Careful with that axe..
The IMF And The Fiscal Multiplier
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
We have seen quite a few peripheral eurozone countries chasing their own tail. That is, they embark on austerity (raising taxes and cutting public expenditure), even heavy austerity:
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But the end result, rather than solving the public finance sustainability, is a seemingly bigger mess with 1930s style collateral damage in the form of 25%+ unemployment rates and 50%+ youth unemployment rates in Greece and Spain. Portugal and Italy aren’t quite that bad (yet?), but the situation is hardly encouraging even there. And we’re not even mentioning France yet.
What’s going on? Well, for years, a few economists have warned for the possibility that embarking on heavy austerity in countries that do not enjoy the possibility of using any offsetting policy levers, such as monetary stimulus or depreciation of the currency, growth could suffer to such an extent as for austerity to yield little results even in terms of improving public finances. [Read on here]