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Debating Conundrums at Davos: Is Austerity the Only Way?

[Editor’s note: the following is a cross post that originally appeared on Wall St. Cheat Sheet.]

In a sense, there was nothing really new at the past week’s meeting of the World Economic Forum at Davos: finding a practical solution to the national debts crisis is the problem, and the consensus solution could make that problem worse. Debating the situation amounted to little more than tweaking it around the edges, because no economic theory – left or right – has a clear answer, now that the problem has gone this far.

The governments of several eurozone countries, mostly but not all bordering the Mediterranean, have greatly overspent during the last decade and have been borrowing gigantic amounts of money to pay for it, by issuing bonds that they now can’t pay back.

Private banks and finance ministries of other countries who bought the bonds are now exposed as well, and fears are that this situation could spread like a virus, if full defaults are allowed. That is the basic problem, but the solution – austerity – could make it far worse, hence the all-consuming debate at the meeting.

There is little debate that the optimal way for a debtor country to get out of trouble is to grow its economy out of it, so that tax revenues would be sufficient to pay off debts. But that option is not available when the debtor country must borrow simply to service its previous debts and pay current bills, and especially if part of the borrowed money is spent in new ways, all of which happened in this situation.

And if that were not enough, the world recession which began in 2008, pretty much assured that the growth-only option was moot, but at some point it must work or solving the problem permanently will be impossible.

Further, eurozone members can’t make their own countercyclical monetary policies, nor do they have central banks, per se, to loan their governments money. This dilemma has prompted Greece to flirt with the idea of pulling out from use of the euro altogether.

This vicious circle [has prompted] bailouts which have their own price, and that is almost always some form of austerity in which the debtor must severely cut back spending, and also raise taxes. Economists of different persuasions can argue over whether cutting government spending (and involvement) helps or hurts an economic recovery, but few would say that raising or creating new taxes could be helpful.

Increasing tax rates beyond some point typically results in lowering, not raising revenues, and new taxes can lead to new types of evasions, including emigration of persons and companies. None of these measures encourage consumers to go out and buy refrigerators, either.

Some Davos participants, such as U.S. Treasury Secretary Timothy Geithner and IMF head Christine Lagarde, were of the view that each debtor case is different and their cures should be “tailor-made,” as she observed. Geithner worried aloud that the austerity measures could lead to a recessionary “cycle.”

Although a majority of Davos attendees agreed that debtors’ budget deficits must be curtailed, dissention arose over short term measures such as austerity, and longer term remedies such as extending debt maturities and lower interest rates on the bonds.

Proximity to debtors and exposure to their debts made a difference: Germany, whose private banks are quite exposed, demanded strict austerity, while the U.S. and the U.K. were more patient, although the latter two were continuing to reject extending help until more comes from the eurozone. Ms. Lagarde said that the IMF is reinforcing a “firewall” financial rescue fund made up of funds donated from eurozone members. She wants to raise hundreds of billions of dollars to that end, as she said that austerity is only a part of the solution.

To accent her appeals, she brought along a designer handbag in which to collect the funds; it wasn’t immediately clear how many billions went into the bag.

Debating Conundrums at Davos: Is Austerity the Only Way?IMF Chief Christine Lagarde

(Front page photo credit: Christian Hartmann/Reuters)

Comments (39)

  • PentecostalForIsrael
    Posted on February 1, 2012 at 6:55pm

    Conundrums are riddles answered with a play on words, often time a pun that is a groaner. Like the Riddler used to ask Batman. Like “How is Catwoman like a banana?” Answer: They both have appeal (a peel).
    Perhaps Blazers would like to submit their own conundrums based on Davos events? Otherwise I see no justification for this fine story’s headline.

    Report Post »  
  • Axe
    Posted on February 1, 2012 at 3:55pm

    “There are two ways to conquer and enslave a nation. One is by the sword. The other is by debt.”

    – John Adams 1826

    Report Post »  
  • BuggiOlleo
    Posted on February 1, 2012 at 6:17am

    To these Davo Speculators, there is a solution; America must join the folding EU into a New Global currency. Are you ready to be a Global Village? Are you ready to pay for EU mess? Nah, nope, no, hell no, nada, nin and nyet!

