Published on 9 Aug 2011

The Riots – Joe Stiglitz makes the Cuts connection as austerity stalks America

The US Federal Reserve today tried a new weapon. A formal preannouncement that ultralow interest rates would stay in place for two years. So why bother meeting? (and it’s something for the Bank of England to chew over). More concerning was the very downbeat assessment of US growth prospects, which have changed dramatically since June, even taking into account the one-off factors such as Japan.

That assessment backed-up what I heard this morning at Joseph Stiglitz’ flat on the Upper East side of Manhattan. He has believed that the US, the UK, the entire North Atlantic faces a Japan-style malaise lasting years, with low employment, and “triple or even quadruple-dips”. He now believes that these prognostications are coming true, partly blaming the Tea Party for the US downgrade, but showing thinly-disguised exasperation at President Obama.

More than that he makes a very strong connection between austerity and cuts. He relays an anecdote about the IMF austerity imposed upon Indonesia that saw riots six months on.

“One needs to say that when you take away hope..” and see prolonged unemployment “for you and your friends, people lose faith in their society… The kinds of draconian cuts [in the UK] are causing many people to lose hope”. When i pointed out that many of the London rioters seemed more like highly consumerist gang members, he insisted that even then it would still be a “sign of economic failure”. Watch the full interview here soon.

Clearly the Stiglitz view is not shared by all in NY by any means. Indeed quite the opposite from one of America’s most famous market commentators: CNBC’s Jim Cramer, who is very excited about UK austerity, and Britain’s place as a safe haven for investment alongside Australia and Canada.

22 reader comments

  1. Saltaire Sam says:

    Anyone else see a link between kids ignoring their own community to go into shops and loot ‘stuff’ that they want, and the financial whizz-kids who ignore the world community just as long as they can make money out of it?

    It would appear that money markets no longer exist for their primary purpose, to enable businesses to be formed and to prosper, but are now just a giant casino in which a few people can make a fortune for themselves.

    Are we really to believe that the billions wiped off the shares of perfectly good companies mean those companies have suddenly become worthless?

    True, they may be affected by the global downturn and turn in less profit and a smaller dividend for a couple of years, but that is the nature of trade. Only a fool expects companies to grow their profit massively without hindrance year after year.

    And anyhow, part of the downturn affecting those profits is caused by panicking traders losing their bottle, and another hunk was caused by bankers trying to make money illegitimately.

    It’s time to crack down on the financial hoodies as hard as we are on those stealing mobile phones and playstations.

  2. flashjumper says:

    Completely ridiculous. If there were ever a country that doesn’t deserve “riots”, it’s the UK- it has NOTHING to do with austerity -these kids were having a great time with a toothless police presence-and they all had Blackberrys!
    This was vandalism with no purpose other than to feed on itself & gain goods through looting. A brief look at the images proves that..This is the yoof culture gone mad & the danger is that it can erupt any time AND that the UK Justice system will just spit them out to do it all over again. These riots had no ideals-no political purpose. NEVER pay attention to Americans who see the world through an American prism.

    1. Kes says:

      Agree with you 100%. The cuts fallacy is a complete distarction. The roots of this thieving, for that’s all it is, lie in decades of failing discipline at home, in school and on the streets. Just about all these rioters were educated under Labour’s educational experiment whereby power was shifted from teachers to “pupils”. Crazy. Rights without responsibility.

    2. sue_m says:

      Why do you think we have this ‘yoof culture’ as you call it? Would it not be the case that if money was invested well in our youth – through good education and, crucially, investment in industries that create real jobs, that our kids would have hope and something better than kicking around the streets all day to look forward to.
      Its not just the cuts, its the whole attitude this govt has towards short term savings without a plan for society in the long term. Don’t forget the recent Bombardier contract that never was. A decision made based only on immediate cost not the long term effect on the UK.
      Of course austerity is playing it’s part, along with the legacy of cuts in the 80’s – these are the kids born to those thrown on the dole then – poor education, poor parenting and being constantly led to believe if you don’t have the latest expensive gadget or designer clothes you are nobody.

  3. Philip Edwards says:

    Faisal,

    There are times when one comes near to despair.

    Take this from Joe Stiglitz: “…he makes a very strong connection between austerity and cuts.”

    Well DONE, Joe. There’s hope for you yet. You might even try reading up the work of Keynes. After all, even Richard Nixon once said, “We’re all Keynesians now,” probably one of the reasons he was deposed.

    Then take this from Faisal Islam: “…more like highly consumerist gang members…”

    Very BADLY done, Faisal. Is there nothing you can reduce to the level of what James K. Galbraith calls, “The freedom to shop”?

