There has been much talk of austerity of late, in particular in Europe. For example, the UK is apparently on the road to austerity. However, when looking at what is taking place, what we are not seeing is any realistic austerity, but rather a slowing in the rate of growth of debt accumulation. The arguments for ongoing debt accumulation are somewhat puzzling in the context of what is taking place in the broader world economy. There is a belief that, somehow, real economic growth (as opposed to consumption built upon debt) will return to the developed world economies, and that this will allow the developed world to grow out of debt.
But what of the competition from the emerging economies? Is everything going to suddenly go into reverse, and the developed world will return to economic ascendancy? According to many analysts, it appears that they just believe this will happen. As if by magic, all will return to how the world used to be. But why should it? Is there some cosmic law that suggests that the developed world must succeed? A recent graph in the Economist (sorry, I can not find the link) showed how India and China were the dominant economies for most of history. If anything, there is a cosmic law that suggests that China and India must succeed, with the Western success a weird exception. A few centuries of economic dominance does not make ongoing dominance inevitable, and the rise of the Japanese economy is a salutary lesson in how fast a situation can change. The difference in the modern situation is the scale of India and China – the amount of potential that is still untapped.
Within this context, the ongoing borrowing and profligacy of the developed world economies just does not make sense. The days of competition between high cost economies have gone – the developed world economies are competing with low cost economies. One way or another, the developed world must face that challenge. Borrowing money, printing money, and all of the other policies that are being enacted are simply delaying mechanisms. They are just means of hiding the falling competitiveness of the developed world.