The Death of Equities?

Buck has been the dean of the SKK Graduate School of Business at Sungkyunkwan University, Seoul, since 2004. SKK GSB is the top MBA program in Korea and one of the top programs in Asia. Previously he was a finance professor and served as associate dean and chair of the finance department at the Indiana University Kelley School of Business. He follows the markets closely as a money manager as well. A version of this article in the Korea Times appeared yesterday, June 25, 2012.

 The Financial Times published an article last May about the end of the cult of equities.  If you are a member of the equities cult, you believe that an investment in equities will provide a superior risk-adjusted return in the long term relative to bonds. Even though risk may be greater, the equity risk premium (equity returns minus bond returns) will more than compensate for the additional risk. Equity returns come from two sources, dividends and capital appreciation. While dividend yields were low by historical standards, investors believed that most equity returns would come from capital appreciation.

Because equities are riskier than investment-grade bonds, for decades dividend yields exceeded bond yields. That all changed in 1956 when 10-year U.S. Treasury bond yields exceeded equity dividend yields for the first time in the U.S. going back a century. Bond yields exceeded dividend yields from 1956 to 2011-2012 when the relationship reversed after more than half a century. Recently the S&P 500 dividend yield was 2.2 percent versus the 10-year bond yield of 1.6 percent.

So the cult of equities started in the 1950s and certainly accelerated in the 1980s and 1990s as equities became the asset class of choice for institutional investors such as pension funds and endowment funds and individual investors through direct ownership of equities or indirectly through mutual funds, which grew rapidly during this period. Individual equity exposure also increased through their pension plans.

What started the cult of equities? One word: performance. From the beginning of 1950 to the end of 1955, equities, as represented by the S&P 500, provided annual returns of 25.2 percent versus 1 percent for long-term corporate and government bonds. As a legacy of WWII, the Federal Reserve, much like today, had suppressed long-term interest rates until 1950. As long-term interest rates rose, bond prices declined and annual returns were minuscule and less than inflation.  As the stock market crash of 1929 and the Great Depression became distant and faded memories, the appetite for equities increased.

Equities continued to outperform bonds from 1956 for the rest of the 20^th century, although bonds did as well as equities in the 1970s. From 1956 to the end of 1999, equities provided annual returns of 10.4 percent versus 6.0 percent for long-term corporate and government bonds. Inflation ran about 4.7 percent annually during this period, so real (inflation adjusted) returns were lower.

So what has caused investors to lose their appetite for equities? Again, one word: performance. The first decade of this century experienced two devastating bear markets in which investors lost at least half of their stock market wealth. The first bear market was a result of the dot.com bubble and an overvaluation of stocks in general. The S&P 500 peaked at 1527 in March 2000 and hit bottom at 777 in October 2002, a decline of -49.1 percent. Five years later, the S&P 500 hit a new peak of 1565 before it started a dramatic decline of 56.8 percent to 677 in March 2009. This was the worst bear market since 1929 and the first since then to have been caused by a financial crisis from the collapsing of credit and housing bubbles.

The end result has been an ugly first 11 years in this century for equities. From 2000 to 2010, the S&P 500 had an annual return of only 0.4 percent versus annual returns of 8.0 percent for long-term corporate and government bonds. Given annual inflation of 2.4 percent during this 11-year period, real returns were negative for the first time since the 1970s. Today the S&P 500 is still well below its March 2000 peak.

In addition to mediocre equity returns since 2000, equity volatility has also been at historic highs. The combination of low returns (negative real returns) and higher risk has been the primary factor for increasing investor risk aversion and decreasing appetite for equities. But not the only one. Other factors would include the financial crisis and the Eurozone crisis, increasing economic uncertainty, increased globalization, regulatory reform in the financial sector, tax rules favoring bonds over equities, high-frequency trading and the flash crash in 2010, less liquidity in the market and the growth of government debt and deficits. So institutional and individual investors have reallocated billions of dollars from equities to bonds and other financial assets since the financial crisis of 2008-2009.

In addition to investors losing interest in equities, corporations have also been reducing equity in their capital structure by repurchasing stocks, and raising billions of dollars in the bond markets, whether needed or not, because of historically low interest rates. The implications of the de-equitization of the financial system can be serious. Equity is the risk capital in a financial system and the absorber of economic shocks. Less equity will result in a more volatile economic system. Plus emerging companies usually publicly access the capital markets first in raising equity capital via an Initial Public Offering (IPO). Despite the publicity, good and bad, associated with the Facebook IPO, fewer companies are going public, annual average of 130 since 2001 versus 503 in the 1990s, which could eventually have a major impact on economic  growth. And investors have fewer choices today; the number of publicly traded companies has declined since 2000.

What should equity investors do going forward? If you are a contrarian or value investor, the Financial Times article could be good news. Many remember the BusinessWeek article in 1979 titled “The Death of Equities.” The 1970s were not a good decade for equities or bonds. Nominal equity returns were 5.9 percent annually, similar to long-term bonds, but inflation was 7.4 percent, so real return were negative for both bonds and stocks. The BusinessWeek article was widely quoted and publicized, but after the 1981-82 recession, the stock market enjoyed returns of 18.5 percent annually from 1982-1999, one of the best periods in stock market history. The media have a long history of bad-timing articles, perhaps this time also. A 1950s scenario of raising interest rates may benefit equities relative to bonds.

Investing in equities always involves uncertainty. There have been many unexpected events since 2000 impacting equity returns in a negative way: the dot.com, credit and housing bubbles; two recessions, one severe; the financial crisis; the Eurozone crisis; and acts of terrorism and wars, to mention a few.  Hopefully there will be fewer such events in the future and investors will regain their appetite for equities. Equities are one of the few ways in which investors can participate in the economic growth of companies and countries. A healthy equities market in which investors have confidence is important for the economy.

Old cults never die, they just fade away for a while; maybe the cult of equities is just lying dormant like in the 1970s, ready to spring back to life after a couple of years. Long live equities.

Can you kick a cliff down the road? Let’s kiss and make up.

Have we somehow gone beyond rational argument? Have we taken differences beyond a logical extreme? Are we about to self-destruct for no good reason? These are the kinds of things I keep hearing. You have to admit that in the US, the so-called fiscal cliff borders on insanity. The news is that congress wants to kick the cliff down the road. Can you kick a cliff down the road? If Congress decides to simply extend bad policies until well into 2013 will that really be the best we can get out of these goof balls? Remind me please. How much are we paying these guys to jeopardize our futures?

