America borrows it's way out of a debt crisis.

HAMISH_MCTAVISH

So as it turns out, not only is it true that you can't cut your way out of a [STRIKE]recession[/STRIKE] depression, it also turns out that you can borrow your way out of a debt crisis.

US budget deficit's fall should make European 'austerians' think again

Budget shortfall predicted to drop to 4%, from 10% in 2009, vindicating Obama's policy of US growing its way out of debt

If only the "austerians" had listened. According to the latest forecasts, the US budget deficit will shrink to 4% of GDP this year.

The slide from 2009's 10.1% budget shortfall is one in the eye for the Tea party and any other advocate of "contractionary expansion".

Worse for the fans of austerity, forecasts published by the US congressional budget office expect the deficit to fall to 2.1% of GDP by 2015 as tax revenues soar.

By comparison, the UK's official forecaster, the Office for Budget Responsibility (OBR), expects a budget deficit on a Maastricht treaty basis of 7.6% this year. Not until 2017 will it fall below the Maastricht maximum of 3%.

Well, ummmm, Crikey.

One in the eye for Osborne then, along with everyone else who thought it couldn't be done.

"The anti-austerity camp will get a boost today," he said. "It is increasingly clear that the Obama administration was right to put off fiscal tightening and focus reforms in the medium to long term.

America is growing its way out of debt.

The deficit is shrinking because tax revenues are coming in better than expected and a rise in house prices has seen the two government-sponsored lenders, Fannie Mae and Freddie Mac, repay some $95bn (£60bn) to the Treasury.

"The good US fiscal performance stands in stark contrast to the UK, where front-loaded spending cuts and tax rises have hurt the economy and caused a shortfall in government revenues.

The OBR expects the deficit to shrink to a manageable level by 2017 but this forecast, like all of the previous ones, relies on sustained economic expansion of 2-3% a year.

It is hard to believe this level of growth will be achieved especially as next month will see another year of cuts tacked on the end of what has become a rolling five-year austerity plan."

Greetham is one of the few City investors to say loudly and consistently that austerity was the wrong medicine.

In 2011 he contradicted George Osborne's message that the UK was like Greece. He said then it was more like the US and should adopt the same remedy.

http://m.guardian.co.uk/business/economics-blog/2013/may/15/us-budget-deficit-austerity-stimulus

America is growing it's way out of debt.

Like many of us have said for a very long time, growth is the only thing that will work......

Masomnia

If that's the CBO's forecast, it assumes that the spending cuts and tax rises that came into effect this year are not reversed.

shortchanged_2

Interesting piece Hamish, and pretty much was my train of thought all along.

The only difference though between the US and UK is the house price issue.
The US had a proper house price correction so then had the good foundation for more sustainable growth in that sector.

The UK housing market on the other hand has been propped up by any and all means possible. This means without a return to loose lending again house prices are still relatively expensive in the UK. And lets be honest. Do we want a return of silly mortgage lending again?

michaels

Masomnia wrote: »

If that's the CBO's forecast, it assumes that the spending cuts and tax rises that came into effect this year are not reversed.

Indeed, at the time wasn't the discussion about whether they should tighten by 5% or only 2% - either way sounds like austerity to me.

Similarly most commentary on deficits looks at the cyclically adjusted figure otherwise you can be like Brown and run a small deficit during a massive boom and claim that you are being fiscally responsible. Similarly the improving US figures may result from an improved positon in the business cycle rather than a big improvemnt in the cyclically adjusted deficit. Hamish normally you try and give a more balanced view than this.

HAMISH_MCTAVISH

shortchanged wrote: »

The only difference though between the US and UK is the house price issue.

Sorry, but that's just not correct.

It's not the only difference at all.

The US government has spent it's way out of recession, and continues to do so. And it's working.

The US had a proper house price correction so then had the good foundation for more sustainable growth in that sector.

Really?

You think 33% rises in a year are "sustainable"?

The best-performing metro areas were Akron, Ohio, and San Francisco, where prices jumped 33 percent from a year earlier. Prices rose 32 percent in Reno, Nevada, and Silicon Valley, California; 31 percent in Atlanta and 30 percent in Phoenix.

And what has happened there has nothing to do with government "props", and everything to do with supply and demand, just like here.

At the end of the first quarter, 1.93 million previously owned homes were available for sale, 16.8 percent fewer than a year earlier, according to the Realtors group.

They have turned a surplus into a shortage, through underbuilding for the last 5 years.

Then they fixed their credit crunch, and prices are rising because more people can now buy.

Simple supply and demand.

Whereas we on the other hand started out with a serious shortage, and have made it worse through underbuilding for the last 5 years.

So despite the fact that we haven't fixed our credit crunch, prices remain high and are rising again.

Supply and demand....

The UK housing market on the other hand has been propped up by any and all means possible. This means without a return to loose lending again house prices are still relatively expensive in the UK. And lets be honest. Do we want a return of silly mortgage lending again?

We have the toughest mortgage lending in decades, yet prices remain high and are rising.

If mortgage lending just reverted to normal, not loose or silly, but just normal, sensible and prudent, then prices would be soaring already.

We're only preventing HPI by preventing millions of people who would normally be considered creditworthy and low risk from buying.

Which is a stupid idea, as it also means we don't build enough new houses for our housing need.

After all, builders won't build what they cant sell.

shortchanged_2

HAMISH_MCTAVISH wrote: »

We have the toughest mortgage lending in decades, yet prices remain high and are rising.

If mortgage lending just reverted to normal, not loose or silly, but just normal, sensible and prudent, then prices would be soaring already.

We're only preventing HPI by preventing millions of people who would normally be considered creditworthy and low risk from buying.

Which is a stupid idea, as it also means we don't build enough new houses for our housing need.

After all, builders won't build what they cant sell.

Transaction levels are very low Hamish. Cash rich buyers are very prominent in the market at present.

With the numerous government interventions in place there are very few forced sellers which would in turn help provide a price correction. As you said Hamish, supply and demand. This can be manipulated by many methods.

HAMISH_MCTAVISH

shortchanged wrote: »

Transaction levels are very low Hamish. .

Because mortgage rationing is endemic.

America has fixed their mortgage rationing problem by pumping $40bn a month of QE into buying RMBS.

Which combined with 5 years of under building, turning a surplus into a shortage, is causing prices to soar.

We never had a surplus. Our serious shortage has only got worse.

So the failure of government to fix the dysfunctional mortgage market here is the only thing keeping prices artificially low.

And even with that, they remained high throughout and are now rising more strongly.

jamesd

It should hardly surprise anyone that you can devalue your currency and borrow your way out of a recession. It's what happened to end the Great Depression, as governments that abandoned the Gold Standard first recovered first and major infrastructure investments were used in the US. And of course Mr. Bernanke literally wrote the book on the subject and has applied the lessons from the research that he and others did.

As before, European countries went with budgetary and fiscal squeeze policies, lengthening the depression in those countries.

In the UK one thing that might be tried is a major house building program, via a combination of planning restriction removal and mortgage support. Plots available for self-builders would be a nice component of this, since that'd take more money out of savings to spend on construction, in addition to say the use of mortgage guarantees and support. Land provision is a key bottleneck here, though.

ILW

I believe public spending per head in the USA is well below the UK.

jamesd

It had better be, given the differences in public services provided in the two places. The relevant wikipedia page says 47.3% of GDP for the UK and 38.9% for the US.

nickj_2

when the usa has made a bit of a dent in it's $16trillion debt then they might have something to get excited about