The Reinhart/Rogoff orthodoxy of the moment tells us that yawning government deficits lead to years of sub-par growth as a big dose of austerity is applied in order to balance the books. Read the authors of This Time is Different on the subject or check with Bill Gross.
But Tim Bond of BarCap is having none of it.
He reckons all of us stuck in high deficit countries (what is it now, PIIGSUSUK?) should actually be looking at strong growth, at least in nominal terms.
And for this we should thank Greece.
Here’s the summary from Bond’s latest Global Speculations. The full note is in the Long Room. It’s well worth a read.
Greece may very well have done everyone a favour. The financing crisis that began to materialise in December has served as a forceful reminder of the limits of investor patience for fiscally recalcitrant governments. The events of the past three months have delineated the boundaries for fiscal policy, showing that there is almost no scope for any of the major deficit governments to avoid a fiscal retrenchment over the next several years. In colloquial terms, it is fair to say that the Greek crisis demonstrated that the bond vigilantes now have the whip hand, although it would be wrong to suggest that further reminders may not be necessary in future.
Public opinion has moved in a similar direction. Polls suggest that the majority of the Greek electorate is firmly behind the government’s budgetary plans. Similarly, UK polls express a broad acceptance of the need for reduced government spending, even if public opinion has yet to happily embrace the reductions that might affect it personally. Nonetheless, in the wake of the Greek experience, it is less plausible to suggest that a hung UK parliament (the most likely outcome according to current voting intentions) would be unwilling to address the fiscal issue.
The markets have effectively cornered the political establishment and eliminated any theoretical wriggle room. A party or politician manoeuvring around fiscal policy for perceived electoral advantage would quickly face terminal accusations of encouraging a financial crisis, consequently facing annihilation in the next election.
This should be clear to all politicians. In the US, the Massachusetts upset is indicative of a groundswell among the electorate against further fiscal relaxation, with polls suggesting that Congressional gridlock is a plausible outlook after November. Historically, gridlock is associated with spending restraint.
As such, the President’s fiscally easy budgetary plans are unlikely to be an accurate guide to the actual trajectory of policy over the next several years. Overall, we think it is fair to say that the Greek crisis has narrowed the range of potential global fiscal trajectories over the next couple of years, tipping the balance of probability towards greater restraint among the large deficit economies than might have been the case just three months ago. To be sure, fiscal outcomes are not a done deal; rather, we would say that the probabilities are hardening towards earlier restraint.
It is tempting to view this hardening of fiscal outcomes as a reason to revise lower economic growth forecasts. Such a revision would be a mistake, in our view. The broad point is that the most important component of a successful fiscal retrenchment is strong economic growth. The primary weapon to deal with unsustainable government deficit positions is fast nominal GDP growth, with spending restraint the crucial secondary armament. Increases in taxation as a share of GDP do not seem to provide much offensive utility in any war on debt.
Related links:
Bond on bonds – disaster ahead – FT Alphaville
The great wall of cash – FT Alphaville