Recall the hitch-hiking scorpion that stings the turtle in mid-steam and they both drown. As he is going under the scorpion admits that he had to sting turtle because that’s what scorpions do. But we are not scorpions. We are people. We have brains. It makes little sense to play games with the fiscal cliff if other options are available.

Obama supporters say that Romney is not good Presidential material. Apparently they think he was a bad governor and a mean businessman. Romney supporters say Obama is not qualified to be president. They point to the dismal state of the economy today.  But please! Argue if you will about their relative successes in life and their specific qualifications. But please, both of these men are running for president. Why waste time with hateful and impertinent allegations? This argument about qualifications has very little to do with solving our immediate issues.

We voters agree on a lot of important things:

·         We agree that too much national debt can cause economic problems. We also agree that tolerating recessionary conditions for too long can be wasteful and unnecessary. 

·         We agree that tax revenues are well below normal. We also know that government spending is decidedly above normal. We know that using one or the other in isolation to solve deficit problems is probably not feasible.  Raising tax rates will surely slow the economy. So will reducing government spending.

·         We know that many poor people have circumstances where government support is the only remaining option. We also know that there are also many people called poor who are not and who could probably live without as much government assistance. We also know there is inefficiency and fraud in many government programs.  

·         We know there are many people who need society’s help with healthcare. We also know that healthcare costs are rising at rapid unsustainable rates and severely impact people of middle incomes.

·         Neither party’s goal is to destroy America. Both want to see the country succeed in economic and non-economic terms.

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I could go one with the many more shared beliefs. We also cherish our freedoms, our great cities, our supportive neighbors, or brave soldiers and so much more. In addition, I think most of us believe it is a waste of time, energy, and emotion to argue at a feverish pitch while our problems just seem to get bigger and bigger. Both sides are dug in –come hell or high water.

Instead of acknowledging and emphasizing the validity of all these share beliefs, we seem to delight in picking one side as the winner and spend our time belittling those who chose the other team.  We have fallen to a point where we would rather jump into a heated fight than rationally, creatively, and dispassionately weigh the facts and find ways to accomplish our joint goals. It is fun to scream for your team at a football game.  But the morning after the football game means little to society while the morning after the next election can mean everything? Are we as dumb as the scorpion?

Hopefully I am wrong but it is difficult to see many leaders in either party earnestly trying to solve problems. Most have agreed that nothing can be done before the election.  They spend more time trying to shame their opponents than governing.  Does it make sense to pay them for the coming months as they avoid doing their jobs? How did we get to such a ridiculous position? What is the problem? Here are some very unpleasant realities to chew on…

·        

There are no real solutions to these problems. Society tries but will ultimately fail anyway. It doesn’t matter who leads the country next year – he will fail anyway.

·         There might be a real solution but it is very complicated. This recession is not your Mother’s recession. Americans cannot handle complexity. Americans respond only to colorful and brief sound bites flowing from the mouths of very attractive quasi-experts. 

·         Any solution will definitely create redistributions of income and/or wealth. Those who see this process going against them will fight for their assets regardless of any long-run benefits that might come to them and others.

·         The press earns money by selling advertising. The higher the pitch and the bloodier the fight the more soap gets sold.

·         Professors, consultants, bloggers, and other experts want to sell their time and words but realize that given the above it makes no sense to explain long trains of information and statistics that support complicated centrist positions. It is not easy to differentiate the professors from the 6 pm news.

·         Companies, labor unions, and other recipients of government largess support only simple positions that help them continue to receive targeted assistance.

·         More?

It seems pretty hopeless, except for one fact. If things get bad enough for long enough self-motivated people will begin to see that their own behaviors are self-defeating. Many people will discover a correlation between their own gradual economic demise and things like intellectual laziness, inattentiveness, selfishness, and politicians who seem never concerned about finding real solutions. This hapless recovery is not enough for most of us to see the landmines of our own ways. How much more will this country have to suffer before we get it? What disaster will have to occur before we elect people who will not feed this frenzy of ignorance and selfishness? Divide and conquer makes a lot of people rich but impoverishes the rest of us. That is, until we clearly see the game. Then, maybe we will have a chance and won’t need to kick cans or cliffs down the hill!

More “Gooulish” Nonsense about European Fiscal Integration

Austan Goolsby wrote in the WSJ on May 30, “A Fiscal Union won’t fix the Euro Crisis.” I first thought that since he is a professor at the University of Chicago that we might be kindred spirits. But that is not the case. While we agree about the ineptness of a proposed European fiscal union we seem to come at this agreement from very different angles. I dislike the fiscal union because it would create too much pressure towards populist expansionary policies across Europe. He dislikes it because he thinks it won’t do enough to supply a coordinated European government stimulus.  

Here’s his reasoning. First, his data shows that a fiscal union among the 50 US states means that US states routinely subsidize each other.  For example, Minnesotans routinely bail out Mississipians through the magic of a federal government. Goolsby worries that a European fiscal treaty would allow any country to easily veto that kind of inter-state redistribution. Thus in a European fiscal union Goolsby worries the austerity hounds would win. I am concerned about the opposite.

Second, Goolsby blames the woes of Ireland, Greece, Spain and others on the monetary union. He notes that since the monetary union began German’s real wages have grown slower than productivity while the opposite happened in the peripheral countries. Thus, the monetary union – according to Dr. G (how many times can I type Goolsby?) – has made the peripheral countries less competitive. This might not be so bad but the monetary union prevents these countries from overcoming this competitive disadvantage through currency devaluation. Dr. G laments that without an exchange rate the only avenue left for these countries is “moving, inflating, struggling, or subsidizing”. Thus he wants the stronger European countries to either subsidize the weaker ones or he wants them to inflate.

Wow. Can we check the facts please? The US federal experiment succeeds because some states subsidize the rest? That is Dr. G’s main explanation for decades of US growth? The only choice for Europe to improve the lot of Italians and Greeks is inflation/subsidy from Germans and Finns? The implication is that the countries that have benefited from monetary union should be the ones doing the subsidizing and inflating. This is the secret ingredient necessary for EU growth?

