“When faced with the choice between changing one’s mind and proving that there is no need to do so, almost everyone gets busy on the proof.”
This brilliant quote from economist JK Galbraith just about sums up why individuals and organisations tend to stick to plan A when the evidence suggests that Plan A isn’t working. No one likes to be proved wrong but, ultimately, the worst thing we can do when our world view turns out to be flawed is stick to it. Yet this is precisely what many of us do.
Given this general observation, it was fascinating to see the IMF conclude last week, with its influential world economic outlook, that it might have got its basic economics wrong. If not quite apologising for leading half of Europe up the economic garden path, the IMF has at least admitted that what we have been arguing for years in this column is right. For the first time, the IMF conceded that austerity doesn’t work and, not only does it not work, but it is counter-productive.
The implications of this concession for the continuation of the ‘austerity at all costs’ policy are enormous – and may prove to be the first chinks in the armour of the troika.
Christine Lagarde’s IMF noted in its global outlook that the world economy has slowed down more rapidly than it had expected, and its experts asked themselves why had they got it so wrong yet again. Given that the main pillars of Irish economic forecasting – the Department of Finance, the Central Bank and the government’s own fiscal advisory thingy – all subscribe to the IMF’s original view of how the economy works, this volte face by the IMF is not merely academic.
So the IMF asked itself what was going wrong with its economic models which, yet again, got the projections so wrong. Remember, this is the organisation, along with the ones mentioned above, that didn’t foresee the greatest crash in recent economic history.
The nub of the issue is what economists call the size of the fiscal multiplier. This concept relates to how much a cut in government spending or increase in taxes affects the rest of the economy. If it doesn’t have much impact, this would be a small multiplier and mean that a country could cut government spending and not be affected so much because the private sector would take up the slack.
This is what the IMF believed up to now. But last Wednesday, it admitted that it may have been wrong. It admitted that the private sector, reeling with too much debt and no access to new funding, might not be taking up the slack at all.
It’s worth looking at what the IMF itself had to say about issues in the report because it reveals the evolution of thinking at the institution that, more than most, affects Irish economic policy. Here’s the direct quote:
“With many economies in fiscal consolidation mode, a debate has been raging about the size of fiscal multipliers. The smaller the multipliers, the less costly the fiscal consolidation. At the same time, activity has disappointed in a number of economies undertaking fiscal consolidation. So a natural question is whether the negative short-term effects of fiscal cutbacks have been larger than expected because fiscal multipliers were underestimated.”
After pages of charts and numbers, and probing into what exactly happens in an economy like Ireland’s, when the government slashes spending, the IMF concludes: “These results suggest that actual fiscal multipliers were larger than forecasters assumed. But what did forecasters assume about fiscal multipliers? Answering this question is complicated by the fact that not all forecasters make these assumptions explicit. Nevertheless, a number of policy documents, including IMF staff reports, suggest that fiscal multipliers used in the forecasting process are about 0.5. In line with these assumptions, earlier analysis by the IMF staff suggests that, on average, fiscal multipliers were near 0.5 in advanced economies during the three decades leading up to 2009.
“If the multipliers underlying the growth forecasts were about 0.5, as this informal evidence suggests, our results indicate that multipliers have actually been in the 0.9 to 1.7 range since the Great Recession.”
Wow! Just take this in for a moment.
This means that the IMF now admits that the impact of cutting government expenditure on economic growth, demand and unemployment is twice as much as it had thought – or maybe more.
The reason for this as the column has been arguing all along, that Ireland and Europe are experiencing an old-fashioned liquidity trap made worse by vicious deleveraging, which is destroying asset prices. Imposing more austerity simply doesn’t work.
The main reason for this is what Keynes described as the paradox of thrift. Most of us are employed buying and selling to each other. Therefore, your spending is my income and my spending is your income. My income is also the root of my savings. But if we all save at the same time, who is spending? And if no one replaces our spending, then demand will keep falling.
