Austerity measures have not worked

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The impending economic collapse David Cameron is warning about is entirely due to the economic polices he and other world leaders have pursued.

All the advanced economies – USA, Europe and Japan – have implemented some form of austerity policy in the wake of the 2008-09 global financial crash and deep recession that followed.

In 2008-09, policy-makers jointly decided to rely primarily on central banks as the prime institutions for managing economic recovery.

The central banks, led by the USA Federal Reserve, together pumped massive liquidity (money) into the their banking systems in the belief that capitalist finance will then lead the way to economic recovery.

The central bank tools employed were quantitative easing and zero-interest loans. Tens of trillions of dollars and other currencies were printed and otherwise provided to the private capitalist banking system.

Private banks were thereafter supposed to lend to non-bank businesses, which would in turn invest and expand and hire new workers. Incomes would subsequently grow, consumer spending would rise, and GDP and economic growth return. At least, that was the theory.

Fiscal stimulus as government spending was considered unnecessary for recovery. Even when offered, it was token, temporary, and soon withdrawn once again.

The problem was, and still is, that despite tens of trillions of dollars provided to the private banking system, the private banks were not eager to lend to the vast majority of businesses, especially small and medium businesses.

They loaned their central bank-provided funds to other shadow banks globally, which speculated in various financial asset markets instead. Of course, that didn’t generate much in the way of real investment, jobs, incomes, consumer spending, and economic growth.

In any event, much of that lending for financial investment went offshore to emerging markets.

Bankers also loaned to non-financial investment projects, but mostly again offshore to multinational corporations and to China and emerging markets. That, too, did not generate much real recovery.

A third thing bankers did with the central bank trillions given them was to buy back their stock and pay out dividends.

That raised their valuations and got senior bank managers nice bonuses. Thereafter, the banks sat on their remaining cash – not insignificant sums – and hoarded it. In the USA alone that remaining cash hoard is reportedly today at around $2 trillion. Austerity is about making the general populace and the working classes pay for the monetary policy strategy’s slow, often interrupted, and limited impact on the real economic recovery.

Austerity policies will continue so long as monetary policy continues to fail to generate a sustained and normal economic recovery.

Alan Hinnrichs

Gillespie Terrace