From Dr. G’s analysis one should find in the years after 1998 when the monetary union began, the peripheral countries were weakened while Germany and some of the others were strengthened. I found a table of real GDP growth figures for OECD countries (  http://www.oecd.org/document/3/0,3746,en_2649_34109_2483901_1_1_1_1,00.html ) with data for the years from 1987 through 2007). There is little support for Dr. G in a pre- post- comparison of real GDP annual growth around the year 1998:

·         Finland’s growth rate was higher after monetary union (2.2% per year versus 1.7%)       

·         France’s growth rate was about the same in both time periods at about 2.2% per year

·         Germany’s average growth rate fell from 2.6% per year to about 1.6% per year after monetary union

·         Ireland’s growth rate fell very marginally after monetary union from 6.1% to 5.8% per year

·         Italy’s average annual real GDP growth also fell marginally from 1.9% to 1.6%.

·         The Netherlands’ growth was helped by monetary union – from 2.5% to 3.1%

·         Portugal’s growth rate almost halved from 3.4% per year to 1.8%.

·         Spain improved considerably after monetary union – from 2.7% before to 4.6% per year afterward.

Germany and Spain’s performances are just the opposite of G’s conclusion since Germany seems to be weakened while Spain was improved by monetary union. Using data on standardized unemployment rates across these same countries shows that except for Portugal, Eurozone countries were greatly improved by the monetary union. For example, Spain’s unemployment rates averaged well above 15% in the years before 1998. Afterward Spain’s unemployment rates averaged about 10% and fell to 8.3% in 2007. It is true that trade patterns after 1998 changed international competitiveness within the Eurozone – but these changes are not mirrored in overall economic indicators like output and employment.

The most outlandish ghoulish assumption, however, is that somehow economic growth and prosperity has much to do with national stimulus and subsidization. I know of no growth theory that supports such an unwarranted conclusion. Growth is all about marshalling inputs and using them in increasingly productive and innovative and competitive ways.  In today’s cynical and skeptical environment stimulus and subsidy are even less useful. There is a widespread concern about more stimulus since governments are deeply in debt and so little has been accomplished in the way of competitive restructuring of financial, product, and labor markets.

Back to the main point about increased fiscal integration of Europe. Dr. G is right – a tighter fiscal cooperation among the 17 Eurozone countries would not be a good idea for Europe. But the reason for the failure is not that it would bring too little stimulus and subsidy. It is precisely the opposite.  Such a democratic project among the nations of Europe would soon produce a majority for the same kind of populist policy trash that now dominates the US. I wouldn’t wish that on anyone! A fiscal union is not warranted by monetary union nor is it in the best interests of any of these countries. 

Will the US Recovery Experience a Fourth Anniversary in 2013?

Two Guest Bloggers this week on the topic of the current US economic recovery. The first is by Tico Moreno (Current Reality is the precise Result of Current Policies). Directly following is the contribution by Buck Klemkosky (Happy third Anniversary).

CURRENT REALITY IS THE PRECISE RESULT OF CURRENT POLICIES

 by Tico Moreno

“Tico Moreno is the owner/manager of a coffee service company that operates in Ft. Myers and Naples, FL. Prior to moving to Sanibel Island FL he worked in Venezuela where he was a promoter and president of a 1,500 Ha. shrimp farm, was involved in planning and logistics in the banking and beer sectors, and was a professor of management at a University. He has a PhD in Engineering Management from Clemson University.”

The May employment figures released by The Labor Department were disappointing. From January 2009 to May 2012 the civilian non-institutional population 16 years or older has increased from 234 million to 243 million, an increase of 9 million, but the number of people employed has remained the same at 142 million. If the same % of the population that was employed in January 2009 were employed in May 2012, the total number employed would be 147 million, so we have a net of 5 million missing jobs. This weak employment scenario is precisely the one to be expected as a consequence of the policies being applied over the last three years. Let’s see:

Monetary policy has been to artificially keep interest rates low. Artificial application of tools will bring about artificial results. We are familiar with the recent experience of what happens when we artificially keep the price of money under what the market rate would be, given our propensity to save. Production beyond what people would purchase is stimulated. Last time around it was production of housing. No telling what bubble is being stimulated this time. Last time the market reacted very efficiently to the carrots and sticks of the time and produced housing in extraordinary numbers. Had the Fed not made available the cheap fuel, bankers would have not been able to make as many housing loans. This time, so far as we know, what has increased is the cost of food and energy, but there is no substantive growth.

Fiscal policy has been Keynesian: increase spending by the Federal Government in the hope that that spending will stimulate the economy. But the government is no magician that can create prosperity; it can only redistribute it. For it to spend one dollar the government has to subtract that dollar from somewhere, a move that has the effect of reducing growth somewhere else. The net effect is no growth and deficits. An alternative approach is a supply-side oriented one: make the economy grow by reducing tax rates and regulations. This approach may increase the deficit initially, but in the end the induced economic growth brings about more revenue to the government. The choice between Keynesian and supply-side economics is not only theoretical. The evidence of the real world abundantly supports the success of the supply side approach and the failure of the Keynesian approach. Witness the Kennedy and Reagan supply-side induced growths, and the Hoover-FDR Keynesian failure to get the economy going in over 14 years of trying. In fact even now, the paltry growth we are experiencing only started after the certainty that the so called Bush-tax-cuts would be extended, a supply-side move.

We are currently experiencing the exact effect caused by the current economic policies.

HAPPY THIRD ANNIVERSARY

 by Buck Klemkosky

Buck has been the dean of the SKK Graduate School of Business at Sungkyunkwan University, Seoul, since 2004. SKK GSB is the top MBA program in Korea and one of the top programs in Asia. Previously he was a finance professor and served as associate dean and chair of the finance department at the Indiana University Kelley School of Business. He follows the markets closely as a money manager as well. A version of this article in the Korea Times appeared yesterday, June 4, 2012.

June 2012 marks the third anniversary of the end of the Great Recession, the most severe of the 11 U.S. recessions since WWII – although the 1981-82 recession was comparable. Conventional wisdom is that the strength of a recovery is related to the depth of the recession. That has not happened three years into the U.S. recovery.

How bad has it been? The growth in real (inflation adjusted) Gross Domestic Product (GDP) has been 2.4 percent since the start of the recovery in July 2009, about half of what real GDP growth would normally be three years into a recovery. The growth rate also lags the long-term (1997-2007) U.S. GDP growth rate of 3.4 percent.

The unemployment statistics appear to be better than GDP growth, but they are deceiving. During the Great Recession, 8.8 million jobs were lost and 4.5 million jobs created thus far during the recovery, so there are fewer jobs in the U.S. today than in December 2007 when the recession started. Even though employment is still several million below its peak, the unemployment rate has dropped from a peak of 10.1 percent to 8.1 percent today.