Retailers react to falling demand by cutting prices to coax us to spend. But the very fall in prices convinces people that prices will fall further, and the bargain will come next month or next year. So the laws of economics are turned on their heads. When prices fall, demand doesn’t go up; it goes down.
Balance sheets are broken because, on one side, we have assets – houses, bonds, land and apartments – which are falling in value but, on the other, we have debts, which are fixed.
At a time when income is falling due to rising unemployment and taxes, this means the debt burden is getting heavier every day relative to income.
As a result, people with savings are saving yet more. Those with debts are trying to pay them down.
People don’t want to borrow because they have too much debt, and banks don’t want to lend because they have too much bad debt. Yet the deleveraging is destroying their capital base, too. Again, the paradox is that deleveraging my balance sheet might make my position better, but when we all deleverage at the same time, we drive down asset prices further, demanding yet more deleveraging. If everyone is saving, who is spending? The rise in government spending is the logical reaction to, not the cause of, the liquidity trap.
As demand falls, real wages don’t fall because those with jobs protect themselves and the adjustment comes via unemployment. Irish unemployment has more than trebled in four years.
So, austerity becomes self-defeating – and can’t work.
The IMF now admits this and, interestingly, the implication of this realisation is that the fiscal compact we enthusiastically signed up to will destroy Europe’s economy.
This change at the IMF is significant. A few weeks ago, this column suggested that the only way out of Europe’s growth mess would be a huge fiscal expansion. The IMF now seems to agree.
It is well understood that economic models are very similar to weather prediction models: they MAY give a reasonable result in the short term, but are unreliable in the long term – this is proved. What get’s me is that the economists, who should know better, seem to deliberately forget this. And, as clearly elucidated by DMW in this article, the other key part to any mathematical model (and let’s be clear: this is what we are talking about here) are the assumptions made at the outset. When modelling complex nonlinear systems, there are usually some key factors, usually “estimated”,… Read more »
This is likely to play out same as the whole Saddam and the WMDs episode. Millions knew that all that was BS!
No! We’re going to fiscal war regardless of any facts!
That dye has been cast!
Re: “When faced with the choice between changing one’s mind and proving that there is no need to do so, almost everyone gets busy on the proof.” from above: Quote from Karl Whelan in Forbes: “The WSJ story supplies a really depressing explanation for why the Eurogroup of finance ministers disagreed with Mario Draghi’s assessment that bail-in tools needed to be used when resolving the Spanish banks. a chief reason ministers decided not to make more privileged bondholders take losses was the Irish precedent, two people said. Dublin has had to pump more than €60 billion, equivalent to around 40%… Read more »
Dogs in the street know this is not working, but when the crooks are pulling the strings and the public trustee’s don’t have the balls to stand up to them we have no chance. IMF is a smart organisation, they are rowing back because they know they have pushed societies to the brink and it is evident that we will all go over the edge with this current plan, once we go over the edge there is no way back. I have been shouting for a long time what my father told me, “you cannot repay debt by borrowing more… Read more »
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This might appear as Keynesian logic. I am not convinced anyone here endorses Keynes (nor Hayek). But trying to triangulated between these will fail. JK Galbraith was an FDR collaborator, where Keynes was rejected. Unless a huge amount of synthetic debt is declared null and void, and I mean synthetic derivatives, the only result of massive money printing will be hyperinflation. The Triple Curve shows (without fancy “multipliers”) graphically whats happening : http://www.larouchepub.com/lar/2002/2903trip_curve.html We have now Bernanke and Draghi in full “helicopter mode”. This tsunami of cash will reach Irish shores just as London shoves its operations to Dublin. Are… Read more »
David,
The notion that the IMF in anyway got it wrong on austerity like they are telling us all is simply insulting and disgusting.
This is a PR stunt on behalf of the IMF.
