Wednesday, 12 February 2014

More notes for preface of German edition

Another objection to austerity critique often heard in Germany and elsewhere is this: the reason austerity appears not be working is that we haven't really tried it yet. Proof? Well, the central banks are printing money like mad. How can this be austerity?

This is an odd argument because it connects different things that are not directly related. Yes, some central bank are 'printing money'. They are engaging in 'quantitative easing' which consists in buying financial assets from banks and other institutions. This provides these institutions with liquidity and props up demand for financial assets. 

How does this relate to austerity? There is no fixed definition of what austerity means. Some people use it to mean cuts of public expenditure. This is close enough to what is happening but in the book I defined austerity more broadly as abstinence from consumption. That comprises most of today's cuts to government expenditure. That's because most government expenditure is for forms consumption anyway and government expenditure for investments is often not reduced as much.

In theory, governments could (and should) take advantage of the liquidity injected by central banks and the low interest rates in order to finance stimulus programs (building roads, power lines, schools or hire more teachers, pay firefighters more etc etc).  But because governments are committed to austerity policies they won't. Companies could take advantage of easy finance--to the extent that it trickles down to small and medium businesses--and invest. But they won't because there is no market for additional output. Private individuals could also take out loans and consume. But they won't because of economic uncertainty and because many people just got burned during the last round of easy credit. 

So there is not really much impact of these monetary measures on demand and hence on investment and growth. That's unfortunate because economies urgently need stimulus to kick-start growth. But in current conditions additional liquidity will not do the trick because no one is willing to spend it. Additional demand needs to be created directly through government expenditure (in the short term) and income redistribution (in the medium term)

The only sector where demand may actually be stimulated by the current monetary policy are financial markets. Cheap money is used for financial speculation: despite the depressed economic situation stock exchanges are up. The supply of liquidity may well result in new asset bubbles on the financial markets but it does very little to alleviate the problem of depressed consumption and investments.

Quantitative easing is not the antidote to austerity. It's an attempt of central banks to do something to keep economies going while austerity politicians are doing their best to strangle growth. 



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