Why the significant drop in the unemployment rate? The big reason is the drop in the civilian labor participation rate which measures the number of people (16 years of age and older) who are working or looking for work versus the number in the total population. The labor participation rate has dropped from a peak of 67.3 percent in 2000 to the current rate of 63.6 percent, the lowest since 1981-82. The continued decline is unusual in an economic recovery because more people usually seek employment as the economy improves.  Since the recession ended, the rate has fallen from 65.7 percent to the current 63.6 percent, thus the lower unemployment rate.

While the potential number of workers has increased during the recovery, the number leaving the workforce has increased even more, taking down the unemployment rate. So where have all the workers gone? Some of the baby boomers (those born between 1946 and 1964) may be retiring early, marginal workers may not have entered the workforce because of slow job growth and stagnant wages, and more are opting for government subsidies. Medicaid spending, disability payments and food stamp usage have all risen sharply under the Obama administration. The bottom line is that no one has a good grasp of the numbers and why people are leaving the workforce.

There are numerous reasons why the U.S. economic recovery continues below average. First, the Great Recession was caused by the severe financial crisis of 2007-2008. As a result, households have had to pay down debt, and banks have had to increase their capital base by extending less credit. Evidence shows that recoveries from financial-caused recessions are slower than other recessions because of the deleveraging that has to occur. It may take more time for this to work its way through the system, so slow economic growth may be the norm in the U.S. and Europe for several more years.

As the experience of Japan has demonstrated, asset bubbles such as in housing can impede an economic recovery. U.S. home prices have fallen about one-third from their 2006 peak because of the speculative bubble in housing prices and over supply of houses. Usually construction, housing and commercial, leads an economy out of a recession, but not this time. Construction jobs are still 25 percent below their 2007 peak in the U.S. So until housing prices stabilize and the excess capacity is worked down, this important segment will be a drag on the economy.

The U.S. corporate sector is sitting on more than $2 trillion in cash and cash equivalents. They are investing less in plant and equipment than normal in a recovery. Why the reluctance to invest? The main reason is economic uncertainty caused by the problems in the Eurozone, a slowdown in China, regulatory reform, healthcare costs (including Obamacare), the so-called fiscal cliff facing the U.S. in 2013 when the Bush tax cuts expire and mandatory spending cuts to the U.S. budget take place, and escalating public-sector debt. Because of below-normal corporate investment and gains in productivity, manufacturing jobs in the U.S. are still 15 percent below their 2007 peak.

What can be done to stimulate the U.S. economy? Probably not much. Monetary policy has pretty much been played out with historically low interest rates, several rounds of quantitative easing, excessive bank reserves, and massive amounts of liquidity. Fiscal policy also is constrained. The U.S. has already borrowed more than $5 trillion to cover fiscal deficits since the start of the Great Recession. Some may argue that there has not been enough stimulus, but $5 trillion has resulted in GDP growth of less than $1 trillion. The bond markets are also closely monitoring public-sector debt and will quickly raise bond yields if government debt and deficits appear unreasonable.

What the U.S. economy needs more than anything is confidence. Confidence that government can  control spending and deficits, that consumers can spend but also not take on too much debt, that banks can provide credit again but also manage risk, and that regulatory reform is reasonable and not anti-business. Otherwise, it is difficult to see what will get the U.S. economy back to a normal growth rate. The worst economic recovery since WWII may continue on its present path. Or worse, it may result in another recession, and there may not be a fourth anniversary of the recovery to write about. Time will tell.

Negative Real Interest Rates Cannot Exist. Or can they?

Imagine going into a bank to borrow some money for a new car. The banker tells you that the interest rate is -3%. You look around the room for the Candid Camera camera and Alan Funt and then ask the banker to repeat what he said. So he speaks slowly so you will understand. If you borrow $10,000 from the bank today and pay the loan off in full at the end of the year – the bank will give you $300.

You immediately get very skeptical. Usually a car loan is quoted at something more like a +10% interest rate and will require that you pay back the $10,000 plus another $1,000 in interest. As such negative interest rates are not part of your usual experience and therefore require a second look.

There are two dimensions to every credit transaction. If in the above case the borrower is getting rewarded for borrowing then the creditor is getting a penalty. So right off let’s agree that negative interest rates tend to favor or incent the borrower – but do the opposite for lenders. So if this was a rugby match the side with jerseys marked borrower would be cheering. The lender side would be weeping in their Fosters.

But before going on to that excitement, we need to make a distinction between market and real interest rates. Right now, most market interest rates are not negative though some are. However it is true that many real interest rates are negative.  

First, market interest rates. How can some market interest rates be negative? Most banks are not quoting negative market rates on loans or deposits. But bonds also offer interest rates. A bond has a rate written on it – it says that if you hold this bond on such and such a date then you will receive the coupon return. So if you buy a $100 bond (you lend $100 to the borrowing company or government) with a coupon return of 4% then you would receive $4 per year. If this bond matures in one year then you will have received $104 back for your $100 investment. That sounds pretty cool. But if you sell that bond on a day when not many people want to buy you might accept $95 for it. In that case Buck, who bought this one-year bond, paid $95 for a security that will give him $104 at year’s end. He expects to earn 9.5% on his $95 investment.  A week later Buck sells the same bond on a day when the market is crazy for bonds. Myra buys the bond for $105 that day. At the end of the year she expects to get $104 back for her $105 investment. Way to go Myra! You get a -1% return on your $105 investment.  

Why would Myra or anyone else buy a bond with a negative return? One reason is that she likes the color of the print on the bond. A more important reason is that Myra looked around and noticed that most stocks, bonds, and real estate were very risky investments. While -1% doesn’t look very good in historical terms, it might look great compared to what she might get back from an investment today in a bank in Greece.

At this moment we don’t see too many cases of negative market returns. What we see more of is negative real interest rates. On Friday the market closed with the following market rates for US Treasuries – 1-year at 0.17%; 10 year 1.45%, 30-year 2.52%.  These are very low market rates. But for all these cases the real returns are negative. Why? Because a real return states the return in terms of purchasing power over goods and services. To obtain a real rate we subtract the expected future expected inflation rate from the market interest rate. How much annual inflation do you expect in the prices of goods and services in the next year? 10 years? 30 years? We could quibble but let’s just say that it seems reasonable that over any of those time periods the prices of goods and services will rise by at least 2.52%. If so, then as of last Friday there was a very negative real rate on 1-year bonds; at least a -1% real return on 10-year treasuries; and a wash for the 30-year bonds.

