Most Popular
1. Dow Max Drawdown Bear Stock Market 2022 - Accumulating Deviations from the Highs - 21st Feb 22
2.Putin Starts WW3 in Ukraine, Will Use Tactical Nuclear Weapons, China Prepares Taiwan Blitzkrieg - 28th Feb 22
3.World War 3 Phase 1 - Putin WINS Ukraine War! - 25th Feb 22
4.INVESTORS SEDUCED by CNBC and the STOCK CHARTS COMPLETELY MISS the BIG PICTURE! - 10th Feb 22
5.Will There Be A 2024 US Presidential Election? - 3rd Mar 22
6.Gold and SIlver, Precious Metals Sector Is at a Terrific Buy Spot - 6th Feb 22
7.Why Putin Wants the WHOLE of Ukraine - World War 3 Untended Consequences - 6th Feb 22
8.Dow Stock Market Expected Max Drawdown 2022 - 19th Feb 22
9.Stock Market Calm In the Eye of the Inflation Storm - 4th Mar 22
10.M = F - Everything is Waving! Stock Market Forward Guidance - 7th Mar 22
Last 7 days
Why APPLE Could CRASH the Stock Market! - 21st May 22
Why Is Crude Oil Ignoring US Inventories? - 21st May 22
Here is Why I’m Still Bullish on Gold Mining Stocks - 21st May 22
THE INFLATION MEGA-TREND QE4EVER! - 20th May 22
US Real Estate Investors – Is There An End In Sight? - 20th May 22
How Technology Affected the Gaming Industry - 20th May 22
How To Set And Achieve Reasonable Goals For Your Company - 20th May 22
How Low Could the Amazon (AMZN) Stock Price Fall? - 19th May 22
Bitten by FANG? Clocked by Cryptos? -- 'Air Pockets' Everywhere - 19th May 22
Northern General Hospital Orthopedics Fractures and and Ankle Clinic Consultations Real Patient Experience - 19th May 22
Cathie Wood Goes All in on Teladoc, ARKK INSANE Noob Investing Strategy! - 17th May 22
This is Anything but Positive for US Housing Market - 17th May 22
What Should We Do If There Is No Fed Monetary Policy Pivot? - 17th May 22
All Possible Ways to Earn Free Litecoin - 17th May 22
How low Could the Amazon Stock Price Fall? - 16th May 22
Cathy Wood ARKK INSANITY There is NO Coming Back! - 16th May 22
NASDAQ 100 Stock Market LOWER LOWS & LOWER HIGH - 16th May 22
Sanctions, trade wars worsen US inflation - 16th May 22
AI Tech Stocks Earnings BloodBath Buying Opportunity - 14th May 22
Futures Contract – Trading Crude Oil With USO - 14th May 22
How to Get Kaspersky Internet Security for 80% Discount! Do not Pay Renewal Price! - 14th May 22
Sagittarius A* Super Massive Black Hole Monster at Centre of Our Galaxy REVEALED! - 14th May 22
UK Public Debt Smoking Inflation Gun - 13th May 22
What Happens When the Stock Market Dip Keeps Dipping? - 13th May 22
Biden Seeks Inflation Scapegoats; Gold Advocate Wins GOP Primary - 13th May 22
Apple and Microsoft Nuts Are About to CRACK and Send Stock Market Sharply Lower - 12th May 22
The War on Gold Ensures the Dollar’s Downfall - 12th May 22

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

The Success of Irish Economic Austerity: The Joke is on Krugman

Economics / Economic Austerity Nov 23, 2015 - 03:24 PM GMT

By: Michael_Pento

Economics

During the late 1990s, Ireland's economy was booming. This was mostly due to a low corporate tax rate of just 12.5% and an international real estate bubble that boosted global Gross Domestic Product (GDP). For a myriad of reasons Ireland was a magnet for foreign direct investment and the envy of Europe.

Buoyed by cheap money, the Irish government embarked on a debt-fueled property boom from 1997 to 2006, which caused the price of an average house to jump more than four-fold. Flush with tax revenue the government also went on a spending binge: investment in Ireland's health service soared by five times and pay for government workers doubled.


Unfortunately, the world-wide financial crisis sent Ireland's boom economy to bust almost overnight; GDP declined more than 14% in the following two years. And, the government's budget went from surpluses during 2006 thru 2007, to a staggering deficit of 14.3% of its GDP in 2008.

In response to this economic crisis the Irish people and elected officials did something few countries are willing to do: they embraced fiscal austerity. The government slashed spending and raised taxes. Since 2008, seven budgets have taken €28 billion ($38 billion) out of the economy in spending cuts and tax hikes, which amounts to 17% of today's GDP.

Fiscal austerity runs counter to the popular Keynesian dogma that in times of crisis governments should spend their way out of economic downturns--regardless of the current level of debt. And while I would have preferred Ireland cut additional spending in lieu of raising taxes, I applaud the people's resolve to embrace smaller government in place of the reckless deficit spending that is in vogue today.

However, Ireland's belt tightening hasn't garnered similar favor by all economists. And it has particularly gotten under the skin of the king apologist for Keynesianism....Paul Krugman.

