Greece's newly elected leftist Prime Minister, Alexis Tsipras, is bringing
deficit spending back into vogue. The charismatic prime minister laid out
plans to dismantle Greece's "cruel" austerity program, ruling out
any extension of its international bailout and setting himself on a collision
course with the European Union. Unabashedly candid, he has burst on the scene
as the veritable anti-austerity rock star; serenading fans with a return to
big spending, including a raise in the minimum wage and pensions.
However, one can argue that the last five years of Greek austerity has
started to pay off. The nation has swung from a hefty deficit, which drove
the 10-year Note to 40% in 2012, to now displaying a small primary surplus,
equal to 2.7% of GDP. The country's deficit had been a whopping 10.7% of GDP
back in 2009. Unfortunately, positive debt metrics have provided little
solace to the average Greek voter. They believe austerity has come with too
large a price, as the unemployment rate has risen to 26% and half of all
young people are out of work. The soaring interest rates of 2012, which
manifested from their fiscally irresponsible ways, are now a distant memory.
Low growth and high unemployment have caused the well intentioned plans of
frugality to go extinct.
This brazen call to end austerity and return to profligate spending is
spreading in Europe like wild fire. In Spain, tens of thousands of people
protested against welfare cuts in rallies led by the left-wing movement
Podemos--which is now leading the polls in Spain's elections this year.
Meanwhile Italy, which like Greece suffers from a stagnant economy,
astronomical youth unemployment, and has a debt load that is 132% of its GDP,
is hoping Greece is leading the way towards the exintction of austerity. If
Italy were to team up with Greece and other debt-strapped eurozone countries
such as Portugal and Spain, it could pressure the E.U. to ease austerity
measures and adopt more fiscally expansive policies. These debtor nations
could threaten to default and leave the E.U. and the euro; thus creating
massive bank runs and economic chaos across Europe.
This anti-austerity sentiment appears to be gaining momentum even in the
core nations of Europe. France's President Francois Holland is suffering
under high unemployment and has asked for a time-out on austerity. Even the
president of the European Commission recently questioned the usefulness of
austerity, noting its results so far have only been shrinking growth and
social suffering.
Austerity in Europe is on life support, but the insatiable desire to spend
is not limited to just Europe. President Obama released his latest budget
that is choc-full of spending goodies for Americans to feast on. Unlike last
year, when Obama was seeking a fiscal bargain with Republicans, this year's
proposal contains no spending compromises. Gone is the request for chained
CPI, an offer to reduce the benefit increases for Social Security and other
federal social programs. The spending restraints that existed during 2010
have vanished; such as the sequester cap on federal spending. These fiscal
restraints have been supplanted by a host of freebie proposals including
"free" pre-school and college.
Seduced by low interest rates, governments all over the globe are yearning
to return to their former big spending ways. Using the cover derived from
lower deficit to GDP ratios--caused by record-low rates--politicians are
emboldened to return to their first love...deficit spending. For example, the
interest payment on the national debt in the U.S. is lower today than it was
during 2008, despite the fact that the national debt is $9 trillion higher.
However, this renewed prerogative to spend money ignores some important
facts, the biggest being; what will happen when interest rates return to
normal levels?
When interest rates rise above theses currently manipulated low levels,
not only will payments for debt service soar, but the asset bubbles created
by central banks over the past seven years will burst. The problem being,
much of the phony GDP growth that has occurred in the developed world since
the Great Recession ended came from the building and servicing of these same
asset bubbles. Therefore, the combination of crumbling GDP and rising
interest payments will cause deficits as a percentage of GDP to skyrocket to
an even worse level than what occurred during the Great Recession.
The nominal level of debt in the world has soared by over 40% since 2008.
We are now set up for colossal and unprecedented deficits in the developed
world once rates rise and faith in central banks fails. The additional
spending proposed by politicians, which has been emboldened by phony interest
rates and GDP growth, will only exacerbate the situation. After the
inevitable collapse occurs, we will hopefully be forced to take austerity off
the endangered species list for good.
