Don't Try Austerity With Your Creditors

 | May 13, 2013 | 2:00 PM EDT
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The new position amongst economists getting media attention is that "austerity", to use their phrase, does not and did not work.

The European economies are crumbling under the load of reduced government spending, and the US economic recovery is sluggish because we are supposedly not stimulating "enough". The call is now to reverse the "austerity" programs in the hope of belatedly catalyzing higher growth around the world.

There is one small detail the anti-austerians are missing, which I will illustrate with an experiment. I conducted it to boost our family's economic growth, and the result gave me this insight.

As I embraced this idea that reduced borrowing could hurt my own economic condition, I decided to call my credit card companies and demand a higher credit limit. I was maxed out on my cards, and no longer able to use them to go to the movies, eat out, or hit the casino. I could no longer enhance our standard of living by using their funds to create consumer demand. Instead, I trudge to work every day, earn a paycheck and dutifully send in my payment every month. What fun is that?

I then called my mortgage servicer to notify them I am reducing my payment in half. Each month I send in all this money and I basically live in the same house I did 10 years ago. What kind of "growth" is that? I can redeploy those funds to buy new furniture, paint the house and get a cappuccino maker -- all of which will really enhance our family's standard of living. I made the same call to our auto lender, student loan servicer and various trade creditors, such as the cellphone carrier and electric utility.

All of them told me things I can do to myself that cannot be printed on a family website.

So the anti-austerians argue that highly-indebted countries should borrow more and spend it to stimulate growth. The question is: borrow from whom? No sane bond manager would make sovereign loans to bankrupt European countries. The Germans have had enough, and the spigot is going to squeeze shut, probably in four short months when Merkel's government falls. The idea that the highly indebted countries can simply order lenders to loan them more is ridiculous!

The only institutions that could assist in an anti-austerity program are the central banks. The ECB can lend unlimited to Portugal, Italy, Greece and Spain. Of course, they do this by printing money. If the anti-austerians succeed, it will be via the ECB and Euro inflation will accelerate. Hard currencies like the Canadian dollar or gold are your main protection, and I would continue to take up my SPDR Gold Shares (GLD) position if I see this policy outcome on the horizon.

The anti-austerians gracing the pages of the New York Times and other pulpits are misguided because they completely miss the point of "austerity". The idea is not that the economies will start growing instantly again. The idea is that there are imbalances, misallocations of resources and behaviors that must be changed. That happens slowly and only by "force"

When I lose my job at the buggy whip factory, the impending threat of poverty does not lead me to another buggy whip job. It forces me to undergo training to learn to weld auto chassis. I must pass through a painful trough to admit I am obsolete, take the time to retrain and then find new work. The same must happen to government bureaucrats in Greece, housing construction workers in Spain, and redundant farmers in France.

This is a multiyear process to force these people to retrain themselves and start producing something their fellow citizens want. That is where the new economic growth comes from. Loaning them more money so they can remain in these unproductive positions will not restore growth; it will only extend the pain.

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