charts That Scream “This Is It” - Here’s What to Do - 22nd Mar 17
Raising the Minimum Wage Is a Jobs Killing Move - 22nd Mar 17
Potential Bottoming Patterns in Gold and Silver Precious Metals Stocks Complex... - 22nd Mar 17
UK Stagflation, Soaring Inflation CPI 2.3%, RPI 3.2%, Real 4.4% - 21st Mar 17
The Demise of the Gold and Silver Bull Run is Greatly Exaggerated - 21st Mar 17
USD Decline Continues, Pull SPX Down as well? - 21st Mar 17
Trump Watershed Budget - 21st Mar 17
How do Client Acquisition Offers Affect Businesses? - 21st Mar 17
Physical Metals Demand Plus Manipulation Suits Will Break Paper Market - 20th Mar 17
Stock Market Uncertainty Following Interest Rate Increase - Will Uptrend Continue? - 20th Mar 17
Precious Metals : Who’s in Charge ? - 20th Mar 17
Stock Market Correction Continues - 20th Mar 17
Why The Status Quo Is Under Increasing Attack By 'Populist People Power' - 20th Mar 17
Why the SNP WILL Destroy Scotland, Exit UK Single Market for EU - IndyRef2 - 19th Mar 17
Crypto Craziness: Bitcoin Plunges on Fork Concerns, Steem Skyrockets and Dash Surges Above $100 - 19th Mar 17
What ‘Ice-Nine’ Means for Your Money - 19th Mar 17
Stock Market 4 Year Cycle - 18th Mar 17
The Only Article You Need to Read to Understand the Trump Phenomenon - 17th Mar 17
Janet Yellen Just Popped the Stock Market Bubble - 17th Mar 17
Financial Crisis, Steve Eisman: Smart, Lucky, Abrasive & Now One Of Them - 17th Mar 17
Gold Cup – Horse Racing’s Greatest Show, Gambling and ‘Going for Gold’ - 17th Mar 17
Trader Education Week - Free Event to Help You Learn to Spot Trading Opportunities - 17th Mar 17
$1.4 Trillion of SPX Notionals Due to Expire - 17th Mar 17
Preserving Order Amid Change in NAFTA, U.S. Sovereignty v. WTO - 17th Mar 17
3 Maps That Explain Why Syria Raqqa Battle Will Drag On - 17th Mar 17

Market Oracle FREE Newsletter

Elliott Wave Trading

Has Sequestration Saved the U.S. Economy?

Economics / US Economy May 01, 2013 - 11:48 AM GMT

By: Money_Morning

Economics

Martin Hutchinson writes: There's a Jamaican saying, "the higher the monkey climbs up the tree, the more his butt is exposed."

The point being that the more we rise, the more vulnerable we become.

That has truly come to pass for a pair of superstars of the dismal science. And it could have a big impact on how successfully (or unsuccessfully) we can get the U.S. economy back on the rails.


Well Up a Tree
You rarely think about economists as celebrities. And that's likely because most of the things they talk about aren't subjects that beg celebrity status.

But a pair of Harvard economists has been stuck in the spotlight again, this time for all the wrong reasons.

Carmen Reinhart and Kenneth Rogoff's 2010 paper "Growth in a Time of Debt" showed that growth rates collapsed in countries whose public debt to GDP ratio rose above 90%. This enforced the notion that you can't borrow your way out of recession; austerity had a crucial place in facing weak economic conditions.

This had huge financial and political implications, especially as the country tried to unmire itself from a financial and economic train wreck. There was evidence that austerity was the only way to get back on track and stimulus was the road to ruination.

Then last week it was announced that there was a spreadsheet error in their research - five countries had been left out of their sample accidentally.

The oversight didn't invalidate their conclusion, but it's been used by stimulus proponents to claim that austerity isn't the cure it was thought to be and to push for more state spending.

Given where that spending will lead, the Reinhart/Rogoff fat finger blunder must surely qualify as the most expensive spreadsheet error in world history.

The Price of Fame
Reinhart and Rogoff had made their names by their 2008 book "This Time It's Different," an excellent study of financial crashes through history that was superbly timed to catch the bewilderment of the political class following the 2008 crash.

This helped get their 2010 paper a receptive audience. It seemed to show a sharp dividing line at a 90% public debt to GDP ratio; if debt levels rose above that line, the average growth rate turned negative.

Unfortunately, with the extra five observations included, the negative growth rate was replaced with modest positive growth. There was still a strong correlation between high public debt levels and lousy growth, but there wasn't a sharp dividing line at which growth disappeared altogether.

But the Reinhart/Rogoff research should not have been conclusive either way. With only 44 countries in their entire data set, only 20 of them "advanced," there were nowhere near enough observations for a statistical conclusion to be valid.

And even after their error was corrected, their overall conclusion that growth declines as debt increases remains true - and is fairly obvious for those who believe in free market economics. Economies cannot be expected to put up good growth rates if they are burdened by immense loads of public sector debt.

Can You Get Out of the Debt Hole?
The two greatest debt loads that have ever been conquered were both by Britain, at about 240% of GDP twice, in 1815 after the Napoleonic Wars and in 1945 after World War II.

The strategies used to overcome the debts were diametrically opposite.

After 1815, the British government of Lord Liverpool cut public spending to an infinitesimal level, balancing the budget through the rapid economic growth that became the Industrial Revolution.

In 1819, over the loud objections of Nathan Meyer Rothschild, they returned to the Gold Standard, making sterling the universal transaction currency and London the world's financial center.

The result, after an initial double-dip recession, was a boom that grew the economy rapidly, thereby reducing the debt burden to modest levels in only a couple of decades. Middle-class savers prospered as never before.

In 1945, Britain went in the opposite direction. It did little to cut public spending, instead imposing draconian levels of tax on the populace for several decades while tolerating low interest rates and a steadily accelerating level of inflation that reached 25% in 1975.

The debt was reduced by the low interest rates and inflation, with the government basically rescuing itself at the expense of middle class savers. Growth was lousy, especially compared to other European countries.

The Reinhart/Rogoff error has been used by opponents to discredit "austerity" cuts in public spending - actually there has been very little austerity, only some moderation. The EU Commission has announced that the whole austerity approach has been wrong, and Italy has formed a government committed to returning to the public spending gravy train.

What little chance there was of reining in deficits has been lost. Meanwhile, even the ECB, the last holdout against Bernankeism, is hinting that it will cut interest rates further from the current 0.75%, while the U.S., Japan and Britain are all committed to further money printing.

This will not end well, and its ending will be far more painful than the modest "austerity" that is now being abandoned (incidentally I regard the U.S. sequester as by far the best stroke of economic policy since the 1996 welfare reform, since it has forced genuine spending cuts to be made, albeit modest ones).

Higher spending will come, and will be financed by ever-larger doses of "quantitative easing" by the world's central banks. Thus the Reinhart/Rogoff spreadsheet error, by providing an excuse for abandoning the last vestiges of common sense, will prove hugely expensive.

Stick with the Midas Metal
As for individual investors, there's one clear recommendation: Gold.

Don't believe the hype about the recent gold crash, which was the result of mindless market panic abetted by massive gold-bear commentary from the media (and maybe some sneaky central bank dumping by Bernanke and his chums).

Gold is already recovering from that crash, and with today's crazed policies being intensified rather than modified, it has a lot further to go. And in my next article I'll be talking about how to take advantage of this bargain sector.

Source :http://moneymorning.com/2013/05/01/has-sequestration-saved-the-u-s-economy/

Money Morning/The Money Map Report

©2013 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2016 http://www.MarketOracle.co.uk - 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

Catching a Falling Financial Knife