By Marshall Auerback
Marshall Auerback, born July 27, 1959 in Toronto, Canada, is familiarwith the international scenery of finance firsthand. After graduating “magnacum laude” in English and Philosophy from Queen’s University in 1981 andreceiving a law degree from Corpus Christi College, Oxford University, twoyears later, he was from 1983-1987 an investment manager at GT Management Ltd.in Hong-Kong.
From 1988-91, Mr.Auerback was based in Tokyo, where his Pacific Rim expertise was broadened to include theJapanese stock market. In 1992 he went to New York to ran an emerging markets hedgefund for the Tiedemann Investment Group until 1995. The next four years heworked as an international economics strategist for Veneroso Associates, whichprovided macroeconomic strategy to a number of leading institutional investors.
From 1999-2002, hemanaged the Prudent Global Fixed Income Fund for David W. Tice &Associates, a global investment management firm, and assisted with themanagement of the Prudent Bear Fund. Since 2003 he is serving as a globalportfolio strategist for RAB Capital Plc, a UK-based fund management group with$2 billion under management. He is also co-manager of the RAB Gold Fund and anindependent economic consultant for PIMCO, the world’s largest bond fundmanagement group.
Moreover, he is afellow of the Economists for Peace & Security (www.epsusa.org) andof the Japan Policy Research Institute in California (www.jpri.org).As Braintruster of the Franklin andEleanor Roosevelt Institute, he is afrequent commentator at “New Deal 2.0” (www.newdeal20.org).At present, Mr. Auerback lives in Denver,U.S.A.
They certainly know what“schadenfreude” means in Germany.But the attempt by the German paper, Der Spiegel, to link the UK to the travails of Greece, takes the concept to amalicious and irrational extreme. According to Der Spiegel:
“The British pound istottering. The economy finds itself in its worst crisis since 1931, and thecountry came within a hair's breadth of a deep recession. Speculators arebetting against an upturn. Instability in the banking sector has had a moresevere impact on government finances in Great Britain than in otherindustrialized countries. London'sbudget deficit will amount to £186 billion (€205 billion, or $280 billion) thisyear -- fully 12.9 percent of gross domestic product.” (http://www.spiegel.de)
Sounds pretty, grim, especially given that Britain’s budget deficit iseven higher than those “corrupt” Greeks, whom the Germans also seem so intenton abusing in print and punishing for their alleged fiscal profligacy.
But the article itself is rife with intellectual dishonesty. You cannotmindlessly conflate EMU states– Germany included – which operate with no real fiscal authority as sovereignstates in the full sense – with countries, such as the United Kingdom, whichfortunately has a government with currency issuing monopolies operating underflexible exchange rates (even though the British haven’t quite figured it out).And, as strange as it may sound, public sector profligacy at this time ispreferable to Germanic style prudence, because as the private sector’s spendingand borrowing go into hibernation, government borrowing must expand significantlyto compensate. Even the French Finance Minister, Christine Lagarde, seems tounderstand that fact- http://www.ft.com(and is taking heat from her German“allies” as a result). Her sin? She had the temerity to suggest that Berlin should considerboosting domestic demand to help deficit countries regain competitiveness andsort out their public finances. Noting that “it takes two to tango”, Lagardesuggested that an expansionary fiscal policy had a role to play here, notsimply “enforcing deficit principles”.
Ofcourse, that’s harder to do in the euro zone, given the insane constraints putforward as a condition of euro entry. As a consequence of these rules, the EMUnations cannot even run their own region properly. They have established asystem which has consistently drained aggregate demand and brought increasinglyhigh levels of unemployment to bear on their respective populations. In thewords of Bill Mitchell (http://bilbo.economicoutlook.net):
“Therules that the EU made up and then imposed on the EMU via the MaastrichtTreaty’s Stability and Growth Pact were not based on any coherent models offiscal sustainability or variations that might be encountered in theseaggregates during a swing in the business cycle. The rules are biased towardshigh unemployment and stagnant growth of the sort that has bedeviled Europe for years.”
Havingconspicuously failed to deliver prosperity to their own countrymen, the Germansnow see fit to lecture the UK (after taking out the Greeks, of course) on thegrounds of Britain’s “crass Keynesianism” (in the words of Axel Weber, thePresident of the German Bundesbank).
