Holy [LIFTED]! Who knew?

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A few knew. We already had the experience of Greece and Ireland, and while Ireland is considered the poster boy for austerity it will be needing another bailout next year. I knew that it would be a struggle, purely because of the debt overhang. Debt does not figure in most of the economic models so that was why they failed. They only account for the flow of debt rather than the stock so they thought that dropping rates to zero and flooding the banks with money will lead to a resurgence of the economy. I knew back in 2009 that it would be more than a decade before the economy recovers, as it would take at least as long as that to get debts down to a manageable level.

The planned austerity might have worked if the problems in the Euro zone hadn't dragged on and on and one.
The problem we have is that if we loose our AAA credit rating we'll ending paying more interest on the money we borrow, which means there'll be less tax payers money available for public spending.
We're kind of screwed either way now. Either we cut spending and risk another recession, or we don't and end up spending more and more money on a bigger and bigger debt.

The article suggests otherwise. It sites three previous recessions in British history where austerity measures were attempted and didn't work. As far as I know, the euro crisis wasn't happening those times.

Osborne loaded us all into the boat, set off down the creek and then threw the paddle over the side.

The problem is that the EU are also following the wrong policy. They have forced tax payers to accept responsibility for the banks losses. That has meant what would have been a short crisis to becoming a decade long mess. They should have allowed all the banks that lent badly to close. It would have left the value of assets considerably lower but that would have been excellent for the creation of new businesses if the premises are a fraction of their previous price. First time buyers would be able to buy homes at sensible prices and not have to worry about being priced out of the market. With the Eu following the wrong policy then it was clear to see that the EU would be stagnant for a decade at least. That means that austerity will be a failure as well.

The government used Canada as an example of successful cuts. Though Canada was still a massive exporter to the US which was booming at the time. So easy to make spending cuts and still grow. If Canada tried that now it would be as bad as the UK.

I believe Iceland is another good example of this, if not more so given how screwed their economy was in 2008.

Loss of AAA rating shouldn't have any immediate effect on bond rates, the buyers will still want the bonds so the prices will stay the same (as has happened already with French bonds). Rates will only rise if there is a glut of safer investments to be had or if the threat of the UK actually defaulting seems plausible - which it does not. So the loss would be mostly to our pride.

The article is sloppy though. It doesn't take into account the drag on UK investment that is caused by businesses and banks hoarding cash as a hedge against Euro breakup, which could happen at great speed. This effect is far greater over here than in America (invalidating his absurd claims about scientific experiments).

It also is too glib in regard to proper responses to external shock. He doesn't appear to understand that there are two shocks here - one happening now with the declining performance of our largest trade partners, the other being their anticipated chaotic meltdown. The second would have such impact on the UK as to count as internal. To be prepared for that is prudent, to the point that it is arguably a mistake for us not to contribute to the Euro bailout funds.

In the event of a Euro meltdown, the UK will need to borrow on a grand scale. Hopefully that shouldn't be too hard to do, as capital flight to safer investments should increase demand for gilts. But it's not inconceivable that investors would instead panic and dump our bonds; the scale of the fallout is incalculable and thus the reaction is unpredictable. So it isn't necessarily a bad idea to have a little austerity now, not least because it indicates that we are capable of more if required. And in the event that our bond yields soar, there would be little hope of avoiding a huge fiscal contraction irrespective of who is in government - look at France, which isn't yet under sustained pressure to see what I mean.

Everybody in 2009 knew all that this was a balance sheet recession characterised by debt. Every economic model includes debt and interest payments in its calculation.To claim otherwise is really very strange.

However the correct approach to deal with it will never be a settled issue because economics is not a science, no matter how much deterministic posturing anyone does. The correct form and scale of stimulus package (or their overall desirability) is impossible to judge up front, and hard even to assess in retrospect. Whether to flush debt by allowing the entire banking system to collapse for a while, or by creating bad banks, or through cheap but slow restructuring of their capital structures, appears to still be controversial (I voted bad bank from the start and I haven't changed my mind). In any case, there will inevitably be unintended consequences - that much is about all that can truly be said with certainty.

The rule of thumb is to let government run up debt while households and businesses flush theirs, then consolidate later with medium term fiscal tightening. I am in favour of that orthodoxy as a rule, but it applies under the usual caveat of all other things being equal. The current recession is not business as normal and to assume otherwise and act accordingly would be folly. I don't think in reality that the circumstances support early austerity, but I am not persuaded by claims that any of you people know for sure it is a bad idea, given that your prophecies include assumptions you cannot possibly justify.

So all we are really learning here is that some people like to pat themselves on the back and exaggerate their own cleverness. The irony of that observation is noted in advance.

The Dunning-Kruger effect. Certain people are a textbook case.