Krugman, who is completely chagrinned by Irish austerity, has devoted an inane amount of time and ink scolding Ireland's austerity plan and has consistently predicted the country's imminent economic demise. Even making it personal in a 2010 column where he mocked, "The best thing about the Irish right now is that there are so few of them." This leaves anyone familiar with the history of Ireland's sad past with famine that wiped out over one million people, justified to question the true conscious of this particular liberal.

Krugman asserts budget-cutting should be postponed until Ireland is no longer embroiled in a "liquidity trap". This liquidity trap he fears is in actuality the free market's way of healing the economy through debt reduction. However, Krugman is convinced that only reckless government deficit spending can free economies from this so called trap. And that Ireland should emulate Japan, which is suffering through its third recession in as many years, a multitude of lost economic decades, a cascading currency, and on the way to spending themselves into a debt to GDP ratio of 250%. That's a hell of a price to pay in order to avoid economic reality while patiently awaiting freedom from their "liquidity trap".

It is clear Krugman fears Ireland's success with austerity will serve to counter John Maynard Keynes's deficit spending doctrine. Thus, calling into question everything he holds dear. So let's have some fun and see who is faring better - the austere Emerald Island or the Land of the Rising Budget Deficits. After all, there is no better anti-austerity experiment than the nation of Japan.

In the immediate wake of its austerity plan, Ireland's economy expanded slowly during the 2010-12 period. However In 2014 the Irish economy grew at a pace of 4.8%, making it the fastest-growing country in the European Union, and with a faster growth rate than the United States in each year since the Great Recession. The Irish economy grew 1.9 % for the second quarter ending in June of 2015, following an upwardly revised 2.1% expansion in first quarter of 2015-which was way above Krugman's and the market's expectations.

Ireland achieved this growth while dragging their budget deficit down to 4.1% of GDP, from the 14.3% in 2008. The country was also the first Eurozone country to exit a rescue program by the IMF. Ireland's seasonally adjusted jobless rate fell below 9% for the first time since 2008, to 8.9% in October of 2015.

For a fleeting moment in December 1989, the Japanese stock market (Nikkei 225) surpassed the U.S. market in size as it hit its peak at 38,916 and a P/E ratio of 80 times; Japanese real estate accounted for half the value of all land on earth at US$24 trillion. When Japan's real estate and stock market bubble burst the Japanese were diligent Keynesians embarking on spending programs in the 1990's totaling more than 100 trillion yen. Where has all this spending gotten Japan? Two and one half consecutive lost decades and counting.

Much to Krugman's delight, in 2012 the Japanese embraced Abenomics, an economic strategy that doubled down on the same specious spending and money printing the Japanese were already engaged in. With one of Abe's three arrows directed at increasing government deficit spending, Japan is currently running a budget deficit that is 8% of GDP. With another arrow aimed at currency destruction to goose exports. However, we just learned that Japanese exports fell in October for the first time in fourteen months. And in fact, the only target Abe's arrows appears to be accurately hitting is a recession.

Most recently, the Japanese economy shrank 0.2% for the September of 2015 quarter and has been unable to provide a sustainable recovery in GDP growth since the end of the Great Recession.

More strikingly, Japanese GDP has gone nowhere in nominal terms during the past decade and, thanks to its currency debasement strategy, has sharply contracted in real terms.

But none of this dissuades Krugman from believing the only thing lacking in Abenomics is its conviction to do more of the same. Krugman selects to trust his lying eyes, preferring to pursue lost decades over a few austere years. In a column penned in 2013 he childishly blustered that, "The repeated invocation of Ireland as a role model has gotten to be a sick joke." Nevertheless...It appears this time the joke is on him.

Michael Pento produces the weekly podcast “The Mid-week Reality Check”, is the President and Founder of Pento Portfolio Strategies and Author of the book “The Coming Bond Market Collapse.”

Respectfully,

Michael Pento
President
Pento Portfolio Strategies
www.pentoport.com
mpento@pentoport.com

Twitter@ michaelpento1
(O) 732-203-1333
(M) 732- 213-1295

Michael Pento is the President and Founder of Pento Portfolio Strategies (PPS). PPS is a Registered Investment Advisory Firm that provides money management services and research for individual and institutional clients.

Michael is a well-established specialist in markets and economics and a regular guest on CNBC, CNN, Bloomberg, FOX Business News and other international media outlets. His market analysis can also be read in most major financial publications, including the Wall Street Journal. He also acts as a Financial Columnist for Forbes, Contributor to thestreet.com and is a blogger at the Huffington Post.
               
Prior to starting PPS, Michael served as a senior economist and vice president of the managed products division of Euro Pacific Capital. There, he also led an external sales division that marketed their managed products to outside broker-dealers and registered investment advisors. 
       
Additionally, Michael has worked at an investment advisory firm where he helped create ETFs and UITs that were sold throughout Wall Street.  Earlier in his career he spent two years on the floor of the New York Stock Exchange.  He has carried series 7, 63, 65, 55 and Life and Health Insurance Licenses. Michael Pento graduated from Rowan University in 1991.
       

© 2015 Copyright Michael Pento - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Michael Pento Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in