Standard and Poor’s – a voice of sanity on government debt

03 May, 2010.

This is my latest piece for the Huffington Post.

It might seem extraordinary, but in the midst of deficit-cutting mania it’s a rating agency, Standard and Poor’s, that is talking common sense about government debt.

By doing so they are challenging members of the international Austerity Party – a political party that dominates economic debate across the world.

In this case the rating agency was commenting on the crisis in Greece and Portugal – but the comment could just as well apply to the United States – or any other economy trying to recover from a financial crisis induced by private bankers.

Standard and Poor’s officials are quoted by the New York Times (28 April, 2010) as saying:

“The main reason for downgrading the debt of Greece and Portugal was the prospect that forced austerity packages would be an even bigger drag on economic growth.

It is the most vicious of circles: stagnating economies are forced to cut back more, which reduces their ability to generate revenue and thus pay off their debts.”

This economic common sense makes a refreshing change from the suicidal howls of the lemming-like hordes leading the international Austerity Party. These dominate all economic debate on the airwaves, in newspaper columns, economic blogs and political outlets.

As they head for the cliffs, they can be heard baying for cuts in government spending – regardless of economic common sense; regardless of the likely economic impact.

Their argument is simple: when a nation is at its weakest, when its debts are highest, when the economy is at greatest peril, then it is imperative to apply draconian policies for cutting the deficit.

These policies must include vicious cut-backs on efforts by the government to stimulate economic recovery, and generate the revenues that will repay debts.

In particular government must cut back on public investment in infrastructure that creates jobs, generates tax revenues (through the ‘multiplier’) and helps the economy recover, so that debts can be repaid.

In other words, when an economy – any economy – is heavily in debt and on its knees…..

That is the moment, argues the Austerity Party, to cut off its legs.

Before forcing it to run the marathon.

Forgive the violence of my analogy, but sometimes words, as Keynes argued, have to be a little wild, to rouse people from their blindness to grave threats and risks.

Right now the European Union and IMF, with the forceful backing of the German Chancellor and Finance Minister, are coercing the democratically elected Greek government into effectively disabling the Greek economy.

According to the Financial Times (2 May 2010) there is to be ” a huge fiscal tightening equal to 16 per cent of gross domestic product – an extra 11 per cent on top of the 5 per cent already announced.”

“Greece’s vicious recession is poised to continue and deepen……The fiscal targets require huge upfront cuts in public spending, including reductions in public sector pay, jobs and pensions.”

The IMF’s representative Poul Thomsen had the gall to argue that this disastrous economic strategy “is credible because it has a lot of support from the international community; it is credible because it is socially well balanced; it is credible because it is the [Greek] government’s programme.”

This is a dishonest and delusional statement.

It is dishonest because it is blatantly not the Greek government’s program. It is the German government’s condition for making bailout funds available.

It is delusional, because it is an economic strategy designed to fail.

While it may be credible with the members of the international Austerity Party – it is not economically viable.

Ask Standard and Poor’s.

The voice of common sense.

Drowned out by the hysteria and flawed economics of the Austerity Party.

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4 comments to Standard and Poor’s – a voice of sanity on government debt

  • the.Duke.of.URL

    For Thomsen to claim that support from a particular community as a justification is nothing more than a justification by group think. How sensible such a suggestion sounds depends on the group you select.

    Invoking the “international community” sounds good, but what if the community were invoked as justification for a neoeconomic policy. A few years ago, the international community might have agreed wholeheartedly with such a proposal. But it sounds hollow now. And it shows Thomsen’s incomplete argument to be bankrupt.

  • the.Duke.of.URL

    Sorry about the typos.

  • Ken MacIntyre

    Well said, Ann.

    Two brief points:

    Government debt is unnecessary because governments have their own source of credit in its central bank (the ECB could do this for the Eurozone countries). There is no need to borrow from private institutions or the IMF.

    Government deficits arise partly because governments choose to ignore the reliable and substantial revenues from taxing economic rents and unearned income. My very rough estimate of a land value tax (proposed by the Green and Cooperative parties) in Britain is £300-£400 bn a year. A modest 10% levy on personal financial wealth would yield £100bn. Greece has compounded the problem by allowing (see Michael Hudson) the wealthy and professionals to avoid tax altogether – a legacy of the CIA-imposed military dictatorship (1967-1974). The Greek ‘crisis’ is ultimately a contrivance and a pretext to justify rolling back social spending.

  • john fletcher

    Ann

    Great, great analysis of the election in your latest Huff Post piece. Congratulations. The British electorate really has dished the powerful.

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