According to Ambrose Evans-Pritchard of the Telegraph
Published: 5:40PM BST 18 Jul 2009:
Fiscal ruin of the Western world beckons
For a glimpse of what awaits Britain, Europe, and America as budget deficits spiral to war-time levels, look at what is happening to the Irish welfare state.
Events have already forced Premier Brian Cowen to carry out the harshest assault yet seen on the public services of a modern Western state. He has passed two emergency budgets to stop the deficit soaring to 15pc of GDP. They have not been enough. The expert An Bord Snip report said last week that Dublin must cut deeper, or risk a disastrous debt compound trap.
Ambrose approves of the McCarthy advice while acknowledging Richard Koo’s argument that stimulus is vital too but foolish capital spending is not.
There was a case for an emergency boost last winter to cushion the blow as global industry crashed. That moment has passed. While I agree with Nomura’s Richard Koo that the US, Britain, and Europe risk a deflationary slump along the lines of Japan’s Lost Decade (two decades really), I am ever more wary of his calls for Keynesian spending a l’outrance.
Such policies have crippled Japan. A string of make-work stimulus plans famously building bridges to nowhere in Hokkaido has ensured that the day of reckoning will be worse, when it comes. The IMF says Japan’s gross public debt will reach 240pc of GDP by 2014beyond the point of recovery for a nation with a contracting workforce. Sooner or later, Japan’s bond market will blow up.
Error One was to permit a bubble in the 1980s. Error Two was to wait a decade before opting for monetary “shock and awe” through quantitative easing.
and his stern advice …
The imperative for the debt-bloated West is to cut spending systematically for year after year, off-setting the deflationary effect with monetary stimulus. This is the only mix that can save us.
This raises a question for Ireland. As Ireland cannot use the quantitative easing mechanism under EMU, how can it balance spending cuts with a monetary stimulus? Will the ECB employ QE in sufficient strength to be effective and will it lend directly to member state governments without washing funding through insolvent banks? And if it were to do so, what is to stop the Irish government spending generously on electorally sensitive sectoral groups (like public servants or farmers) or on building motorways and airports to cater for a future of abundant cheap energy, which will never exist ?
At least bridges to nowhere were obvious expressions of make work policies.
