Household economics: What’s positive about austerity & slowdown?

The whole nation of Greece stood up in protest, when confronted with the prospect of austerity measures from the Government in response to the debt crises. The parts of the world where austerity was considered as a bitter pill, have refused to see it in the eye, either politically or, practically.

Talk about slowdown and you can add another few wrinkles to central bankers, economists, companies and less weathered individuals.

I contrast the above with a situation that ticked me to thinking about slowdown in a positive way. My son of three and three quarters years was jumping on the sofa wildly and later jumped on to the floor and was too much for my TV glued eyes. I softly admonished “slowdown, slowdown…” It just lit on me, why wasn’t I stressed about slowing him down and began to believe that I was doing this in “his interest”. By imposing him to slowdown, I was perhaps stopping him from hurting himself, losing control or may be just to prevent him from getting overly exhausted. I prevailed because of paternal ascendancy.

In another incident, my mother kept admiring my late grandfather (her father) for his thrift, which made him live an austere life, but finish with reasonable net-worth and a substantial life without taking any debt, bank or informal. I could not satisfactorily debate that whether his austere upbringing made him thrifty or, his thrift that drove him to austerity. Whatever led to the other, he did not complain to anyone of having put his life on a narrow austere course right upto his grave.

This may just be simplistic when compared to the crying need for countries to attend to slowdown or, implement austerity.

It’s a “Slowdown”

There is enough literature now on the seventies to the last financial crises on how companies and countries have fared over the decades. Think of a slowdown or, recession you can imagine reduced output and by its consequence a sorry GDP, static incomes or, painfully low growth in paychecks (if the pink slip is not served), lower income in Govt treasury and the not-so-exotic picture of foreign institutional investors and local investors pulling out money thus, adding to scourge.

Milton Friedman, a respected Nobel prize winning economist trusted the market (the nature of supply, demand and its related chemistry) can repair the situation, a self-repair mechanism. Keynes (did not win a Nobel, I checked Facts on Nobel, disappointingly) who preceded Friedman would advise a parental intervention by Government.

Switch on your TV or, flip open your newspaper to see a name called Keynes invoked to exorcise the grim scenario, by making Government spend, lower rates and seduce individuals and corporates to spend, or at least borrow. Then the factories start humming and things pretend to look normal, before they look normal.

“Prevent Slowdown”

In a recent training on Risk, the instructor (a man with enough gray hair and good mix of actual risk management & training hours) just made a reflective statement that the by trying to prevent an orderly business cycles in last few decades, we are actually causing bigger and more frequent slowdowns or, downcycles. As I collected thoughts on this statement, it did not take too much to realize that

Governments in order to keep their economies from contracting are putting stimulus too much, too early or may be over extended periods. Frankly there is no scientific or, objective model that can identify the signs of contraction, determine the size of stimulus injection and the period of keeping things easy.

For Governments and central bankers, to allow a natural wave of market correction (not supremely endorsing Friedman) that waters down overcapacities, overleveraging and some excesses, but comes with collateral damage of job losses, in some cases social unrest, lowered tax collections will be interpreted as plain sadist.

Hence, stimulus packages and quantitative easing make grand entry. Well as responses to infuse money, Governments in deficit will have to issue debt. The Government raises its debt and by lowering rates to allow spending and lower saving, individual and corporate debts are encouraged.  The case of overleveraging on the part of Government and individuals, may simply be overlooked in the repairing process.

A country in deficit, repeatedly injected with stimulus packages, whenever it catches cold can it build its immunity or, ever appreciate austerity?

Sounds to me more like a parenting challenge!

My late grandfather’s recipe

It is presumptuous to believe that my late grandfather and many people in his generation and the one succeeding did not have compelling and competing avenues to spend. It is reasonable though that debt did not come easy. Hence, living within the means and to have a higher savings rate ensured long term sustainability and provided resistance to shocks and resource to needs. Every time the formula of savings to debt went wrong, he would reduce spend, pay up debt and manage with less.  Would injecting with external debt, or temporary oversupply helped his cause? Well they may have, only to make him less principled.

To treat slowdown and austerity as natural phenomena and element of life needs positive acceptance. A scared frown to either of them and short-term salvaging does not produce long-term panacea. It needs tremendous consensus across countries and corporations that austerity is a course to strike a balance, to earn and to have a sustainable means to current and future spending.

Gandhiji’s austerity may have made him shirtless but did not make him lose his shirt, ever. Nor, did my grandfather. I won’t hesitate to ask my son to slowdown, than be sorry.

   

 (I take privilege with some simplification of scenarios. But, simplification enables complexity to be understood...and for the purists - I wrap this article under Household Economics!)