IMF work as a partner with The Fed and BoE etc and all sing from the same 1694 central banking system hymn book of tricks, piracy and plunder.
and there was I thinking that it would be necessary to go out and improve the economy, when all we need to do is borrow a few hundred billion and the economy will recover to the state it was in in 2006. The reason that 99% of professional economists didn’t see anything wrong with the economy in 2007 was simply that they believed, and still do, that economies can avoid any recessions if demand is sustained by government borrowing. They assumed that this would be done, in the way that the ‘Greenspan Put’ had got rid of any threatening downturns… Read more »
The IMF didn’t see the crash coming.. really?!
It planned it! along with it’s globalist banking demons cabal
SDR’s one world electronic currency = total control. ORDER OUT OF CHAOS. It’s how they work. Don’t be fooled. NO escape if they get their way.
Watch Arron Russo http://www.youtube.com/watch?v=O6ayb02bwp0 start just over 1 hour in – first hour is mainly concerned about income tax in america
“When faced with the choice between changing one’s mind and proving that there is no need to do so, almost everyone gets busy on the proof.”
I wonder was Galbraith married at the time or was he reflecting on the time his wife first proposed to him and he decided to extend his batchelor hood before taking the deep plunge .
Marriage and Fiscal issuance go hand in hand all the way to the Alter ( Bank)
All economic models are horseshit. According to chaos theory you can never have the correct starting points and therefore all simulations are prone to different results.
Check out “The Secret Life of Chaos”.
It’s all one big con and the only thing that’s going to Change things is mass revolt anything else is window dressing .
When you do the maths and see and hear with open minds about what’s gone on and what’s going on and what’s comming the majority of people and the ones going to behit past present and future,need to rebell or face the fact that so many are going to pay for so few.
The only real way out of “Europe’s growth mess” is to sort out the debt problem. This can only be done by some sort of restructuring involving some sort of debt forgiveness and/or defaults. If “huge fiscal expansion” actually worked then Zimbabwe and Argentina would be two huge success stories. I’m afraid we have reached the endgame for this Keynesian experiment in growing our way out of debt saturation. New ideas are needed in eliminating all this debt and they will have to go beyond this flawed “growth” model which is over. A choice in the currency we can use… Read more »
got to side with the radicals on this one,
the imf have been at this for years, and to assume that they were surprised by this outcome seems honestly way beyond belief. we need to stop trusting all financial establishments.
yup all.
this is theft.
its not an accident.
You are not alone. The New Zealand Treasury continues to have difficulty letting go of failed neoclassical economic models and has similar difficulties getting its forecasts within cooee of reality. Perhaps there’s too much clever maths and not enough humility within the ranks of economists worldwide?
I seem to recall the IMF repeatedly warning that the Irish Housing market was overvalued.
Euro Will Explode with a Big Bang Oct. 15 (EIRNS)–Ludwig Poullain (92), the eminence grise of German banking, longtime former CEO of West LB, wrote in an op-ed for the {Cicero} monthly magazine, that he is firmly convinced that the euro system does not have the slightest chance of survival. “All rescue packages so far have proved useless, and they will continue to be so. The money paid is gone, the euro rescue one big fiasco,” he wrote. “Even before there is a rescue action for Italy, we will experience a giant blow, something like a currency-policy big bang which… Read more »
Galbraith from 2009 on Obama’s Supercommittee : The USA and Europe are run by a tutor-cracy and faux-politics to exploit the alleged debt crisis to dispose once and for all of the welfare-state. Democratic economist James Galbraith, in an interview with the Italian daily Il Messaggero published Aug. 9. Asked whether the super-committee will give the right suggestions, Galbraith says: “For God’s sake! It will be a Junta, a body without legitimacy. It would be better to leave decisions to Members of Congress; true, they quarrel even in a dirty way, but eventually they must always be accountable to their… Read more »
´´a huge fiscal expansion´´ will screw the savers/pensioners and reward those who took on unsustainable debt´´. Survival of the weakest.
