Best of the Week
Most Popular
1.The Greatest Stock Market Crash Of Your Life Is Just Ahead… – Warns Harry Dent - GoldCore
2.Budget 2016: Borrowing, Lifetime ISA, House Prices, Economy, Syria, Brexit and Stocks - Nadeem_Walayat
3.Gold Price Intermediate Top - Clive_Maund
4.Brussels Terror Attacks, Death of the European Union, BrExit Wake up Call - Nadeem_Walayat
5.Stock Market Maybe This Time is Different? - Tony_Caldaro
6.UK House Asking Prices Break Above £300k! Housing Market Paralysis - Nadeem_Walayat
7.A Big Reason Why Silver Price Is Set To Soar - Hubert_Moolman
8.The Financial Crisis Has Just Begun; Is The American Dream Is Over? - Chris_Vermeulen
9.Gold Stocks Spring Rally - Zeal_LLC
10.GLX, GLDX, Baby Gold Bull Market Stillborn? - Rambus_Chartology
Last 7 days
Derivatives Crisis Of Banks…Worldwide - 3rd May 16
Bank of North Dakota Soars Despite Oil Bust: A Blueprint for California? - 3rd May 16
Stock Market Technical Analysis - 3rd May 16
Central Banks Need a Higher Gold Price : Hello GATA - 3rd May 16
A Currency War Battle That Europe and Japan Can’t Afford To Lose - 3rd May 16
When the Truth is Found to be Lies, Confidence in Currency Dies - 2nd May 16
How Brexit Could Help All of Europe - 2nd May 16
US House Prices Outpacing Official Inflation Rate, Household Income - 2nd May 16
USD Still Declining... - 2nd May 16
Gold & Silver Rally Huge as Central Bankers & Analysts Flub - 2nd May 16
Stock Market Bounce Day - 2nd May 16
Stock Market Uncertainty Following Two-Month Long Rally - Will It Continue? - 2nd May 16
Stock Market Correction Underway "Upside Objective Reached" - 2nd May 16
USD, Yen and an ‘Inflation Trade’ Update - 2nd May 16
Gold Commitments of Traders and More - 1st May 16
The Magic of Gold Ratio Charts - 1st May 16
Consensus Forming: China Heading Back Into Financial Crisis - 30th Apr 16
The Next Technical Price Targets for Gold & Silver - 30th Apr 16
Stock Market Downtrend Should be Underway - 30th Apr 16
Gold And Silver – A Clarion Alarm Call For All Paper Assets - 30th Apr 16
US Economic Statistics LIES, LIES AND OMG, MORE LIES - 30th Apr 16
Stock Market Strong Elliott Wave Relationship is Developing - 29th Apr 16
Fed's Kaplan: Brexit to Factor in US June Interest Rate Decision - 29th Apr 16
Silver Miners Strong in Grim Q4 - 29th Apr 16
Is Silver a better bet than Gold in the Near Future? - 29th Apr 16
How to Use the CoT Report in Gold Investing? - 29th Apr 16
Sri Lanka is Intriguing: Areas to Consider for Value Investing - 29th Apr 16
Gold “Chart of The Decade” – Maths Suggest $10,000 Per Ounce Says Rickards - 29th Apr 16
Are We or Are We Not in a New Gold Bull Market? - 29th Apr 16
Silver: The “Five Year Plan” and the Great Leap Forward - 28th Apr 16
Michael Hudson: The Wall Street Economy Has Taken Over The Economy and Is Draining It! - 28th Apr 16
AUD/USD - Trend Reversal or Just a Bigger Pullback? - 28th Apr 16
A Gold Revaluation Could Transform Your Financial Status - Overnight - 28th Apr 16
Monetary Policies Misunderstood - 28th Apr 16
Gold Bullion vs Gold Miners - 28th Apr 16
OECD Suggests BrExit Would Cut Net Migration by 1.2 Million by 2030 - 28th Apr 16
MP Naz Shah Punished for Tweets Made During Israel's Genocide of Gaza Palestinian People - 28th Apr 16
Global Recession in 2016 and Beyond - The Obvious Evidence - 27th Apr 16
Why Gold Bugs Need to Stop Listening to The Fear Mongers and Start Thinking for a Change - 27th Apr 16
BlackRock’s Fink: Fed to Raise Interest Rates by Quarter Point ‘at Best’ - 27th Apr 16
Gold More Productive Than Cash?! - 27th Apr 16
Donald Trump Will Fire Janet Yellen and Be Trapped - 27th Apr 16
Money Saving Gardening by Propagating Roses From Cuttings - Propagating Rose Plants Over 2.5 Years - 27th Apr 16
Facebook Censors Pro Trump and Negative Hillary News - 27th Apr 16
This is the Era of the Democrats and Your Taxes are Going Up - 27th Apr 16
Long Awaited Gold Price Breakout - 26th Apr 16
Crude Oil Price Double Top or Further Rally? - 26th Apr 16
Madness in the Crimex Gold and Silver Trading Pits - 26th Apr 16
Britain's Prospects: GBP and BREXIT - MAP Wave Analysis - 26th Apr 16
CRB, Gold, Oil, Cotton, Coffee - 7 Must See Commodities Charts - 26th Apr 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Catching a Falling Financial Knife

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