Friday, April 13, 2012

The Investment Community Catches Up With the Rest of Us – Starts to Recognize that European Austerity Means Austerity

Next Week They Discover 2 + 2 = 4

As has been mentioned ad nauseum here and other places, the European policies of promoting austerity in the public sector to reduce government deficits don’t work.  It is simply not possible to grow an economy by shrinking it.  But Europe’s policy gurus believe that austerity is the right policy, and so are implementing it as fast as they can.  But investors are starting to get wise.

Investors are growing increasingly skeptical about the ability of Spain and other heavily indebted nations to successfully implement mandated austerity measures. The worry: Deep spending cuts and increased taxes could send those economies into a downward spiral, making it even tougher to handle their debt loads.

Duh!  What exactly did they think would happen?  Did they think that something illusionary like the ‘Confidence Fairy’ would descend into Europe and make all the good little companies spend and invest and hire just because they had confidence in the economy?  Uh, yes they did.  But now they have been hit by the ‘Reality Fairy’, and reality is not fantasy, reality is real.

In normal times, such a gesture of fiscal restraint might reassure bond markets. But increasingly, investors have grown concerned that measures like this in countries such as Greece, Portugal, Italy and Spain may hurt their economies too much as they struggle with their debts.

Spanish 10-year government-bond yields climbed 0.21 percentage point to 5.95% as prices declined. Though that yield is still well away from the 7% level economists consider unsustainable, many traders predict the bond selloff could accelerate if yields pass the 6% level, as has happened in the past.

In a new sign the nervousness is spreading, Italian 10-year yields rose to 5.67%.

And for more on Spain there is this.  Industrial production is plummeting in the country. 


MADRID—Spanish industrial production fell at an accelerated pace in February, the latest sign that the euro zone's fourth-largest economy remains mired in contraction as Prime Minister Mariano Rajoy expressed renewed support for austerity cuts.

Industrial production fell by 5.1% in February in calendar-adjusted terms after sliding 4.3% in January, due to lower activity in the construction and car-making sectors, statistics institute INE said Wednesday. Spain's industrial output hasn't been in positive territory for a year.

Gosh, we have said it before but apparently not everyone was listening.  Contractionary economic policy produces economic contraction.  Really, it does, just think about it. 

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