    Report Post » BuggiOlleo  
  • OperationNorthwoods
    Posted on February 1, 2012 at 2:20am

    Austerity for the people. Bailouts and billion dollar bonuses for the globalist bankers.

    Report Post » OperationNorthwoods  
  • fukjihad
    Posted on January 31, 2012 at 11:54pm

    Did this dumb lady really bring a designer bag to collect funds, how stupid is this whole group. The **** is going to hit the fan I believe

    Report Post » fukjihad  
  • Alan
    Posted on January 31, 2012 at 8:54pm

    Europe made this mess, I reckon they get to wallow in it.

    Report Post »  
    • TheSchu
      Posted on January 31, 2012 at 9:13pm

      It is simple collapse the world currencies and create a new single world currency base on resources and population.

      Report Post »  
    • Unix
      Posted on January 31, 2012 at 9:26pm

      Cut spending IDIOTS, my 14 year old daughter is smarter than the lot of you so called economists and leaders. You think paying off debt with debt is a smart thing? WOW there are some ignorant people out there.

      If your in a deep hole and want to get out, you don’t dig deeper, you stupid morons! To think we trust these people, who got us into this mess in the first place???? arrrrrrrrg

      Report Post » Unix  
    • MCDAVE
      Posted on January 31, 2012 at 10:52pm

      Obama wanted us to be more like Europe so he spent us into the same disaster…We should be in washington by the millions demanding he be removed immediately …I am sick of him blaming others for his crimes against the USA

      Report Post »  
    • wbalzley
      Posted on February 1, 2012 at 5:00am

      @UNIX: Or you could print DEBT FREE money and expand production of NEW WEALTH.

      Report Post »  
  • AmericanFightingMan1
    Posted on January 31, 2012 at 8:22pm

    American socialists/leftist want economic calamity. That will drive desperate people to government for protection. That is the plan. People will forfeit their liberty for government protection.

    Given that generations of children have been mis-educated (indoctrinated) and don’t know the freedoms they are giving up, the model is workable. The only salvation is that people who know better wake up and confront the leftists.

    Report Post » AmericanFightingMan1  
  • lukerw
    Posted on January 31, 2012 at 7:51pm

    Austerity means Weakness… and Weakness means WAR! Blame, Frustration & Revolt means WAR! Energy Restrictions and a Caliphate means WAR!

    Report Post » lukerw  
    • wbalzley
      Posted on February 1, 2012 at 4:58am

      WAR is coming…the big wigs are all rubbing their hands together, salivating over the massive profits they plan to reap from the spoils:

      Banks: Interest on the war debt
      Corporations: Fat Military Contracts
      Governments: Turn public anger outward
      Politicians: Play to the patriotism of the people
      Celebrities: Sell patriotic songs, movies, and memorabilia

      While you and get sent to bleed and die in foreign lands. We pay the price, while they reap the rewards. You have got to LOVE the Crony Socialist system we live in…

      War is inevitable when war is profitable.

      Report Post »  
  • ViewPointtt
    Posted on January 31, 2012 at 7:44pm

    JP4JOY,

    The fact that the U.S. borrowed heavily from China and Saudi Arabia indicates that both these lender-nations are at a level of great prosperity.

    The fact that Russia is the largest exporter of natural gas and is the largest producer of oil indicates that Russia is also at a level of great prosperity.

    The fact that Israel discovered massive gas reserves in 2009, later discovered massive oil reserves and subsequently became a member of the OECD/Organization for Economic Cooperation and Development (the rich country club; 33 most wealthy nations in the world) in 2011, indicates that Israel is also a level of great prosperity.

    Report Post »  
  • David, the Constitutional Libertarian
    Posted on January 31, 2012 at 7:38pm

    If you have not heard about Ann Barnhardt, do a quick google and find her page. Anyway, Greece is talking about paying 30% off on their debt. The reasoning is because of CDS would have to be paid if they completely expunged the debt. So the financial places like Goldman Sachs would be hit hard if exposed to the default of these sovereign debts, so what do they do, pay the minimum so those that sold the CDS instruments, get to keep the money for those instruments, yet do not have to pay off when the debt is defaulted. See, if they pay the minimum, then they are not considered defaulted.