    Meanwhile, a scared Anglo Saxon Establishment sounds the usual platitudes coupled with greed. It’s always the same when we get a depression/slump. It will be the same when the next one comes along.

    You might as well rehearse the script for next one. Because there WILL BE A NEXT TIME. Doubtless then you will also hear the same garbage about “new weapons” and “changed attitudes.” All of which makes you one of the biggest suckers – if you fall for the tragic nonsense and propaganda.

    Try this one on for size: What about a Bill of Economic Rights? That’d sort the men from the Nazis……..

    1. Charles Jurcich says:

      The UN Charter already has articles which are effectively economic rights. Governments are supposed to pursue full employment under the charter – this has been effectively ignored since the invention of the silly NAIRU contrivance.

      Governments are also supposed to give people the right to CHOOSE their job – this is also being gradually eroded by changes to the benefit system.

  4. Kes says:

    Faisal,

    Stiglitz is indeed a genius if he manages to make a connection between “austerity and cuts”!!!

    Your “consumerist gang members” line was very apt. The evidence is overwhelmingly supportive of this concept. Gangsters among the looters, the fact that they targeted flat screen TVs, trainers and easily fencible stuff all point that way.

    This seems to me to be a bad case in a series of mindless events over the decades. To claim it has anything to do with “cuts” is nonsensical as they have hardly bitten yet.

    The whole point of cuts is that we spent money we don’t have. If I buy myself a Rolls Royce on borrowed money, I may feel like I’ve got a smart car but I will have to give it back when I fail to keep up the payments. UK just spent too much in a reckless decade. Now the inevitable results are clear.

    1. sue_m says:

      But we do have the money – it’s just that the vast majority of it is concentrated in the pockets of a very small minority. And the system continues to amplify that problem.
      Cuts need to be prioritised much much better and additional revenue sought elsewhere, such as in closing tax loopholes.

    2. Kes says:

      Actually sue, I agree completely that we need a tax loophole free economy. The attraction of capital, which creates jobs, through tax incentives is as illusory as improving quality of life throigh government spending. Both are short term effects and easily reversed. Inward investment is what creates jobs and therefore the money to improve educational standards etc.

      Where I disagree with you is in this idea of unequal distribution of wealth being the core of the problem. None of these rioters would share their money if they won the lottery. The rich poor gap will always exist. In fact it seems to be a trending phenomenon rather than a one way trip in favour of the rich if you look back through history. Currently, the rich are on an up although I’d say it’s the lucky. You have to recognise that a lot of great wealth is earned and that it does create opportunity for us poor lot too.

      “We” are who exactly? The state? Sate money is our tax money. It is near broke. So “we” don’t have the money.

  5. Amelia says:

    I’d like to see the full interview with Stiglitz please

    1. Andrew Dundas says:

      Paul Krugman got there first! Krugman observed last summer (in NYT) that the UK had then been embarked by its new government on a strategy that was most likely to lead to prolonged recession. Krugman wished he’d be proved wrong, but feared that the UK government had made the wrong calls.
      It’s worth saying that the US market view is that the policy adopted for the US by Congress was most likely to lead to stagnation – which is what Krugman had thought likely for the UK – which makes T-Bonds a safety option in face of probable decline in stock prices. So there’s some co-incidence of barmy Republican and Tory policies, that make the errors that caused the 1930s slump.
      I suggest that the same mistaken policy is happening here too: consequently, investment managers are preferring Bonds over Equities. That extra demand has bid up Bond prices and caused yields (ie interest rates) to drop. So that UK low interest rates in the UK are NOT any symptom of a successful government austerity plan, but the consequence of investment managers’ expectations of our stagnation continuing for some years!
      Osborne is painting the Coalition into a corner: committed to a stagnation policy.

    2. Andrew Dundas says:

      Hello Amelia,
      Joseph Stiglitz’s article in the FT (p9; 20 Aug) outlines his analysis and policy remedies.
      A

    3. Andrew Dundas says:

      Hello Amelia,

      I was less than helpful! The Krugman article was published on 21st October last year, and concludes:

      [http://www.nytimes.com/2010/10/22/opinion/22krugman.html?ref=paulkrugman].

      “What happens now? Maybe Britain will get lucky, and something will come along to rescue the economy. But the best guess is that Britain in 2011 will look like Britain in 1931, or the United States in 1937, or Japan in 1997. That is, premature fiscal austerity will lead to a renewed economic slump. As always, those who refuse to learn from the past are doomed to repeat it”.

      We’re already part way into the ‘economic slump’ and by next spring we’ll be there.