´´those with jobs protect themselves´´ Known in Ireland as the Croke Park agreement. Solution – half their wages and use the savings to build infrastructure which gets the builders off the dole. Same amount of money sloshing around in the economy and a lot more hope.
Some are so locked up in the dead-end Keynes v. Hayek zoo, that the world simply passes them by. Now see what vulture funds are all about today : Argentina: “We will Not Cede Sovereignty to the Vulture Funds” Oct. 15 (LPAC)–So stated Argentina’s Foreign Ministry in an Oct. 12 statement, responding to the offensive by the City of London’s predatory vulture funds which seized the naval frigate Libertad on Oct. 2 as it docked in a port in Ghana, a country notorious for its subservience to the British Empire. The frigate remains embargoed in Ghana at the behest of… Read more »
Dear David This article is tosh – not because the analysis is off but because of the basic premise that the IMF are honest economic brokers is absolute rubbish. Again David you fail to see that its not that the IMF are stupid – this stuff is proceeding according to their plan. About a year ago you were predicting the demise of the Euro and if I remember correctly I and others stated that the Euro was planned as a means to an end – the end being an undemocratic united states of europe and that it wouldn’t fail as… Read more »
No sign of a chink in the Troika Golem armor here. Is it running on autopilot? Troika Drives Portugal to the Brink of “Blowing Up” Oct. 15 (EIRNS)–Three leading Portuguese political figures have warned in the last week that their country is at the point of blowing up, under the Troika’s austerity policy. The government’s presentation today of its 2013 budget plan, denounced by the Socialist Party as a “fiscal atomic bomb,” and sparking dissent even in the ruling party’s coalition partner, the CDS, already provoked the first clashes between police an protestors in weeks of protests in front of… Read more »
A sort of dissappointing article as it fails to challenge the fundamental premise that mere fiscal reflation will do anything useful. Let’s really understand why the IMF are sweating: The original austerity plan is starting to blow the whole banking system and their elite to confetti and the endgame is coming a tad too uncontrollably at them. The next trick is to spawn a new ponzi scheme to quieten the masses before they truly wake up. That’s all that is going on. Galbraith’s quote applies to us all including the belief in this article that mere monetary policy alone can… Read more »
To me, the question is not so much about debt itself, but about the use to which the borrowed money is put: Prof Hyman Minsky described three types of debt, each of which pushes an economy to a crisis: Hedge debt, Speculative debt, and Ponzi debt: – The first is ‘good’ debt – a company borrowing to increase the production of something, and paying off the capital and interest from the proceeds of the activity. – The second is less good – essentially used to fund turnover which never creates enough to pay off the capital sum, which needs to… Read more »
David what happens when the bust comes ,who’s going to lose out in terms of the people who funded the thing in the first place.