    People, the governments are doing EXACTLY what the greatest US President stated- “The last official act of any government is to loot the treasury.”

    But these thieves are taking that to a whole new level. They are looting private accounts and wealth as well. MF Global was just the tip of the iceberg.

    If I did not know better, these folks are going all in on stealing everything they can for some cataclysmic event. Of course it is just marxists doing what marxists do.

    Read more here- http://barnhardt.biz/

    Report Post » David, the Constitutional Libertarian  
  • The Third Archon
    Posted on January 31, 2012 at 7:25pm

    “Increasing tax rates beyond some point” approximately 70%, it‘s known as the ’Laffer Curve’ “typically results in lowering, not raising revenues”

    Report Post » The Third Archon  
  • flatbroke
    Posted on January 31, 2012 at 7:09pm

    Of course austerity is not the only way just keep spending and spending and spending, and soon China will own us all.

    Report Post » flatbroke  
    • Mateytwo Barreett
      Posted on January 31, 2012 at 7:21pm

      Naw! I don‘t think they’re buying anymore. Ben Breneke and the guys are ponying up for the shortfall. Monetization of the debt works great! Cuts down on the paperwork, translation, etc. I tried it once- Its called writting bad checks.

      Report Post » Mateytwo Barreett  
    • barber2
      Posted on January 31, 2012 at 7:47pm

      MATEY: Like that writing bad checks solution. Just the thing for the government to do after they have pressured banks to give loans to people who have been in the past “discriminated ” against because they are poor ! Just another one of those ACORN Genius ideas!

      Report Post »  
    • wbalzley
      Posted on February 1, 2012 at 5:05am

      We could find a reason to declare WAR on China, and call “nixies” on all our debts. All we need is a good excuse…like supporting an enemy combatant…like IRAN…

      War looks pretty good to our politicians right now…

      Report Post »  
  • Birddog
    Posted on January 31, 2012 at 6:44pm

    For far to long the political class has used borrowed money to get them self’s elected and reelected, lots of stuff today and no pain. Now the bill is coming due in the Euro zone, as it will in the USA, and it will take as many generations plus, as it took to run it up to pay for it. In one way or another. Sad

    Report Post » Birddog  
  • Stoic one
    Posted on January 31, 2012 at 6:22pm

    And the potus wants to follow in their footsteps?

    Report Post » Stoic one  
  • JP4JOY
    Posted on January 31, 2012 at 6:12pm

    The only reason the US and the UK were less adamant about austerity than the Germans is that they both can endlessly print more money whereas Germany is constrained by the EU and only can use its own resources which would be much more quickly depleted than the other two.
    If you think you can get out of debt by spending more money, please use your own.

    Report Post » JP4JOY  
    • barber2
      Posted on January 31, 2012 at 7:30pm

      But..but..but..the Obama Democrats promised we could spent our way to prosperity . Wasn’t that the whole idea behind the Stimulus ? Well, actually they were promising that we could Tax our way to prosperity since all of the money came from the pockets of the taxpayers who are so 99% ripped-off by the leeches. And now the Obama crowd wants to hit the taxpayers up for more ! Well, the Obama folks make it “ ok” because they say only the nasty, evil“ rich” will get ripped ! Ha. Am sure they will be pulling more of their 99% fuzzy math ! ( Soon there will be more angry, ungrateful but entitled people in the wagon than pulling the wagon ) Hmmm. wonder whom the Deficit King Obama and his Democrats ( who brought us the fuzzy math Affordable Housing Act ) will Target next time ? Who comes next after the evil “rich?”

      Report Post »  
  • mattmo79
    Posted on January 31, 2012 at 6:10pm

    The solution is quite simple, stop spending money you don‘t have on programs you don’t need and stop stealing the money to pay for these disgraceful programs from the hard working citizens. Amazing how the countries that don‘t have bloated social programs don’t have any major financial problems that will bankrupt their countries!! Huh, funny how that works!!

    Report Post » mattmo79  
    • JP4JOY
      Posted on January 31, 2012 at 6:17pm

      I can‘t find ANY country out there that isn’t upside down. Can you name one please, I might relocate.