      I hope this helps.

  6. Saltaire Sam says:

    OK, you masters of capitalism, what good has short selling ever achieved apart from making a few gamblers richer?

    And what an easy market to control. We have seen in recent days how quickly the market can shift because of ‘rumour’, and how easy to start a rumour that the stock you want to go down is in trouble.

    It does nothing whatsover for the promotion and funding of business which is what shares are supposed to be about.

  7. Saltaire Sam says:

    OK, you masters of capitalism, can you please explain what is the use of short selling?

    And what an easy market to control. We have seen in recent days how quickly the market can shift because of ‘rumour’, and how easy to start a rumour that the stock you want to go down is in trouble.

    It does nothing whatsover for the promotion and funding of business which is what shares are supposed to be about.

  8. Cynthia Martin says:

    Can anyone tell us where quantitive easing money has gone? Is there any accountability for this? Has it disappeared into the financial system? Would quantitative easing not be better applied to building infrastructure and creating jobs? Bankers appear to be helping themselves and politicians have surrendered power to big financial institutions.

    1. Charles Jurcich says:

      Cynthia,
      My understanding is that QE doesn’t really add any money to the economy, it simply adds excess reserves to the banking system – i.e. it doesn’t “go” anywhere. It has however lowered the value of the £ which may boost exports, and it might help to reduce the interest on future government debt – but that’s about it.

      I agree with you, that if we are going to lower the value of the £, better to add real money to the economy building infrastructure etc to create jobs and growth.

  9. Kes says:

    Faisal,
    It might be helpful to mention that the UK’s position within the global economic situation is bound to make life very difficult for the government in the years ahead. We seem to be slipping into Crisis Part 2 just about everywhere from US to Brazil to China. The UK cannot be immune from that.

    It is very easy to portray our government as cutting too much at a difficult time. The trouble is that there is little option as the previous government removed any freedom of manoeuvre by its failure to follow Keynes, let alone common sense, with its reckless binge spending.

    Absolute levels of spending are also a major illusion beloved of our Labour colleagues. I am sure that most people understand that there has been monstrous waste of public money. Huge sums have been spent but horribly inefficiently. The NHS, education, MoD, civil service, policing etc etc could all deliver significantly improved services for a lot less money if they were well managed.

    The UK is vulnerable. A policy of radically improving efficiency is probably the only way out. Bond yields reflect recessionary concerns but also reflect policies that give us a chance long term.

    1. Andrew Dundas says:

      Actually, it was the 2nd Wall Street crash that caused our difficulties. Not any ‘reckless spending’.
      In 2007, US Banks discovered that they’d been misled by the ratings agencies: the CDOs they’d bought from Lehman Bros couldn’t be valued because no one knew for sure how many potential defaulters they contained. Auditors assumed any of Lehman’s counter-parties had unreliable balance sheets, so Wall St banks stopped lending into the LIBOR market: which did for Northern Rock’s borrowing strategy.
      As the CDO problems rolled on, UK Banks wrote down the value of their assets against their tax liabilities. Which cut Corporation Tax receipts to well below normal, thus creating the alarming growth in the UK deficit.
      That problem was compounded because it turns out that RBS had bought dud finance houses in the US and a bankrupt bank in Holland (ABN-Amro) whose bad debts swamped its balance sheet. Meantime another spiv-run Bank (BoS) had been making ‘entrepreneurial’ loans which were turning bad too. Government guaranteed the Banks in return for shares we now own. The cost of those guarantees are treated as public spending …
      So. Not reckless spending. Just reckless…

  10. Cicero - 55 BC says:

    “The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt. People must again learn to work, instead of living on public assistance.”

  11. e scared says:

    Mass yob culture largely opportunistic, hardly an unknown.What gave rise to the opportunity, why now, I assume this is the question at point? Criminal Justice Budgets vs. what else, when times are hard, might act upon levels of criminality, mindlessness, a deep hatred and disregard for ones community exploding on to the streets? Not the state of the economy that’s a ridicules idea, the problem is that some rioters have council houses and they alone need to be made homeless.(Owner occupiers don’t need to worry yet, that would take a new law).

    A spokesman recently said Greece will default and that means their banks will be supported by taxs. He side stepped a question on individual EU countries as it’s simply a binary question, the Euro zone will federalise or breakup (the latter most likely). But nevertheless, all will pay back the money our governments have been borrowing for us to live off. Not his exact words but you get the gist. I wondered, is this God talking or just a Master of the Universe. And then I wondered if my portion of the debt will be deducted at source, assuming a functioning government is retained after the above events come to pass…

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