The Global Austerity Disease

August 30th, 2015
in Op Ed

China's Stock Market Tumble and the Outlook for the Global Economy

by L. Randall Wray, New Economic Perspectives

Interview of L. Randall Wray by Dasha Chernyshova, Moscow reporter for the Sputnik News Agency

Follow up:

Q: In simple terms, how is the slowdown in China affecting the Eurozone?

A: I think the impact is overstated. China is still growing relatively rapidly. Her consumers enjoy rising incomes. They want high quality foreign manufactured goods-prestige goods, luxury goods. Over the short run, the Eurozone will still enjoy positive growth of Chinese demand. The bigger impact could be on commodities exporters (Russia, Brazil). China is learning how to economize on use of natural resources in her attempt to move toward sustainable growth.

However, over the long term, the EZ faces huge problems-some of their own making, and some that have to do with movement of jobs abroad. China will get some of the jobs, but Eastern Europe and Southeast Asia will get more. And robots will be the biggest winners as manufacturing increasingly succumbs to robots. China will lose more jobs than Europe-this is a global phenomenon. It is relatively easy to resolve through government creation of replacement jobs-largely in the public services and in infrastructure investment-but governments won't do it out of fear they'll "run out of money".

Finally, you must understand that stock markets neither reflect economic activity nor impact economic activity. They are simply spheres for wild speculation. In the US the average holding period for stocks has fallen to less than a year-even lower than in 1929 before the stock market crash. The Chinese stock market is fueled by speculation on steroids. Lots of Chinese middle class households have extra cash and want to get rich quick; this is money they don't need. They can lose it without much if any impact on their lifestyles. Of course they are now mad that the government cannot seem to do anything to stop the fall-but it won't have much impact on their spending.

Q: Given that the stock markets continue to slide into negative territory, do you think the problems lie in the Fed monetary mismanagement or China causing pain to others via yuan devaluation?

A: When a stock market is driven by speculative fervor, anything can set off sales. Yes, the currency devaluation (which itself followed pressure on export sales) might have been the spark. But any news or rumor could have started the sell-off. Note that the US stock market is similarly driven by speculation plus corporate stock repurchases (to fuel value of executive stock options) to euphoric heights. So it, too, can easily be turned around.

Q: Is Eurozone prepared for another crisis?

A: No. The EZ has proven itself incapable of responding to crisis. The only thing we can say that is positive is that some within the EZ have come to realize that the EZ as structured cannot respond to crisis. While it looks like we have a Greek problem, we actually have an EZ problem. Country after country will face attacks until finally the center-Germany-cannot hold. The euro was designed to fail; it is not a sustainable system-and unsustainable systems ultimately implode.

Q: In this regard, what about eurozone's quantitative easing program?

A: A narrowly defined QE program will have as little effect in the EZ as it had in Japan (for 20 years) and the US more recently-zip, nada. If the ECB goes out and buys troubled sovereign debt-which is actually disguised fiscal support-it can have a positive effect. This goes against the ECB's DNA-and so far it has been done by the ECB (and other Troika members) only reluctantly and with strings attached (austerity). Fundamentally, QE is all about taking earning assets out of the banking system and substituting lower interest earning assets. Why would that help anything? It won't. Only if QE focuses on buying trashy assets that face default would it do any good-and it would do most good by taking government debt out of the markets.

Q: Overall, what should we expect for Eurozone by Christmas time?

A: Forget Santa Claus-he's not coming. Politics trump all decisions right now, and the politics of the "winners" (mainly Germany) dictate forcing more austerity on all the losers (approximately four-fifths of all the members). This will not end well. Eventually it will drag down Germany too-as her markets stumble. And there is no way German workers can win the eventual race to the bottom-against the east and far east. Will all of this happen by Xmas? Probably not. Expect more disappointing growth from the EZ and more wild fires that will trigger reluctant support with more austerity demanded.

Q: What about the US economy? What is the impact on the US recovery?

A: The US is the world's consumer of last resort. Slower US growth (which is already in evidence) makes things worse for the rest of the world. So I'd put it the other way around: if the US continues to falter, global prospects are worse. The US can-if it wants to-continue to recover and that would help the rest of the world. Will she choose robust recovery? I do not think so. The austerity disease has taken hold in Washington, too.

To put this in highly technical terms, we're all pretty much screwed.









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