There is no questionthat the UKhas some unique features which make it more than just another casualty of theglobal credit crunch. It foolishly leveraged its growth strategy to the growthin financial services and is now paying the price for that misconceived policy,as the industry inevitably contracts and restructures as a percentage of GDP.This structural headwind will no doubt force the UK authorities to adopt an evenmore aggressive fiscal posture than would normally be the case. This ispolitically problematic, given that the vast majority of the UK’s policymakers (and the chattering classes in the media) still cling to the prevailingdeficit hysteria now taking hold all over the world. But the reality is thatthe UK has considerablygreater fiscal latitude of action than any of the euro zone countries,including Germany.
Let’s go back to first principles: In a country with a currency that is notconvertible upon demand into anything other than itself (no gold"backing", no fixed exchange rate), the government can never run outof money to spend, nor does it need to acquire money from the private sector inorder to spend. This does not mean the government doesn't face the risk ofinflation, currency depreciation, or capital flight as a result ofshifting private sector portfolio preferences, but the budget constraint on thegovernment, the monopoly supplier of currency, is different than what most havebeen taught from classical economics, which is largely predicated on the notionof a now non-existent gold standard. The UK Treasury cuts you a benefits check,your check account gets credited, and then some reserves get moved around onthe Bank of England’s balance sheet and on bank balance sheets to enable thecentral bank (in this case, the Bank of England) to hit its interest ratetarget. If anything, some inflation would probably be a good thing right now,given the prevailing high levels of private sector debt and the deflationaryrisk that PRIVATE debt represents because of the natural constraints againstincome and assets which operate in the absence of the ability to tax and createcurrency.
UnlikeGermany, or any other EMUnation, there is no notion of “national solvency” that applies here, so theidea that the UK shouldfollow Greecedown the road to national suicide reflects nothing more than the traditionalGerman predisposition to sado-monetarism and deficit reduction fetishism. Acommitment to close the deficit is also what doomed Japan throughout most of the 1990sand 2000s, when foolish premature attempts at “fiscal consolidation” actuallyincreased budget deficits by deflating incipient economic activity. Why wouldyou tighten fiscal policy when there is anemic private demand and unemploymentis still high?
RememberAccounting 101 (http://www.newdeal20.org). It is the reversal of trade deficits and theincrease in fiscal deficits, which gets a country to an increase in net privatesaving, ASSUMING NO STUPID SELF IMPOSED CONSTRAINTS along the lines proposed byGermany under the Stability and Growth Pact (which should be re-christened the“Instability and Non-Growth Pact”). Ideally, we want the deficits to beachieved in a good way: not with automatic stabilizers driving the budget intodeficit because unemployment is rising and tax revenue is falling as privatedemand falters, but one in which a government uses discretionary fiscal policyto ensure that demand is sufficient to support high levels of employment andprivate saving. That in turn will stabilize growth and improve the deficitpicture. Once this is achieved, any notions of national insolvency (or more“Greek tragedies”) should go out the window.
The UK can do this,even if its policy makers fail to recognize this. But not in the eyes of DerSpiegel, which warns that “tough times are ahead for the United Kingdom, so tough, in fact,that none of the parties has dared to say out loud what many in their ranksalready know. At a minimum, Britons can look forward to higher taxes and fees.” And much lower growth if that prescription is followed.
We suspect that many in Germanyand the rest of Europe understand this. So onehas to query what other motivations are at work here? Clearly, callingattention to the state of Britain’spublic finances and drawing specious comparisons to Greecein effect invites speculative capital to take its collective eye off the eurozone and focus it on the UK.Given that the alleged “Greek solution” proposed recently by the EuropeanCommission does nothing to resolve the country’s underlying problems, itbehooves the euro zone countries to draw attention elsewhere before theircollective resolve to defend their currency union comes under attack again.
And heaven forbid that the UK was actually successful(admittedly unlikely today, given the paucity of British political leaders whotruly understand how modern money actually works). If Her Majesty’s Government spending actually managed to conductfiscal policy in a manner which supported higher levels of employment and amore equitable transfers of national income (via, for example, a government JobGuarantee program - http://bilbo.economicoutlook.net) then what would be the response inthe euro zone? Wouldn’t this cause its citizens to query what sort of boguseconomic “expertise” that has been fed to them from their technocratic elitesover the past two decades? The same sort of neo-liberal pap fed to the US courtesy ofgroups such as the Concord Coalition.
Noquestion that public spending should be carefully mobilized to ensure that itis consonant with national purpose (not corporate cronyism). But the ideaperpetuated by Der Spiegel that the government is somehow constrained bysome self imposed rules with no reference to the underlying economy is comedyworthy of a Brechtian farce. Unfortunately, this particular German jokeis no laughing matter.
