Wednesday, January 26, 2011

O Says No to Austerity

In last night’s State of the Union speech, President Barack Obama called for Americans to “rekindle their competitive spirit”—

—but the real take-away was the following metaphor:
Cutting the deficit by gutting our investments in innovation and education is like lightening an overloaded airplane by removing its engine. It may feel like you’re flying high at first, but it won’t take long before you’ll feel the impact.
Like all great political metaphors, it captured exactly what one side of the debate believes and at the same time provides them with a club with which to bash the other side: You want to cut government spending NOW? That’s like ripping off the engines on an airplane in mid-flight!

Nobody ever said O didn’t know how to deliver a pithy line. 

The line is great, and the British situation is even better: The coalition government of David Cameron is passing through a series of painful austerity measures—and at the same time, the UK economy shrank 0.5% in Q4 of 2010. 

Is there a correlation—or a causality—between the Cameron austerity measures and the shrinking of the UK GDP? Certainly not—

—but that won’t matter in the United States: Democrats will use the British example to point to how unwise it would be to cut government spending at this time. 

Yet the Republicans control the House—so . . .

So bottom-line, there will be a continuation of what we have so far seen: More tax cuts by Republicans, more stimulus spending by the Democrats. 

And since the Federal Reserve is monetizing 50% of FY 2011 deficit spending . . . expect that to rise as well. 


  1. Two questions for the 10pm Tutorial:

    1. How is the Fed's POMO connected to rising commodity prices globally (and the resulting food riots)?

    2. How is the Fed's POMO connected to continual green closes on the DJIA, S&P, etc. (if at all)?

    I appreciate your expertise and value your insights.

  2. Here in Britain we lost service jobs and gained manufacturing ones.Hurrah! I'm just afraid that Austrian economics will catch on too late.


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The cult of stability is a culture of death.