      Report Post » JP4JOY  
    • Stoic one
      Posted on January 31, 2012 at 6:26pm

      Hong Kong, Sigapore, South Korea, & India off he top of my head. South East Asia had a version of this around the turn of the century and we could learn from them.

      Report Post » Stoic one  
    • Exrepublisheep
      Posted on January 31, 2012 at 6:28pm

      Stop coddling the very rich who are absorbing more and more of the available cash flow just to ship jobs overseas. The more jobs we lose to almost slave labor means the more people need “bloated social programs.“ Increase taxes on ”overseas” companies (protectionism) to the point that it makes no sense to send the jobs away. America first! Americans constitute the single largest consumer block in the world, companies will ALWAYS sell to us, even if they make less. Then there’s the problem that the country that has so much money to lend, China, is communist. Also, increase the tax burden on American companies keeping Trillions of dollars overseas every couple of years until they are forced to bring American money back to America. Like I said, we are the buyers, the corporations aren’t going anywhere, neither are the billionaires. Stop listening to millionaire lobbyists who convince hard working people to protect the very parasitical wealthy companies and individuals that are draining America to pad their own pockets. America first, it means Americans first. More jobs here means less food stamps, less unemployment benefits, less medicaid etc…

      Report Post » Exrepublisheep  
    • Mateytwo Barreett
      Posted on January 31, 2012 at 7:27pm

      @Pubicsheep
      Sounds great! Lets get those evil corporations to bring all those outsourced jopbs back so they can be taken by union labor, system riders ( how many weeks would I have to work to qualify for unemployment), EOE and the rest. Bring job s back to a country whose citizens have been taught not to work. . . $579 sneakers anyone.

      Report Post » Mateytwo Barreett  
    • Mateytwo Barreett
      Posted on January 31, 2012 at 7:29pm

      @JP
      I trhink Kenya is doing well.

      Report Post » Mateytwo Barreett  
    • Exrepublisheep
      Posted on January 31, 2012 at 7:33pm

      Lol Matey, so don’t try to create jobs here because they will just go to the wrong types of people? You’re silly.

      Report Post » Exrepublisheep  
    • barber2
      Posted on January 31, 2012 at 7:40pm

      SHEEP: Can tell you are up to date on the Democrat campaign spiel. Good job on that “ nasty rich guy” theme ! Nothing like a little class warfare , anger and division in the country ! You go, man : Grab those pitch forks. It’s Obama campaign show time !

      Report Post »  
  • Outlaw_Josey_Wales
    Posted on January 31, 2012 at 5:58pm

    United States will have austerity in the near future, then the greatest depression will start.

    Report Post » Outlaw_Josey_Wales  
  • Baddoggy
    Posted on January 31, 2012 at 5:51pm

    If we cut off our Government leeches they would revolt in the streets. They would burn down major cities and many would die. The sad FACT is that it will be coming one way or the other. We will get a preview of it whne they start cutting over there. It will not be pretty…

    Might as well do it now and save the republic. the longer we wait, the worse it will get.

    Report Post » Baddoggy  
    • wbalzley
      Posted on February 1, 2012 at 4:50am

      SNARK: Do you include Wall-Street Bankers and Crony Socialists among the leeches?

      Report Post »  
  • MDDAWG
    Posted on January 31, 2012 at 5:43pm

    Yes, austerity is the only way!
    All of us are going to feel it one way or another.
    Better we make choices to curtail our out-of-control spending than having it imposed on us.

    Report Post » MDDAWG  
    • wbalzley
      Posted on February 1, 2012 at 4:47am

      PROPOSAL: Austerity ALONE would result in large amounts of money being spent out of the economy to service debt–leading to a contraction in the money supply. The result will be DEFLATION and DEFAULT.

      The government needs to stop spending BORROWED money. They need to reduce taxes on business, and use the revenue to pay off debt. At the same time, they need to issue new DEBT FREE money to fund the creation of NEW WEALTH…open up federal lands for development; issue permits for oil and gas drilling, mining, and industrial development; expand agriculture…provide subsidies for companies to build factories in America and outfit them with the latest technology…

      As new jobs are created, transfer funding from unemployment, social security, and other entitlement programs, and use them to subsidize training programs…

      Report Post »  

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