Blanchflower Thinks Austerity Is Hogwash

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“There were pretty good indicators of what was coming to Europe, so I think investors ought to have been looking at things like housing prices and what happened in the United States housing market in 2006. At the time, I said almost everything that happened in the US happened in the United Kingdom six to nine months later—it’s completely disingenuous of Mervin King (Governor of the Bank of England) to say that he had no idea what was happening. Lots of other people did. Bernanke eventually moved and the Bank of England moved and then countries around the world moved and things started to pick up. So fiscal authorities thought it was all over and essentially have been hugely optimistic from then on.

My advice to an investor is that you absolutely have to cover the downside risk. That was especially true in the fall of 2008 and 2011. The worry now is that that money has basically come to an end and most of the same people are still in charge making the same idiotic mistakes and the risks remain to the downside. Everything they say is overly optimistic; they assume everything will be back to normal when they’ve been completely hopeless. Are we any further on? We are, but in the UK politicians told economists they didn’t know what they were talking about and they knew best.

George Osborne (UK Chancellor) and most of the European Union argued there was such a thing as an ‘expansionary fiscal contraction,’ which means you cut the public sector and the private sector will leap in. Well, lots of people told them that was hogwash and it turns out it was and continues to be hogwash. There is no growth—over the last six quarters the UK has grown less than Spain—so it’s entirely appropriate to say that nothing much has changed and there does not look to be much hope that economies are getting back to normal.

And who is to blame? Osborne says it’s not him and Mervyn says it is not him, claiming it was something that happened in 1997.

We need a growth plan before we have austerity. Think about Keynes, the great expert on desperate recessions; think about infrastructure spending where you get the economy moving again. You can give firms incentives to invest and hire—and that gives incentives to large investors.

To claim bond yields are really low because of the success of the government is absolutely ridiculous. I think bond yields are really low because of the failure of the government to deliver growth. If you argue that being AAA rated is the be all and end all, what happens when you lose it? The policies that have not yet worked are unlikely to start working. Investors have to look at governments—the US has done pretty well, but there is a fiscal cliff coming. Output is going to drop by 3% or so unless they stop the measures that are coming into effect.

These are worrying times. We are certainly not out of this, but there are opportunities because chances are that the Bank of England and the Fed will do more quantitative easing (QE). Central Banks are the only player in town and sadly for investors, interest rates are really, really low, but everything else is worse. Investor groups have been complaining that they have been hit by QE, but they’ve benefitted from the appreciation in asset prices that have occurred because of it. Everything these people are proposing instead would lower growth and raise unemployment—then everyone would be worse off.”