What is the upshot?

·         This is a time of great global financial risk and US Treasuries are the go-to asset

·         Market and real interest rates have gone so low recently because of market forces – not because the Fed drove them down.

·         This leaves very little for Fed policy to do now. Would it really help if the Fed drove these rates even lower?

·         Meanwhile borrowers are pretty happy and creditors are not. 

Saving for a Rainy Day

Larry – eat your vegetables, read a book, and save some of your allowance.  How many times did my mother advise me of the basics of a good life? It is not easy to argue with any of these recommendations. We wouldn’t need this kind of advice, of course, if it was easy to follow. Most people struggle to find time in the day to read and learn; to prepare healthy meals; and to not spend every penny. It is this spending and saving issue I want to focus on in this post. The bottom line is that the US squandered decades of opportunities to prepare for an economic crisis like the one we have been experiencing. It didn’t have to happen this way and it was caused largely because we cannot control our national spending.

Wants have no bounds. We can want more goods and then when we have enough of them we often want better ones. In either case this satisfaction requires more income. Not all of our money is spent on our own material satisfaction as most of us share our incomes with our relatives, friends, and members of our community. There is no real end to what we could spend in any given month or year. Yet, we all know that we should save. We save for predictable future events like our kids’ college educations. Of course we all know that Social Security is not enough to provide for our needs in retirement so we save for our golden years. We save for unpredictable events so that we can weather unexpected disasters, an illness, or a job separation.

If we don’t save then we take risks. Every month that finds us spending as much or more than our incomes means that we incur risks. This is not ALWAYS bad. If your future income is higher than expected you and your children can borrow money  at that time to finance a college education. Or you might be lucky and never encounter an unexpected layoff or firing.  Your employer might offer you a great retirement package that supplements your Social Security payments. You might win the lottery or receive a major gift from a relative or friend.  In those cases it turns out that you probably could have saved less. But then again, many of us may not be so lucky and therefore it is very important that we save. If we do not save and if we are not so lucky, then we suffer unnecessary consequences. Our child may not be able to afford college. A lack of saving means that you might have to sell your car or house after you lose your job. It could also mean that you have to borrow money or move into the home of an unpleasant relative. 

You get the picture. Another way of saying this is that there is a clear TRADEOFF between spending today and spending tomorrow. It is tempting to not save today. There is so much we need.  There is so much good we can do with the money right now. But this preference for the here and now clearly and definitely has a cost in terms of the risk of severe difficulties in the future.  By saving a little bit each month you reduce these risks. You sleep a little sounder and there is less probability of an economic disaster in the future. This is what my mom meant.

We are all human and therefore it is easy to understand human failings. But we should, I think, have a higher standard for countries and governments. While we could debate forever the appropriate extent of government spending and saving, I think most of us agree that there should be a government and we should pay taxes to that government so that it can perform important services.  A government is just like a person or household in the sense that it receives income (tax revenues) and it spends (outlays).  And just like us, a government can spend more or less than its current income. When it spends more than its income we call that a government budget deficit or government dis-saving. When it spends less than it receives we call that a government budget surplus or government saving.

Most of us expect our government to be prudent. Some countries have VERY prudent governments that routinely save.  Singapore is one of those countries. The Singapore Investment Corporation takes the country’s saving and invests it on the behalf of the people of Singapore.  We do not all share the view that governments should always save. To many of us, a prudent government would be one that saves in some years, dis-saves in other years, and routinely has some balance between deficits and surpluses. Notice that if a country follows this flip-flopping saving pattern that it never acquires much of a national debt. In years of deficits countries must borrow and acquire debt. In years of surpluses they do the opposite. Debts rise in some years and then are paid off in future years.  This behavior is sensible for me and you and most of us believe this is good for our government as well.

This means that we understand that countries, like individuals and families, have “bad years” where they need to spend more. We even have things called “automatic stabilizers” that enforce that outcome. When a country grows slowly, spending automatically rises and tax revenues fall without any legislation. Of course, when a country enters a very bad economic period, the government will sometimes augment these automatic stabilizers with discretionary fiscal policies that are designed to generate even bigger deficits. While the latter is controversial, I think it is safe to conclude that most people think this is government business as usual. 

Many of us believe it is the right and the responsibility for the government to spend more than it receives in revenue during slow growth and recessionary periods.

Luckily for most countries recessions are infrequent. So while we encounter deficits in the recession years, we have plenty of years to offset the debts incurred. Between 1990 and 2010 there were a total of 21 years in the US. Of those 21 years we had recessions that spanned about four years. After the recession in 1990 we did not have another recession in the USA until 20001. The next one came at the end of 2007. That means there were roughly 17 years when we did not have a recession. It is not unthinkable that during those 17 years our government would have been saving for a rainy day. How might things have been different during the global economic recession of the past years had government’s taken Marge Davidson’s advice to save a little?

Saving is made easier during years where economic growth is stronger. Automatic stabilizers raise tax revenue as they reduce government spending. So the automatic tendency is to increase government saving during these non-recession y ears. During all the non-recession years between 1960 and 2010, you find exactly that – tax revenues not only rose but they rose as a percentage of GDP. That is, taxes rose even faster than GDP in each between-recession time period. But here is the interesting thing about the USA – in only one of these time periods between recessions did the USA budget balance turn to surplus. Between 1991 and 2000 the USA government budget went from a deficit of 3.6% of GDP to a surplus of 1.9%. But even in this case lasting 10 years only three of those years showed budget surpluses. Thus the entire between-recession decade had a very large deficit and managed to add about 18% to the USA national debt.

The recovery and expansion after the 1960 recession lasted about seven years. The first five years had surpluses followed by two years of deficits before the recession of 1969/70. That was the last between-recession time period which cannot be characterized by rising national debt. In that one case, government debt neither increased nor decreased. In a half century of US history we therefore find that our government has not been prudent.  We have added greatly to our national debt during recessions and added even more to the debt during the best times.

You might say that there were between recession time periods when the deficits were made smaller and I would agree with you. The data shows that the US budget deficit fell between 1976 and 1979, 1983 and 1989, and between 2002 and 2007. But notice that in these three episodes the lowest yearly government deficit as a percent of GDP was respectively, 0.5%, 2.4%, and 1.7%. In one sense that is good news. 

During those between-recession years, government deficits as a percentage of GDP did decline. But please notice that during each of those time periods, the national debt rose respectively by 7%, 26.3%, and 14.4%. It is not enough to reduce the deficits in those strong growth years – a country needs to provide surpluses to pay down their debts. Otherwise the debts get larger and larger.

