Even if we don’t go over the “fiscal cliff” at year’s end, the cries for governmental austerity will only grow louder. So writes Bob Seawright, chief investment and information officer for Madison Avenue Securities and a contributor to AdvisorOne.
Noting that Augustine famously prayed for chastity, just not yet, Seawright writes that “In much the same way, Fed Chairman Ben Bernanke warns that federal debt and deficits are a real problem. Indeed, he gave a speech on the economy earlier this month and asked Congress to address the issue. But he doesn’t want anything done quite yet.”
Pointing to Europe, he argues that heavy austerity seems to have crippled growth in countries like Spain and Greece.
“With unemployment near Great Depression levels and with middle-class workers reduced to picking through garbage in search of food, austerity arguably appears already to have gone too far. The International Monetary Fund recently released a report conceding that tax hikes and spending cuts can inflict far more damage on weak economies than previously thought. Pretty much everything that has happened economically since the general move from stimulus to austerity, from interest rates to inflation to output, has supported the idea that austerity hurts struggling economies.”
The sad reality, he adds, is that there “is not a lick of evidence” that political leaders would have the “strength and discipline” required to impose austerity when times are good.
“I suspect that austerity will only be palatable and thus achievable in response to a perceived crisis, and a major one at that. A healthier economy does not a crisis make. Indeed, it won’t be seen as a crisis at all; it will be seen as a reward and yet another opportunity to open the piggy bank.”
He concludes by noting, “It’s a major quandary. If we do what is almost surely the right thing in the aggregate, the overall problem is far less likely to be fixed and probably becomes much worse. On the other hand (and ironically), doing the wrong thing by implementing austerity right away will probably provide the better overall result over time.
“But it won’t lessen the near-term pain.”