Guest post by Kris Sayce of Money Morning Australia
When is a cut not a cut?
When it’s an increase.
Sorry to be cryptic, but we laugh when we see presidents, prime ministers and finance ministers talk about ‘austerity’ and ‘slashing budgets’.
Because just like central bank money printing, the markets get excited for about three minutes before they realise what even an idiot can see…
Cut spending isn’t what governments do. For governments, spending only ever goes one way. That’s up.
Last week the papers were going batty on the news that, ‘Spain unveils austerity budget as political turmoil mounts.’ So says the Australian newspaper.
According to the Wall Street Journal:
‘The Spanish government presented 13 billion euros ($16 billion) of spending cuts and tax increases for 2013 and said it will place new limits on early retirements as political turmoil heightens investor concerns over Prime Minister Mariano Rajoy’s ability to slash a towering budget deficit and stabilise one of Europe’s largest ailing economies.’
We wish Spain luck. Especially considering the following post to the UK Daily Telegraph‘s blog covering the Spanish budget overnight:
‘Spanish government sees unemployment bottoming out and has predicted an average rate of 24.3pc [per cent] for next year.’
The same blog also reveals:
‘Spanish deficit targets: 6.3pc in 2012, 4.5pc in 2013, 2.8pc in 2014, 1.9pc in 2015.
‘These cuts are aimed at chopping €40bn off Spain’s budget deficit next year.’
Right on cue, of course, Spaniards began rioting in the streets. Here’s a bit of free advice for Spanish Prime Minister, Mario Rajoy. When your government is announcing welfare cuts, it’s probably best not to be photographed chomping on a cigar in New York:
But before you start getting too excited about so-called spending cuts, and the positive impact it could have on the world economy, just remember this: when governments cut spending, it doesn’t mean they cut spending.
Not as Good as the Treasurer Claims
It was a bit like the smoke and mirrors from Aussie Treasurer, Wayne Swan. Last week he spun the argument that the Aussie federal budget was $661 million better off than predicted.
The mainstream press fell for it hook, line and sinker. What a great Treasurer they said. What a good boy.
What they didn’t focus on (just as the Treasurer hoped), was that last year the government spent $43.7 billion more than it raised in taxes.
To cover the shortfall the government had to issue more bonds…in other words go further into debt. And with commodity prices collapsing, the Aussie budget position is set to get worse.
It’s the same for Spain. Just because it reduces the annual budget deficit doesn’t mean the economy or debt position is any better. Last year Spain’s budget deficit was 8.5% of GDP, or about €97.8 billion. And its total debt will hit 85.3 percent of gross domestic product by the end of this year, and continue rising.
So even if Spain cuts spending by €40 billion, it’s still spending €57.8 billion more than it takes in with taxes. And by the end of next year its total debt will reach 90.5 percent of gross domestic product by end 2013—and continue rising.
And that’s assuming the Spanish economy doesn’t get worse, which it probably will given the proposed tax increases.
So, when is a cut not a cut?
When it’s an increase.
What we’re getting at is this: it’s nearly five years since the world economy started to fall apart.
The US Federal Reserve has virtually admitted that it’s out of ideas. The only solution it’s got is to print money…even though that’s never worked before.
The Eurozone thinks it can fix its spending problems by keeping on spending and creating a bigger debt problem instead.
And China thinks it can stop its economy from crashing by building more roads, buildings and railways…that no-one can afford to use.
And as for all those in the mainstream media who love the Chinese economy, and fall over themselves to praise it, just remember what we’ve said about China for the past four years – it’s a brutal economy and leadership that sees the Chinese people as a means to stay in power and line their own pockets.
How Chinese Infrastructure Projects Work
Take this news story from the New York Daily News that you won’t read in the compliant, China-loving Aussie press:
‘Stomach-churning photos have surfaced allegedly showing the moment a Chinese protester was crushed by a steamroller while trying to stop government officials from relocating his village to make way for a commercial development.
‘A local government official allegedly ordered the trucks forward, and the man was flattened beneath one six-wheeled hulking behemoth, the report said.’
How are you enjoying your iPhone now? And anything else that’s ‘Made in China’.
All this tells us that those in power are getting desperate. They’ll do anything to make sure the economy doesn’t collapse on their watch.
That means pretending to cut budgets while increasing debts, it means printing money as a last resort, and it means crushing people to death in order to erect a new building paid for with government stimulus money.
Kris Sayce is editor of Money Morning Australia. He began his financial career in the City of London as a broker specializing in small cap stocks listed on London’s Alternative Investment Market (AIM). At one of Australia’s leading wealth management firms, Kris was a fully accredited adviser in Shares, Options and Warrants, and Foreign Exchange. Kris was instrumental in helping to establish the Australian version of the Daily Reckoning e-newsletter in 2005. In late 2006, he joined the Melbourne team of the leading CFD provider in Australia.
This post first appeared at Money Morning Australia on 28 SEPTEMBER 2012