Do the government know how bad things are out there if they do and they make things harder for the low to middle class in the December budget,this will prove how devoid they are from the people who elected them. Electric Gas Oil Food Toll charges The basic things if increased like the above will drive the people over the edge. I am tired of hearing about how we have turned a corner and the little signs of growth . When you here the large job numbers comming you don’t here about all the small amount of job losses add… Read more »
Molly they couldn’t care less
My biggest fear about Kilkenomics is that the speakers will be of the kind mentioned as not willing to raise their head for a look around. Last year the speakers at MaGill Summer School were the same old same old party line. I remarked to a friend that if the country was relying on such to solve the problems there was no hope. I will attend what I can in Kilkenny and hope to be illuminated and proven incorrect in my fears. I am hoping to hear DMW suggest that a good start is to close the Central banks, ban… Read more »
Glaspre-L-enspiel
Hi, This is a benign enough article in that it’s a rehash of what’s been said before. What’s important is the fact that events have proved your analysis correct. Buachaill maith David. What I am really looking forward to is seeing if the IMF changes it’s cuts at all costs policy now that it knows it’s the wrong thing to do. It will be interesting to see if Mr John Perkins is proved correct in his analysis David won’t it? I sincerely hope I am proved wrong but I think they will keep cutting. I sincerely hope Perkins is wrong… Read more »
Mexico wakes to reality Recently Mexico announced it had purchased 92 tonnes of gold to add to its reserves. An investigative reporter has obtained information that the gold purchased was likely a paper promise or worse that the sale appeared to be real when in fact that same gold has already been sold to several others. Loosely termed fractional reserve banking in gold–otherwise known as criminal fraud if we tried the same thing. Worse still most of Mexico’s gold is held in London and likely already hypothecated. Another word to describe gold sold to others, leased out or otherwise disposed… Read more »
The government, the auctioneering “profession” (sic), RTE and The Irish Times have been talking up the real estate market recently. Yet, here are some very serious statistics from Davy http://www.davy.ie/LR?id=5936 [ Data on arrears in Irish buy-to-let (BTL) lending were released for the first time yesterday in a speech by Central Bank regulator Fiona Muldoon. As we expected the 90+ day arrears rate for BTL lending at end-Q2 2012 was 20%, twice the rate for owner-occupiers, at 10.9%. Also, almost two-thirds of BTL loans in arrears have been so for more than 180 days, compared to around 50% for owner-occupiers.… Read more »
The gold market almost awoke to reality. Not enough physical to meet demand.
http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2012/10/16_London_Trader_-_Bullion_Banks_Had_To_Halt_Golds_Advance.html
David
There is a wider problem as the posts here point out, but I agree with your article. Austerity is leading to disaster and that policy (which you criticized from the start) needs to be changed. You have to start from where you are.
David, I really did not enjoy this article at all and let me tell you why. From your article somebody might conclude that what is going on in economy is somehow different what is happening in the last 50 or more years. Somebody might think Austerity is something really big, while I did not see it that way at all. They do not do anything substantial to make me think, like you did above. IMF is not changing their mind, it is the same policy they had, pushing credit expansion, talking about aggregate demand, multipliers and other nonsensical constructs. You… Read more »
‘The IMF now admits this and, interestingly, the implication of this realisation is that the fiscal compact we enthusiastically signed up to will destroy Europe’s economy. This change at the IMF is significant. A few weeks ago, this column suggested that the only way out of Europe’s growth mess would be a huge fiscal expansion. The IMF now seems to agree.’ Fiscal policy as I understand it relates to things governments do to stimulate or slow economic activity but do not include monetary policy. Things like taxation, duties, subsidies, & government spending. These things are still largely the preserve of… Read more »
[…] full article at source: http://www.davidmcwilliams.ie/2012/10/15/waking-up-to-reality […]
Everybody take a look at this graph it says everything I want to say! Were already worse off than the Greeks : http://thepressnet.com/2012/10/16/were-already-worsr-off-than-the-greeks/
Default – because in the end, in reality, There Is No Alternative to default.
The ECB, and EU commission, and G-Sucks gang in Pennsylvania Avenue are completely against default.
But in the end, Default is unavoidable.
And until it comes, the people will suffer in Ireland, Greece, Spain and elsewhere.
Waking up to Reality In this article I am reminded of a waking up to an ‘afterlife ‘- an eternity of bliss and family reunions a place of all fluffy clouds , choral music and hot young angels . How nice it is to trumpet this transcedent experience – an odyssey – a Judaeo – Christian model. Alas! I have a memory so I don’t want to wake up or do many others either. Should we do we will all wake up psychotic , angry , confused , and wanting to ‘go back’ or as David said ‘ busy on… Read more »
There is no austerity being applied to the Anglo Bondholders !!!!
