They chose the rock
In previous letters I have been empathetic toward our American friends because they are between a financial rock and an economic hard place. Greece, Ireland, Italy, Portugal, Spain and now France all occupy the same rocky ground. They all owe too much money.
They hope to muddle through this problem by (a) stimulating their economies so they can continue to make their loan payments, and (b) introduce austerity programs to cut back expenses so they will have extra money to make their loan payments. Of course, these two policies are exactly opposite: how can a country do both? Hence, they are all between a rock and a hard place.
In August 2011, the Americans, with grandiose flair and pizzazz, chose austerity. When President Obama was first inaugurated, he inherited the exact opposite; a stimulus package started by the George Bush Republicans in response to the global banking crisis of 2008/9. The stimulus didn’t work, and the President got the blame for continuing economic weakness. Earlier this summer, the Republicans did an about turn and pushed for cut-backs. As a Canadian, I am fascinated by how skilfully the Republicans are instituting their agendas – stimulus in 2008/9 and austerity now. The politics is fascinating, but the economics is inevitable. The debt expansion game is over. Countries can no longer borrow their way to prosperity. It’s pay-back time.
It’s always fun for commentators like me to sit back and pretend we know all about the problems of state and of economics. But wise words aren’t going to help those who owe too much – or those who loaned them the money. Now that pay-back time has arrived, we don’t need knowledge or words; we need money. And, ironically, in modern economies, money is created by bank lending. The very process that caused the problem is the solution.