Last month I spent $4 of my $2 allowance. Mom, I only spent $3 of my $2 allowance this month.  It is true that I did better this month and while my debt per month got smaller – my total debt increased from $2 to $3. This is no way for little Larry to get ready for college and it clearly is no way to run a country.  With more saving and less borrowing the onset of the world financial crisis might have been less impactful. More importantly, with more saving and less borrowing, the ability of countries to positively deal with the impacts of the crisis would have been much stronger. Clearly one lesson we should learn from this crisis is the importance of sovereign saving. Of course, we might also eat more vegetables and read a book or two!

I end this with a comparison of the US against 29 other countries – countries that are compared in a publication called Annual International Economic Trends published by the Federal Reserve Bank of St. Louis. Using a recent edition and an earlier one dated 1999 I was able to cobble together annual government budget balances (as a percent of GDP) for 30 countries from 1986 to 2007 – a time period encompassing 22 years. 

I rank these 30 countries in terms of how many times they saved – or how many times* they had budget surpluses in those 22 years. A brief summary follows:

·         Out of those 30 countries, the US ranked 19^th in number of budget surpluses.

·         The US had four surpluses in those 22 years. Those surpluses came back-to-back between 1996 and 1999. During those 22 years there were four recession years. The US government should have been able to save in 18 of those years and managed to save in only four of them.  In 14 years of growth taxes as a percent of GDP rose. Thus in the US we found ways to increase spending even more than taxes during the good times.

·         5 Countries were the best savers with S. Korea and France leading that group having surpluses in all 22 years. The other three countries Malaysia, Chile, and Norway had at least 19 surpluses in the 22 years.

·         Another 13 countries were middle savers – with government surpluses in 5-14 of the 22 years.

·         The bottom group of government savers consisted of the remaining 12 countries – countries that had surpluses in 0 to 4 of the 22 years. Five of these 13 had deficits in all 22 years (Austria, Greece, Israel, Italy and Turkey. The US was part of this group.

*I admit that this evidence is not exhaustive. I have not accounted for the size of the surpluses and deficits. But my main point has to do with spending habits and habits have something to do with frequency.  The US government saved only 4 times in 22 years while most countries routinely saved much more frequently. Since the median number of years saved by these 30 countries was 8 years – the US was well below the median. 

The US is in the company of several countries that have had the most dire choices and consequences because of their inabilities to withstand the financial impacts of the recent world economic recession. 

Austerity is Hot

Warning – No matter how hard I tried I could not write on this topic in less than three encyclopedias. 

Here’s the plan. Those of you who don’t have six months to read this veritable Gone with the Wind masterpiece, I have divided the post into two parts. Read down to the repeated happy faces (JJJJJJ) and stop. Those of you who apparently do not have a life may keep reading to see what groovy facts I used to support my conclusions…

Austerity is hotter than a Britney Spears /Beyonce hook-up. I wrote about austerity on May 1 and then my guest blogger Robert Klemkosky said more last week. Robert Barro piled on in the Wall Street Journal (May 10, page A15, “Stimulus Spending Keeps Failing”). No matter how you come at it, much of the wailing about austerity is overdone and inappropriate. It reflects the ongoing misdirected love of the Keynesian short-run. Barro makes two points. First he used Germany and Sweden as two examples of cases wherein governments imposed fiscal austerity while “sustaining comparatively strong growth.” So austerity must have some benefits. Second, he pointed out strong biases which accept the validity of Keynesian stimulus without requiring strong supporting empirical evidence. He likened preferences for more stimulus (and less austerity) to religion.  Amen.

Let’s back-up a minute and define what we are talking about. What do we mean by austerity? Let’s face it – austerity is a pretty austere word! Dictionary.com says austerity means “severe in manner or appearance; uncompromising, strict, forbidding; rigorously self-disciplined and severely moral….” L Makes you want to weep. Had enough? Want to say uncle? If that is what austerity means then most of us would rather run and hide than be austere. It sounds a lot like my fourth grade teacher at Coconut Grove elementary School, Mrs. Montgomery.

Luckily there is more to this term austerity. Wikipedia helps – it says

            “In economics, austerity is a loose term referring to policy of deficit-cutting by lowering spending often via a reduction in the amount of benefits and public services provided.^[1] Austerity policies are often used by governments to try to reduce their deficit spending^[2] and are sometimes coupled with increases in taxes to demonstrate long-term fiscal solvency to creditors.^[3] "Austerity" was named the word of the year by Merriam-Webster in 2010.^[4] However, regarding policies designed to address fiscal problems, a more accurate term is fiscal consolidation^[5], whereas "austerity" may as well mean countercyclical policies, eg in periods of high inflation. Critics argue that, in periods of high unemployment, austerity policies are counter-productive, because deficit cutting reduces GDP (which typically means less tax revenue to pay off the debt); and that short-term stimulus is necessary to deal with deficits in the long-term.…”

Wikipedia took that definition from a Paul Krugman article titled “Europe’s Economic Suicide”. Despite the source it is okay and useful and gets us on the right road. It does a couple of things. First it gets us to a way to measure austerity by looking at government budget positions. Second, it makes clear that we have more than one way to look at government budget positions. According to this definition it is okay (J) to have a policy of austerity if inflation is the country’s main problem but it is not okay (L) to reduce government deficits if the country’s main economic disease is recession and/or high unemployment. It hints, furthermore, that austerity might be a way to demonstrate to creditors a commitment to long-term fiscal solvency.

This definition puts any country in a real quandary if it has a debt problem AND high unemployment. A real debt problem implies that creditors are worried that the country in question may not pay its debts. Stimulus driven larger deficits make creditors even more uneasy and makes it harder to borrow what it needs to finance those larger deficits. Therein is the rub. Therein is Greece. Therein will be the US. Therein is a really cool word.

My analysis below the happy faces comes up with two conclusions. First, this austerity worry is a red herring. According to IMF statistics there has been much talk but very little action with respect to austerity. The evidence supports just the opposite of austerity – countries have piled on stimulus. Except for Greece, there has been very little austerity. These dour faced commentators who decry the negative economic impacts of austerity can find it in one and only one place – Greece. Now those folks have done austerity. Of course, only Greece REALLY needed it. Greece had a major government deficit problem even before the global crisis of 2008. While most countries fit the case that Keynesian stimulus was more popular than paying creditors right away, Greece did not. Their structural government deficit (this is a precise term that is defined more below) went from -10% of GDP in 2007 to -17% in 2009. Greece was a basket-case before the global recession and therefore was an even bigger problem once it joined the others in a cornucopia of government stimulus. But then Greece quickly moved to reduce their deficit to -6.8% of GDP. That was a major move to fiscal austerity.