Just seen a Saturday paper preview on a news channel. One of the broadsheets (!) has a panic headline including the phrase 'triple dip recession'.

One thing I love to do when money is tight is spend more, in fact, I like spending money I don't have even when I'm doing okay. Works every time, except never.

I'm no fan of Osborne, but seriously, where is the money to come from that pays for all this [LIFTED] we couldn't afford five years ago let alone now.

What other option than austerity is there? Really, what is the option? Could somebody please tell me how we are supposed to pay for not being austere, because the whole Internet is saying austerity is wrong and maybe I'm a fool, but I cannot see how you can spend money you don't have to pay your way out of a debt ridden situation.

Other than the fact that money is pretty much an illusion, because if we admit that, the whole house of cards comes down.

The direness of our economic situation is overstated. Gordon Brown wasn't perfect, but he didn't run up insurmountable debts. There is plenty of money available for the UK to borrow, and we would if we wanted have a certain latitude to do that without condemning our grandchildren to squalor.

We have the advantage of borrowing in our own currency which means that if the debt ever does get out of hand we can engineer higher inflation to pay it down without technically resorting to austerity at all - that strategy splits the repayment costs between the debtors (us) who have their pay packets skimmed a little and lenders (also us via our pensions, but also lots of foreigners) who get worse returns on their investment.

Inflating away the worst of the debt over the medium term (five to ten years from now) is arguably the fairest and least painful way to do this stuff because it hits everyone in lots of little ways rather than clobbering one set of people. Benefit claimants, and pensioners whose incomes have been decoupled from inflation will no doubt disagree, and if there is the risk of having to push it too far - then good luck finding a lender.

The downsides of using inflation to wash away debt from the government includes that it moves it elsewhere - into corporate and household debt as they are hit by the same inflation. It pushes up yields to make future government debt issue more expensive. It raises costs in the economy without contributing to its ability to add value - which also leads to more debt and basically makes us less competitive in the global market place. And for some, who prefer purity to pragmatism, it is also seen as just cheating. Old timers also tend to be afraid of inflation in and of itself.

Another option is to invest. Still cut that legendary Whitehall flab that every politician in 50 years has promised to do away with (i.e. some kind of austerity now) but don't save the cash, spend it on investments in infrastructure, and borrow on top of that too. The idea being that the thing you buy now is going to generate new value in the economy and so pay for itself indirectly. A road can do that if it reduces the cost of transporting goods from Swindon to Manchester and thus enables new businesses to flourish.

In theory these projects boost demand now (increasing GDP as the otherwise unemployed builders buy stuff), and then the debt they incur at the build stage is returned many times over their useful life. In practice, less of the money goes on wages than once would have been the case, much more on imported machinery, and there are less opportunities for an infrastructure project to really pay off in an advanced economy which already has lots of infrastructure anyway. Worse, you can't build anything sizable in this country without 10 years of arguing and then you have to evict hippies from your building site before work can begin. So the time to make this decision is when you see a recession on the horizon, not when you are in the middle of it.

These problems reduce the positive impact of infrastructure investments. Which is a shame, because we need lots of stuff. New, well designed hospitals with the best facilities would be worth building right now just because they are worth having. They would benefit the economy a lot as it happens, both through generating demand now, and by keeping people healthy and productive for decades to come. The same goes for schools, some of the existing ones look a bit tatty to me. Unfortunately, were we to adopt that plan, we would inevitably use terrible forms of financing that would undermine the project.

So the issue of whether to use austerity now, later or never is not cut and dried. Everyone can wheel out their pet economist to pronounce that their preferred solution is obviously best, because economists - being practitioners of a false science - cannot agree on a method by which to arrive at a truth on the subject. In that respect they are really more like philosophers or theologians.

Although the actual truths that are available are limited. I would point to two that I think are worthy of attention though.
1. The exact benefits of any approach are uncertain, and the precise consequences are incalculable - especially given that we seem to rely on blunt tools such as GDP calculations. So it is unwise to presume that anything is certain.
2. Perfectly sane, clever and decent people are capable of looking at the same evidence as you and coming to different conclusions. This does not invalidate their sanity, intelligence or moral standing. So the fact that somebody does not share your conclusions is not evidence of their being evil, stupid or mad.

Iceland also refused to bail out its banks so its budget deficit did not balloon. So not the same.

They are already trying to inflate the debt away. The Bank of England has not done anything to clamp down on inflation because the real threat is asset deflation and that would wipe out the banks. The level of private debts is enormous and so the only solution is to try and keep the debtors solvent as they pay down their debt. That has been achieved with zero interest rates but it will destroy the savings and pensions for most people.

As far as I can see we're already inflating the debt away.