Now that the absolutely irrelevant debate over the applicability of the 90% debt/GDP Reinhart and Rogoff hard cutoff for sovereign growth is supposedly over due to an excel mistake of the type that JPMorgan did at least once to misrepresent its VaR both internally and to public shareholders (which to a large group of supposedly people is equivalent to supporting the notion that a record debt global conflagration can only be resolved with even more debt), perhaps the debate can shift to another question: why despite all the bickering and complaints, Europe never actually engaged in austerity, in spending or debt cuts, and that the primary reason the people’s plight in the periphery worsened in the past three years is nothing more or less than gross political and governing incompetence?
Exhibit 1: the only two countries in Europe that have actually reduced government spending are Iceland and Hungary (and Ireland has done a good job of keeping spending flat). To everyone else: please complain about austerity louder – maybe it can mask the fact that you never actually implemented any in the first place.
Exhibit 2: change in public debt. No comment necessary
Exhibit 3: Has the surge in debt resulted in any increase in growth? Yes. If by yes one means no of course.
Finally, here is why the R&R defintion is completely meaningless – debt is fungible, and in a ZIRP world in which all debt is backstopped by central banks, not just sovereign, the true metric is consoldated debt to GDP, not just government. That chart, as Morgan Stanley reminded us some time ago, shows that 90% is a completely irrelevant metric.
But wait, there’s much more!
When one adds contingent, off-balance sheet liabilities that are not represented by currently funded debt, including healthcare, pension and various other soon-to-be-debt-funded guarantees, things get simply ridiculous:
So don’t worry, and spend, spend, spend (on credit of course), not because someone made and excel error, but because it’s not like there is any hope of any of these trillions and trillions in current and future obligations will ever be honored and/or funded.
Inspired by Sean Corrigan of Diapason