The battle between Growth and Austerity continues as economies have become stagnant with no end in sight for the current crisis. In one camp the solution is to grow our way out of trouble by increasing public spending, therefore trying to shrink the debt as the economies size increases. The other school states, we need to reduce spending and remodel the economy away from the old borrow and spend mentality. It's hard to know who to believe. On the one hand economies got into this mess because they spent beyond their means, increasing their GDPs to artificial levels therefore one could conclude that the logical outcome is to reduce spending, to set right these imbalances. However many nations have adopted Austerity, growth has flatlinned, even gone into reverse, and created higher unemployment with incomes being continually squeezed.
Do our main political parties really offer options? In the UK the pro growth Labour Party claims we need to increase spending, while the Conservatives, the pro austerity party, claim we need to cut spending. Despite all the rhetoric the difference between cuts actually implemented by the Government and the cuts that would have been proposed by the opposition under Alistair Darling results in only a £9B difference, small in comparison with an economy estimated to be in that value of £1.5T.
The problem with both camps is that neither really offer solutions to the problems at hand. Greece has attempted to implement austerity but has not really addressed the core issue. That core issue is the fact that the country is bankrupt, and when something is bankrupt it needs to default and restructure. Without a default and restructure the debate on growth or austerity is irrelevant, Greece will never be able to get out of its current mess. The same goes for many nations facing similar issues, primarily spiralling Government spending with income from taxation not keeping pace.
The schools of thought can be summarised as follows.
In order to solve deficits austerity proponents state that spending has got out of control, therefore Government spending must be cut. A lot of the cuts are half measures, cuts made on the fringes of the welfare system that don't amount to much and don't affect the majority of the people.
Interest rates are still held exceptionally low, printing money is still deemed as austere and emergency loans from the ECB/IMF are considered to be tackling the spending crisis.
With the above, austerity is not really being implemented instead many countries are just postponing spending into the future.
The followers of pro-growth believe the false Socialist Keynesian fallacy that we need to increase Government spending in order to haul our economies out of this mess. They believe that Growth can come from the Government and this will alleviate the debt crisis. Its a simple solution, although fatally flawed and over the long term would have the complete opposite effect. The level of bankruptcy within the country would intensify over time, with peoples living standards eroded further.
As spending increases, so do deficits. Governments over the long term can never create growth by arbitrary spending. Over time, taxes are raised to try and cover the gap caused by increased spending, undermining potential future growth further. Genuine capital for investment begins fleeing along with income from taxation as individuals stop paying taxes. The Government is put under further pressure and prints money to cover the shortfall. Inflation rises, living standards decrease, Entrepreneurship dwindles. In other words it becomes a vicious cycle where the Government finds themselves back at square one, however now in a more dire state of affairs. The Growth camp can only intensify the crisis further.
Default and Roll back of state
The other camp that remains out of the debate is one of default along with a roll back of what functions the state should perform. As Governments can not pay on the majority of their spending commitments they need to default on bond holders. If Greek debt stands at over 100% of GDP then the best way to reduce this is to default on much of it and liquidate capital, similar to private entities and companies. Billions of Dollars are liquidated all the time, either through share price falls or outright bankruptcy, yet the system is incredibly efficient and re-mobilises economic resources producing genuine long term future economic growth.
The solution also involves rolling back the state and allowing free enterprise further reign in society to improve productivity and reduce costs. Healthcare, Schools, Government Pensions - the costs continue to rise while productivity falls. Private capital would solve many of these issues.
Default is politically unpopular and a banishment of the state is a banishment of politics. Many people still believe that state systems are "free" and that they benefit from them i.e. they take more from them then what they put into such systems, convincing many members of public that we need welfare. To default on loans is a political parties nightmare as this tarnishes the incumbent Government, despite helping to solve the spending problems by freeing up wasted lines of production. It is important to distinguish that a default will not solve the issue on its own, the Government has to take the correct action after the event, that's why a roll back of the state needs to occur with moves towards greater individual freedom and a smaller state.
In our current system only until market forces deem the situation so dire does bankruptcy come about. Currently the market is lenient as it realises debt can be monetised by Governments and inflation is historically low. It also realises that Governments control the rules and consequently can lend to itself or other Governments (as its been doing). Without the recent QE and low interest rates the market would have already started forcing bankruptcy upon many nations, fixing the ills we see. When Governments have such extraordinary control economic problems get out of hand, in comparison private companies go bust very quickly if they can't control expenditure versus income. Governments merely take or adjust the rules in play to avoid this scenario, thus continuing to put economic resources to bad use.
Default comes about when inflation gets out of control or Governments struggle to monetise the debts, then the markets deliver the killer blow instigating a default. Britain went Bankrupt in 1976 because inflation was out of control meaning printing money would have been unacceptable to the public and markets refused to lend to a Government who couldn't control spending. The IMF bailed the UK out but it didn't fix anything, it just pushed the problems into the future. We should have just defaulted and rolled back the state. Of course the Government can still ignore these signals under a dictatorship and just print more money et al Robert Mugabe, leading to a world of misery.
From a global point of view, the current fractional reserve system can deal with the odd small country defaulting, say Iceland, but when it comes to larger entities such as Italy, Spain, France, UK and so forth, then the true naked state of the system is shown. The interconnectedness of the current fractional reserve banking system comes down like a house of cards, calling into the question its very existence. People would then ask questions such as why do Governments have free reign on interest rates, money and permit fractional reserve banking? Why do we need Central Banks? Why do we need Governments? The ultimate solution is to remove all central powers, instead empowering individuals with the freedom to run their own lives, free from third party interference.
Current state of affairs
So we find ourselves in the current predicament, no one really wants to do the right thing therefore the crisis is prolonged. Governments have great power through the monopoly they have in money so rather than accepting the situation they opt instead to push problems into the future. Bankruptcy and failure is nothing to fear or to avoid, it happens all the time in the free market and is an outcome of discovering prosperity. Until people are educated and aware in such matters then we will always have Government debt crisis throughout history on a regular basis. Austerity or Growth, both solutions do not fundamental solve the problems baked into the system.