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AUSTERITY BITES
By John Newsome on 24th May 2012


Warren Buffett observed that investors should look for companies that are so bulletproof, an idiot could run them because one day, that is probably what will happen. If he is correct, we conclude that if capitalism is likely to let the odd wally hop into the driving seat, then it's a cast iron certainty that politics and economics will. Whether it was Alan Greenspan's belief that lower interest rates were the answer to every potential economic problem, John Major taking Britain into the ERM or Gordon Brown's sale of half the country's gold reserves, they were all decisions shown to be ……. well, a bit dumb.

 

The trend continues today. As governments fall across Europe, electorates are increasingly willing to listen to politicians proposing economic u-turns. Austerity has suddenly become so last year with growth (greater government spending) once again high on the agenda. It's a remarkable change of heart but it just goes to show that in adversity, the unlikely becomes possible. Who knows, by going back to the future, we may yet witness the return of kipper ties, Betamax video recorders and UK Border Force checking passports (occasionally).

 

But how realistic is it that salvation lies in the policies that helped get us into this mess in the first place? French President, Francois Hollande, says austerity should no longer be inevitable. It's a great idea but it has just one tiny flaw and that is, you don't get the chance to choose austerity; austerity chooses you.

 

The Shadow Chancellor continually delivers the message that Osborne is 'cutting too far and too fast'. Mr Balls' belief is that pump priming the economy will deliver a multiplier effect whereby a growing economy will eventually reap the tax revenues that enable repayment of the extra debt incurred. Mmmm ...... it's an interesting theory but then so is time travel. Unfortunately, we suspect the latter has a greater chance of being proven correct because if persistent deficit spending was all it took to prevent economic contractions, there would never be recessions. Furthermore, if the premise had any validity, the national debt would not have more than doubled between 1997 and 2010.

 

Yet Balls looks positively Thatcherite compared to Fed Chief, Ben Bernanke. In 2002, he said "the U.S. government has a technology called a printing press that allows it to produce as many U.S. Dollars as it wishes at essentially no cost". Well, nobody could accuse him of not practising what he preached but while Bernanke attempts to win the Mugabe prize for economics, he will eventually discover what many others have discovered before him and that is, while the printing press can produce unlimited amounts of money, it is powerless to determine the real purchasing power of it.

 

Overall, a large proportion of the economics profession is selling the public a pup. Admittedly, it's a pup many of them are happy to purchase but the veteran Wall Street fund manager Peter Lynch was on the right track when he noted that "if all the economists of the world were laid end to end, it wouldn't be a bad thing".


John Newsome can be contacted on:
01423 705123


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