My second conclusion is that despite historical amounts of government stimulus, there is no real evidence, a la Robert Barro, to support a further round of economic stimulus. While I would agree that too much austerity too quickly might not be prudent in Greece or anywhere else, the data nowhere supports the view that another round of solvency-threatening increases in government deficits is warranted. These deficits were not successful for many reasons – many reasons that I have been writing about for years now. The deficits do not in any way attack the root causes of the global recession and therefore have nothing better than fleeting impacts. Worst, they raise the specter of financial calamity and in so doing undermine the very goals they hope to achieve.

So there you have it. Austerity hardly exists today and doing the opposite of austerity – the chosen mantra of liberal politicians everywhere – will not work. It is too bad that government officials would rather lob austerity bombs back and forth at each other rather than sit down and patiently design policies that actually correspond to widely known financial and structural  problems.

One last point. Some of you would like to rip my brain out right through my eyeballs. Let me point out that the above summary does not stand on its own. The data and analysis below helps you see the basis for my conclusions…

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The fun starts here.I looked at International Monetary Fund (IMF) data on government deficits and conclude that very little austerity has been tried. That is, there is much ado about almost nothing. There is much concern and worry about austerity that simply has not happened yet. Or as austerity’s defense lawyer might proclaim to the jurors – ladies and gentlemen my client is not guilty!

So why is everyone so sure that austerity is behind the world’s most current economic crisis?  As in many of my previous posts I liken the wailing about government cuts to a disconnection between “cuts” and what amount to sensible retractions of temporary changes. It is as if these folks believe that no matter how much government spending is increased – there is never any case to be made to bring down temporary increases to something more sensible. It is like me when I gain five pounds in a week and promise to only gain three pounds next week. Would it really be that hard to lose one of those five pounds? 

Some of you are answering YES it would be that hard. You believe that the recent economic slowdowns in Europe, China, Brazil, and other places warrant more economic stimulus. You would say that now is not the right time to withdraw stimulus…or to even discuss reducing it. You want to wait until the dust settles a bit before pulling the rug out from under a very fragile world economy. To that I would say a couple things. First, aside from Greece, almost no one has shown any predilection to seriously reduce stimulus. The data below will support that little austerity has been tried. Second, there is some data to support the idea that more austerity is planned by a larger number of countries. But please notice that the plans do not involve reducing stimulus until 2013. The world economic recession started in late 2007 and was over before the end of 2009. That means we have given stimulus 4-6 years to work. If that is not evidence to make one rethink the effectiveness of more stimulus, I am not sure what would be. Some of you might retort that it just shows they didn’t try enough stimulus. The data below show massive stimulus. Please!

The data I use comes from the online version of the data appendix to the April 2012 IMF World Economic Outlook.  http://www.imf.org/external/pubs/ft/weo/2012/01/pdf/tblpartb.pdf   I used data from Table B7. Advance Economies: General Structural Balances. 

General Structural Balances are the closest measurements we have for changes in a government’s budget position based on intended legislated policy decisions.  The widely reported data on government budget balances are also impacted by automatic changes in government spending and taxes that arise because spending and revenues can change without any real changes in policy. When a country experiences slower growth, for example, under existing laws more will spent on open ended social programs and less revenue is collected from firms and individuals who report smaller incomes. The structural budget balance ignores those automatic changes and reports only changes in government spending and taxation that are the result of new legislation. Thus the structural balance better measures the intent to change policy.

The IMF data I am using reflects actual recorded structural budgets for 30 Advanced Economies from 2007 to 2011. It then forecasts the same information for each country for 2012 and 2013. In 2007 before the full onset of the global recession, these countries averaged structural government deficits of about -1.6% of their combined GDPs. Seven of these countries had structural budget surpluses in 2007; 22 had deficits, and one country had incomplete data. The deficits ranged from -1% for Australia to -8% for Ireland and -10% for Greece.  Thus most countries were in good shape but Ireland and Greece were not.  Only six countries had deficits that exceeded 3% of GDP. One would expect small deficits or surpluses in a strong year like 2007.

By 2010 these governments had time to change fiscal policy in response to a severe economic downturn and they did.  Some countries reached maximum budget stimulus in 2009 – others in 2010. At the maximum in 2009 or 2010, 22 countries had structural government deficits greater than 3%. Only Luxembourg, Finland and Korea had surpluses – though their surpluses were considerably smaller than in 2007. Thus – all countries in the IMF Table stimulated their economies. Whereas the average structural deficit in 2007 was -1.6% it had more than tripled to -5.2%. The biggest structural deficits were registered by Greece (-17%), Ireland (-12%), Portugal (-9%), Spain (-9%) and Japan (-8%).  Emphasis – their actual deficits were larger. Recall that I am quoting structural deficits.

What matters more for measuring intended policy stimulus is the CHANGE in the Structural Balance between 2007 and the maximum year. Below are some of the changes that underscore the intended fiscal stimulation. Whereas there was a more-than-tripling of stimulus for the whole group, Spain’s structural deficit increased about 7 times! Australia and New Zealand had large swings to stimulus that took them from surplus to large deficits. Notice that a swing of 5% means 5% of GDP. This is unambiguous stimulus. A swing of 5% of GDP is a major stimulus for any country. The table below shows this swing to stimulus for selected countries.

                                                2007    Max     Change

All countries                -1.6      -5.2      -3.4%

            Spain                           -1.1      -9.1      -8.0

            Greece                       -10.0    -17.3    -7.3

            New Zealand                 2.1     -4.5      -6.6

Japan                           -2.2      -8.1      -5.9

Australia                        1.0      -4.6      -5.6

            Portugal                       -3.8      -8.8      -5.0

US                               -2.8      -7.8      -5.0

            Ireland                          -8.0      -11.9    -3.9

To what extent did these countries move to austerity after reaching maximum stimulus in 2009/2010? To answer that question I examine the structural budget balance changes between the max year and 2011; and between the max year and 2013. If austerity had been imposed by 2011 then that would mean the structural budget position would have returned to its value in 2007. That is, if full austerity was in place by 2011, the structural balance would have widened during the recession and then gone back to its original value when the recession was over.

