Best of the Week
Most Popular
1.The Gallery of Crowd Behavior: Goodbye Stock Market All Time Highs - Doug_Wakefieldth
2.Tesco Meltdown Debt Default Risk Could Trigger a Financial Crisis in Early 2015 - Nadeem_Walayat
3.The Trend Every Nation on Earth Is Pouring Money Into - Keith Fitz-Gerald
4.Do Tumbling Buybacks Signal Another Stock Market Crash? - 26Mike_Whitney
5.Could Tesco Go Bust? How to Save Tesco from Debt Bankruptcy Risk - Nadeem_Walayat
6.Gold And Silver Price - Respect The Trend But Prepare For A Reversal - Michael_Noonan
7.U.S. Economy Faltering Momentum, Debt and Asset Bubbles - Lacy Hunt
8.Bullish Silver Stealth Buying - Zeal_LLC
9.Euro, USD, Gold and Stocks According to Chartology - Rambus_Chartology
10.Evidence of Another Even More Sweeping U.S. Housing Market Bust Already Starting to Appear - EWI
Last 5 days
Gold And Silver – Elite Supernova Death Dance In PMs? - 1st Nov 14
Pretium - Canadian Golden Elephant - 31st Oct 14
What USA Today Got Wrong About the Stock Market Fear Gauge - 31st Oct 14
Election Result - Labour Wins South Yorkshire Police and Crime Commissioner - 31st Oct 14
Gold Price Falls, Stocks Record Highs as Japan Goes ‘Weimar’ - 31st Oct 14
EUR/USD - Double Bottom Or New Lows? - 31st Oct 14
More Downside Ahead for Gold and Silver - 31st Oct 14
QE Is Dead, Now You Tell Me What You Know - 31st Oct 14
Welcome to the World of Volatility - 31st Oct 14
Stocks Bear Market Crash Towards New All Time Highs as QE3 End Awaits QE4 Start - 31st Oct 14
US Mortgages, Risky Bisiness "Easy Money" - 30th Oct 14
Gold, Silver and Currency Wars - 30th Oct 14
How to Recognize a Stock Market “Bear Raid” on Wall Street - 30th Oct 14
U.S. Midterm Elections: Would a Republican Win Be Bullish for the Stock Market? - 30th Oct 14
Stock Market S&P Index MAP Wave Analysis Forecast - 30th Oct 14
Gold Price Declines Once Again As Expected - 30th Oct 14
Depression and the Economy of a Country - 30th Oct 14
Fed Ends QE? Greenspan Says Gold “Measurably” “Higher” In 5 Years - 30th Oct 14
Apocalypse Now Or Nirvana Next Week? - 30th Oct 14
Understanding Gold's Massive Impact on Fed Maneuvering - 30th Oct 14
Europe: Building a Banking Union - 30th Oct 14
The Colder War: How the Global Energy Trade Slipped From America's Grasp - 30th Oct 14
Don't Get Ruined by These 10 Popular Investment Myths (Part VIII) - 29th Oct 14
Flock of Black Swans Points to Imminent Stock Market Crash - 29th Oct 14
Bank of America's Mortgage Headaches - 29th Oct 14
Risk Management - Why I Run “Ultimate Trailing Stops” on All My Investments - 29th Oct 14
As the Eurozone Economy Stalls, China Cuts the Red Tape - 29th Oct 14
Stock Market Bubble Goes Pop - 29th Oct 14
Gold's Obituary - 29th Oct 14
A Medical Breakthrough Creating Stock Profits - 29th Oct 14
Greenspan: Gold Price Will Rise - 29th Oct 14
The Most Important Stock Market Chart on the Planet - 29th Oct 14
Mysterious Death od CEO Who Went Against the Petrodollar - 29th Oct 14
Hillary Clinton Could Be One of the Best U.S. Presidents Ever - 29th Oct 14
The Worst Advice Wall Street Ever Gave - 29th Oct 14
Bitcoin Price Narrow Range, Might Not Be for Long - 29th Oct 14
UKIP South Yorkshire PCC Election Win is Just Not Going to Happen - 29th Oct 14
Evidence of New U.S. Housing Market Real Estate Bust Starting to Appear - 28th Oct 14
Principle, Rigor and Execution Matter in U.S. Foreign Policy - 28th Oct 14
This Little Piggy Bent The Market - 28th Oct 14
Global Housing Markets - Don’t Buy A Home, You’ll Get Burned! - 28th Oct 14
U.S. Economic Snapshot - Strong Dollar Eating into corporate Profits - 28th Oct 14
Oliver Gross Says Peak Gold Is Here to Stay - 28th Oct 14
The Hedge Fund Rich List Infographic - 28th Oct 14
Does Gold Price Always Respond to Real Interest Rates? - 28th Oct 14
When Will Central Bank Morons Ever Learn? asks Albert Edwards at Societe General - 28th Oct 14
Functional Economics - Getting Your House in Order - 28th Oct 14
Humanity Accelerating to What Exactly? - 27th Oct 14
A Scary Story for Emerging Markets - 27th Oct 14
Could Tesco Go Bust? How to Save Tesco from Debt Bankruptcy Risk - 27th Oct 14
Europe Redefines Bank Stress Tests - 27th Oct 14
Stock Market Intermediate Correction Underway - 27th Oct 14
Why Do Banks Want Our Deposits? Hint: It’s Not to Make Loans - 26th Oct 14
Obamacare Is Not a Revolution, It Is Mere Evolution - 26th Oct 14
Do Tumbling Buybacks Signal Another Stock Market Crash? - 26th Oct 14
Has the FTSE Stock Market Index Put in a Major Top? - 26th Oct 14
Christmas In October – Desperate Measures - 26th Oct 14
Stock Market Primary IV Continues - 26th Oct 14
Gold And Silver Price - Respect The Trend But Prepare For A Reversal - 25th Oct 14
Ebola Has Nothing To Do With The Stock Market - 25th Oct 14
The Gallery of Crowd Behavior: Goodbye Stock Market All Time Highs - 25th Oct 14
Japanese Style Deflation Coming? Where? Fed Falling Behind the Curve? Which Way? - 25th Oct 14
Gold Price Rebounds but Gold Miners Struggle - 25th Oct 14
Stock Market Buy the Dip or Sell the Rally - 25th Oct 14
Get Ready for “Stupid Cheap” Stock Prices - 25th Oct 14
The Trend Every Nation on Earth Is Pouring Money Into - 25th Oct 14 - Keith Fitz-Gerald
Bitcoin Price Decline Stopped, Possibly Temporarily - 25th Oct 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Free Forex Forecasts

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

© 2005-2014 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

Free Report - Financial Markets 2014