Ritholtz: "Austerians" Have It All Wrong

Barry Ritholtz of FusionIQ and The Big Picture blog says that the Federal Reserve has done just about all it can do it fix the economy, and that changes to fiscal policy are needed to really get things moving in the right direction. But, he adds, many government officials have a track record of getting fiscal policy completely backwards.

Saying that he suspects the Fed’s blunt language in its recent statement was a message to Congress to take action, Ritholtz writes on his blog that he doesn’t think the elected officials who have been preaching austerity will listen. “Don’t expect a policy response from the Austerians,” he says. “These misguided politicos are in charge in D.C., despite having gotten the past few economic cycles precisely backwards. During the last expansion (2003-07), instead of raising taxes and cutting spending — managing the deficit, creating a better private/government spending ratio — the hypocritical deficit peacocks in the USA did the exact opposite. We cut taxes during (2) wartime, created yet another entitlement program, and raised yet other government spending during private sector economic expansion.”

That’s the sort of approach that should be taken today, when the economy is struggling, Ritholtz says. “Instead, we suffer from the opposite,” he writes. “Based upon a fundamental misunderstanding of the works of John Maynard Keynes, they are once again out of phase. Now, the same crowd is looking at raising taxes and reducing government spending when an already frail economy cannot support it. Hence, the Austerians and a complicit White House are all but guaranteeing a 1937 like recession will be increasingly likely.”

Ritholtz says that with the Fed out of ammo, “traders are now left to their own devices”. He sees decelerating growth, little new hiring, and peak profits falling 15% to 25%. He says the “next stop” is 1,100 for the S&P 500, “with 950 as a realistic downside target . . .”