Tuesday, December 20, 2011

Austerity Measures Could Lead to Depression

Economic austerity measures imposed by governments could land the world in a Great Depression.

That is the unvarnished warning from two parts of the UN System that usually have very different takes on policy matters: the United Nations Conference on Trade and Development (UNCTAD) and the International Monetary Fund (IMF).

In a new Policy Brief, UNCTAD has explained that warning. It noted that because of lack of consumer demand several advanced economies were “hovering on the brink of a second bout of recession,” but their “political attention" had "turned to ways to cut fiscal deficits and reduce the domestic public debt.” If they continued with that effort it would make it impossible for the private sector to grow and "de-leverage" its own massive debt.

Without “a rapid policy turnaround” said UNCTAD, the world is “in danger of repeating the mistakes of the 1930s.”

“During the Great Depression of the 1930s, the United States had experienced “two sharp downturns in succession.” Recovery from the “first wave (August 1929 to March 1933),” began “after President F.D. Roosevelt took office, in 1933. However, another severe downturn set in during 1937-38. That second downturn, UNCTAD said, was the result of “poor government policy, especially the decision to tighten up fiscal policy too early in the recovery.”

UNCTAD called on countries “threatened by recession and deflation” to “avoid intensified austerity measures because these are unlikely to produce the intended outcomes and could propel the world into a renewed bout of recession, or even into an outright depression.” (It did not address the possibility of hyperinflation if governments continued massive stimulus policies by simply printing new money.)

Given today’s highly integrated world economy, the “impact will not be limited to specific sectors or to well-defined regions.” Further, a “lost decade” for the world economy would “throw into question the ability of democratic governments to tackle the most urgent challenges of our age.”

Not to mince words, that is a warning that a Depression could bring fascist demagogues to power.

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