In the case of Greece, the structural deficit was down to -6.8% in 2011. Since it was -10% in 2007 and -17.3% in 2010 , this is a remarkable move towards austerity. But the data do not show that kind of result in general. The average for all countries was a structural budget deficit of -3.8% in 2011 of GDP. This means that there was 2.2% more stimulus remaining than the -1.6% in 2007. Below I describe the austerity changes by country. The details can be found in the table below.

No Austerity: 4 countries had no change in structural budget balance between the max value and the value in 2011. They had removed no stimulus. Thus they had no austerity.

Minimal Austerity: 9 Countries reduced their deficits from the maximum value attained in 2009 or 2010 by 0% to 20%. For example, Italy’s deficit fell from a peak of -3.6% of GDP in 2009 to -2.9% in 2011. That amounted to 0.7% of GDP during a two-year period or a 19% reduction in the structural deficit from its value in 2009. For the other 8 countries in this group, the declines were smaller.

Moderate Austerity: 11 countries reduced their deficits by between 25% and 50%. Malta, for example, was able to reduce its deficit from -5.4% in 2010 to -2.9% in 2011.

A total of 24 countries, therefore, did not halve their peak deficit by 2011. They did not go half-way toward removing the large stimulus to government from 2007 to the peak value.

Large Percentage but small absolute Austerity: 4 countries had very small deficits or surpluses at the max in 2009 or 2010. They had very small surpluses or deficits in 2011 too. In some cases the changes look large in terms of percentage changes but in no case was there a large change in the deficit or surplus. For example, Korea’s surplus went from 0.7% of GDP in 2009 to a surplus of 2.4% in 2011. That amounts to a 243% change but represents a 1.7% of GDP move over two years.

Country	Max Stimulus	2011	Austerity	% Austerity	Comment
New Zealand	-4.5	-4.5	0	0	No austerity
Japan	-8.1	-8.1	0	0	No austerity
Netherlands	-4.6	-4.6	0	0	No austerity
Denmark	-0.6	-0.6	0	0	No austerity
Norway	-5.8	-5.6	-0.2	3	Less than 20% Aus
US	-7.8	-7.2	-0.6	8	Less than 20% Aus
Cyprus	-6	-5.5	-0.5	8	Less than 20% Aus
Advanced	-5.8	-5.2	-0.6	10	Less than 20% Aus
Australia	-4.6	-4.1	-0.5	11	Less than 20% Aus
Canada	-4.1	-3.6	-0.5	12	Less than 20% Aus
Luxembourg	-0.8	-0.7	-0.1	13	Less than 20% Aus
Belgium	-4.4	-3.7	-0.7	16	Less than 20% Aus
Italy	-3.6	-2.9	-0.7	19	Less than 20% Aus
Euro	-4.4	-3.2	-1.2	27	27% to 46% Aus
Spain	-9.1	-6.5	-2.6	29	27% to 46% Aus
Other Advanced	-2.1	-1.5	-0.6	29	27% to 46% Aus
Slovak	-7.5	-5.3	-2.2	29	27% to 46% Aus
UK	-9	-6.3	-2.7	30	27% to 46% Aus
Slovenia	-5	-3.4	-1.6	32	27% to 46% Aus
France	-5	-3.4	-1.6	32	27% to 46% Aus
Ireland	-11.9	-8	-3.9	33	27% to 46% Aus
Austria	-3.6	-2.4	-1.2	33	27% to 46% Aus
Portugal	-8.8	-5.7	-3.1	35	27% to 46% Aus
Malta	-5.4	-2.9	-2.5	46	27% to 46% Aus
Germany	-2.2	-1	-1.2	55	Large % but small
Greece	-17.3	-6.8	-10.5	61	Very large Aus
Sweden	-1.2	0.2	-1.4	117	Large % but small
Korea	0.7	2.4	-1.7	243	Large % but small
Finland	-0.1	0.5	-0.6	600	Large % but small
Estonia	Na	na	Na	na	NA
Average	-5.3	-3.8	-1.5	na
Median	-4.6	-3.7	-0.7	29

What about beyond 2011? The IMF estimated structural budget balances for these countries in 2013. As you might expect, they forecast continued improvements in budgets. By 2013 the IMF sees 14 countries at or better than the structural deficits they had in 2007. That is, the IMF sees about half of these countries returning to the deficit levels of 2007 by 2013. Among those with the best forecasted austerity performances through 2013 are Greece, Italy, Ireland, and Portugal. The countries that remain with higher deficits and less austerity in 2013 are Japan, New Zealand, Luxembourg, Canada, Norway, and Finland.

While these future projections were done in early 2012, much has been happening in the EU that would put these improvements in doubt. Inasmuch, I would guess that if the IMF did the forecast process again today, it would estimate even less improvement in structural budgets in 2013. Thus they would find even less austerity between 2011 and 2013. 

This data suggests several things. First, there is no wild and crazy movement toward less government stimulus and more austerity when measured by changes in structural budget balances since 2007. Greece remains alone in this category. Greece needed austerity because it stood alone in terms of fiscal laxity before and during the recession. Second, there is no clear relationship between economic recovery and government stimulus/austerity. Germany had little stimulus and significant austerity and was among the strongest in terms of economic growth. The US had plenty of stimulus and little austerity and also had above average economic growth – though not necessarily any better than Germany’s. Third, countries doing the most austerity are not easy to categorize. For example, Spain had a dose of austerity which only reduced 29% of the stimulus before it; Ireland’s austerity removed a third government stimulus; Greece’s austerity removed more than the increases generated during the recession.

I am not sure what the issue is over Italy’s austerity. Italy’s structural deficit did not increase very much so there was little to remove. Italy’s structural deficit went from -3.2% in 2007 to -3.6% in 2009 and then down to -2.9% in 2011. In contrast the US structural deficit went from -2.8% in 2007 to -7.8% in 2010. It remained at 7.2% in 2011. Why are people focusing on Italy and ignoring the US so much?

As the world economy weakens in 2012 it is likely that the government budget numbers will look much worse than the structural budget data published by the IMF. So the level of alarm about deficits in any of these countries might be higher pitched than this data might indicate. But the question of intended stimulus versus intended policy austerity is unaffected by this dimension. It remains that much stimulus was added and much remains – very little of what we have seen governments implement can be called austerity. The Greeks appear to be the only exception.  Perhaps they could dial it back a bit. The rest should pay attention to their knitting.