Dublin Airport Authority, with massive debts thanks to the T2 debacle. There is no finer example of what David calls “the good room” with expensive furniture and linen curtains, than T2. It is “the good room” of Ireland. Never mind the towns where it is not safe to walk the streets at night. Never mind the suicides of small business operators. Never mind the rampant substance abuse. Ireland can have a nice shiny face, and be highly pretenscious in T2. No wonder Ryanair avoided it (apart from the cost issues there). And now the DAA are paying pensions that would… Read more »
Something is afoot : Looks like Sandy Weill is right there is no hope for the banking system without Glass-Steagall. Citibank CEO Forced Out; `FDIC Was Ready To Shut This Bank Down’ Oct. 16, 2012 (LPAC) — Numerous sources report that the resignation of Citigroup’s top management on Tuesday morning was a purge, despite ousted CEO Vikram Pandit’s multiple interviews later in the day, in which he claimed that he chose the right time to leave, etc. Pandit and president John Havens, what was sometimes called the “Morgan Stanley group” running Citigroup, left with immediate effect, with their departures announced… Read more »
For those Tigers still lingering in a Greenie fantasy land, look at this Germans Increasingly Enraged about Rising Energy Prices Oct. 16, 2012 (EIRNS)–Outrage among the German population about the rising electricity prices is set to rise, after yesterday’s announcement that the renewables tax on power consumption will increase from EU3.6 cents to EU5.3 cents. This special tax, which is to finance the expansion of so-called renewable energy sources and cover their immense financial losses, caused by the fact that they are highly inefficient, was introduced along with the government’s decree, 15 months ago, to exit from nuclear power completely.… Read more »
The bank of England speak about the end of the world, literally.
http://m.cnbc.com///id/49444401
That scares me.
I’ve heard David’s ‘Parodox of Thrift’ explanation for why the recession seems to have deepened but I have a number of issues with it. First of all, prices aren’t going down so no-one’s incentivised to wait for a bargain next month. Secondly, people saving money instead of spending is not the reason why there’s less money during a recession. The reason there’s less money during a recession is because when a loan is repaid to a bank the money used to do so no longer exists. If anyone’s interested in a technical explanation for how this is the case it’s… Read more »
After Sandy Weill of Citigroup in August and the Financial Times on July 4 2012 called for Glass-Steagall, many are changing their mind. “Bring Back the Banking Divide” Says London Investment Analyst Oct. 17, 2012 (LPAC)–Another voice from London admitting that dismantling Glass-Steagall was a mistake, comes in a column by Anthony Peters, a strategist for SwissInvest, which is published in Thompson-Reuters’s International Financing Review, commenting on the dumping of Citigroup CEO Vikram Pandit. Peter says that Pandit “joins the scrap heap of former investment bankers who made it to the top of a commercial bank,” where it has been… Read more »
Swiss Military Expert: We Are on the Eve of World War III Oct. 17, 2012 (EIRNS)–A source who is a retired manager and is part of a circle of military officers in Switzerland, told EIR today that “we are on the eve of World War III.” He said that the traditional saying, that “the war is too important to leave to the generals,” must be reversed today, as the U.S. generals are the only ones who oppose a war. He compared the situation to 1938 in Germany, when Wehrmacht heads Blomberg and Fritsch opposed Hitler’s war plans, and were “watergated”… Read more »
Hey I changed my mind today. I took the Dart from Greystones to Connolly this am. I had planned for days to attend a jazz session at JJ Smythes. I would then bike back in the night time. After having a good late lunch with pleasant company and a Guinness to savor, I looked at the weather and decided to return to Greystones. On the bike it took 1.5 hours of cycle time(Does not count the red light stops). Not much more than going by Dart what with the getting to and from the station and having to be be… Read more »
Commodity money is not a civilised option. It is an ancient form of the wealth of oligarchs; not of ordinary humans. Commodity money would not resolve the core problem we face today; which is the usurpation of the social and political order and the civil commons by financial oligarchs. Today under cover of the financial crisis which they caused (as well as by other means, such as the so-called free-trade treaties) they are moving to complete their theft of the world. They are stealing the world from beneath our very noses; and no one can see it, because their corporate… Read more »