The following is an excellent explanation on austerity which may help some people understand what's going on.
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HOW TO RUIN WHAT'S LEFT OF THE ECONOMY
OR:
THE MULTIPLIER EFFECT ALSO RUNS IN REVERSE.
Austerity is good for individual families and households - indeed, it is
essential. What's spent by a household goes out of that household and very
little of what gets re-spent out of that household into and beyond the
community finds its way back to that household. Wealth becomes correspondingly
more scarce for the individual or household which spent it and spent for one
service or commodity is no longer available to that individual or
household to spend on something else. Austerity is a good strategy for individuals
and households, keeping back some of that wealth to spend on needs or to
use on better opportunities and investments.
Austerity is disaster for nation-states.
Here is why programs of austerity are wrecking Europe and threatening to
destroy the American economy. Wealth spent within the community gets
re-spent and re-re-spent within the community and some of that re-spending finds
its way back to products or services offered by that household, enterprise
or family. That moves products and services, signals and pulls people and
resources into productive activity and keeps them productive so that more
wealth is being produced. This is the "Multiplier Effect" economists talk
about - how a dollar does the work of several dollars as it passes from hand
to hand in the exchange of goods and services. The more work that a dollar
does - let's say, its passage pulls into play five dollars' worth of goods
and services - the higher is that particular infusion's "money velocity,"
in this instance a value of 5.0.
Austerity means less money in circulation, less wealth being created, less
wealth pulled into play, fewer people and resources being pulled into
productive activities to create that wealth. One hardly needs to be a follower
of the leading economist John Meynard Keynes to understand and appreciate
his analysis of what happened in the Great Depression: that if you take
away people's ability to buy your goods and services, you are not expanding
your market very well!
Austerity programs in Europe have taken away the ability of most people
and enterprises there to buy products and services from each other. Thus the
wealth is not being created there the taxes and revenues from which would
retire the overload of debts which was the reason given for the austerity
demands in the first place. The austerity we have been practicing here in
the States is a large part of why our recovery from the panic of '08 has
been so slow and painful. The austerities forced by our (the USA's) fall over
the fiscal cliff, combined with those forced by our immediately pending
collision with the statuatory debt ceiling, for all that both situations are
artificial having been caused by our short-sighted and reckless political
maneuverings, are likely to do far more damage than anything we have seen
to date. Some Congressmen and some millionaires can play their games and
then move their monies to variously sheltered accounts elsewhere in the
world - the rest of us pay for whatever mistakes are being made.
Nation-states DO need fiscal restraint and responsibility- otherwise, they
soon find that they can't purchase much for their promises. But the
Multiplier Effect also runs in reverse. If the money you withhold and take out
of the economy has a velocity of 5 and you take $100 billion out of the
economy, other things equal, you have reduced the wealth of that economy by a
half trillion dollars. The grocer and his employees can no longer afford
to buy from the baker, the baker and his employees can no longer afford to
buy from the grains and flour wholesaler, who can no longer afford to buy
from the miller, and the farmer likewise, etc. And so the withdrawal of the
dollar whose infusion into the economy does the work of many dollars,
creates the absence also of many dollars when it is withdrawn, and that many
people involved are no longer receiving the returns and signals and
inducements for the productive activities which create wealth.
Prediction: Inflation is going to strike heavily at Europe before, and
much more strongly than, it hits the American economy. Prices spiraling
upward is the result of too much money chasing too few goods and services. A
scan of the media or of the Net has by now shown you dire predictions by
various economic pundits of major inflation hitting the States. Maybe so, but
if so Europe will be much harder hit, because austerity there has rendered
many more of its people and businesses unable to buy products and services
from each other, thus Europe, now in the second "Dip" of the Double-Dip
Recession, is producing far fewer products and services. The third "Dip" will
be when further interruption of productive processes will occur from
resulting social disorders like we saw in the Great Depression. The pity of all
that is that as we head into the new crash, the latest economic reports
were showing that both unemployment and the housing market were finally
healing at a much-improved pace of recovery from the wounds inflicted in 2008,
so that sanity - so often the last thing to recover - would soon have had a
chance to result in rational economic and political decisions and
behaviors. The darkness into which we appear to be headed may instead last for a
very long time.
The more that austerity ruins a nation's economy, the more unsound that
economy appears, and the greater impetus there is toward imposing more
austerity. The outlook for Europe could stand some improvement. If the States
go over the "fiscal cliff" this December 31, or if the USA shuts itself down
in its collision with the statuatory debt limit, our own outlook here can
also stand some improvement.
Any idea or theory or practice or ideology, if extremely pursued to the
exclusion of all other considerations, gives rise to monstrosities. If our
doctrinaire economists and idealogues weren't so tunnel-vision, this lesson,
which should have long since been driven home by our experience of the
cascade of wealth-stream interruptions which gave us The Great Depression and
eventually World War II, this lesson should have been painfully obvious to
any of our experts who have been entrusted with handling such matters.
Let's not be Keynesians or anti-Keynesians, let's simply recognize that in
the affairs of great nations, the Multiplier Effect is a major factor
compared with the situation of individual families and households where wealth
once spent is much less likely to come back to pocket, that you need a
different balance between austerity and investment and that both are needed
together, not in exclusion of each other. "Balance" is the key.
The household that practices consumer restraint and austerity, will tend
to survive, to have preserved some of its wealth for when need arises, and
for when more advantageous purchasing opportunities arise. Where little or
none finds its way back to you once you've spent it, there is no Multiplier
Effect to help you, and practice of austerity - other things equal - is
well recommended. In the affairs of nation-states, the Multiplier Effect is
one of the main elephants in the room, and our doctrinaire and careless
pursuit of austerity sets us up for some pretty severe trampling.
.....win wenger
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