Austerity in booms and now also in times of bust

Paul Krugman at the New York Times has an article entitled 'The Austerity Agenda' published on 31st May.  He quotes the economist John Maynard Keynes who said 75 years ago: “The boom, not the slump, is the right time for austerity.”  Krugman then poses the question as to why certain governments are pursuing an austerity agenda in this time of 'slump' rather than waiting to cut public spending and jobs when their economies are in better shape.

Krugman's basic assumption is that our economies will recover; that economic growth will resume as we've always known it to.  But is this correct?

In 2005 something of a very fundamental nature changed in the world economy.  World energy supply stopped growing.  It was no coincidence that, in that same year, Wall Street began to bundle mortgages together into investment parcels, and then offloaded them as quickly as they possibly could by any means feasible.  This appears to be related to the fact that when the annual supply of world oil stabilised at a time of unprecedented and climbing demand the price of this vital commodity started to skyrocket.  Thus, sharply exacerbating a global liquidity glut (capitalism under 'limits to growth' = great financial profits for a select few and austerity for everyone else).

The US Federal Reserve then decided (also in 2005) to raise interest rates.  Families hit with rising oil prices then had to begin paying higher interest rates on their mortgages....

A period of conscious self-reflection on the results of our economic model is long overdue.

Brenda J Rosser.  Monday 4th June 2012.