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Has Europe hit the paradox of thrift wall? Is Australia next?

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I've been reading the IMF is starting to eat a bit of humble pie over it's forecast for European growth. Seems they were a tad optimistic, though surprisingly (sic) their forecasts were very similar to various Euro Governments.

Seems the IMF believed that for every euro in austerity cuts made, their modelling predicted economic growth would only fall by 0.5 Euro. Turns out the fall in GDP was more like 1.5 euro for every euro of cuts.

Considering the debt levels of the Euro periphery, slow growth of most of their major trading partners, and the deleveraging of the private sector, I always thought the huge levels of austerity being forced on most countries were going to be counter productive. Like a business, you can cut costs as much as you can, but if sales only keep going down, well eventually there's nothing left to cut or grow.

Possibly the years of poor management have left Europe with no choice, since the credibility of the Governments there to enact a plan to stimulate growth now, and then cut spending as the economy started growing again, well you would have to question if they could do it.

Throw in the large number of zombie companies over their, companies that have been able to get access to cheaper debt funding, but can barely afford to pay the interest bill on it, let alone any capital with surplus left over to reinvest in the company for growth, is Europe headed for some lost decades like Japan? The creative destruction of the market is not happening as it should.

Still, it's economics 101 with the paradox of thrift that what's good for the individual - saving for a rainy day - can have quite disastrous effects when everyone is starts doing the same, and Governments are joining in. Where will the demand come from to generate growth and a reduction in unemployment. 50% youth unemployment in Greece and Spain is a scary statistic.

Surely the IMF could see that without a huge increase in growth via exports, fiscal austerity on already weak economies was going to do more harm than good? Every major economic area is trying to export their way to growth, and it's just not going to happen.

Now I'm wondering if Australia could be headed the same way. The public sector staff cuts in Queensland, with a similar potential should the LNP win at a Federal level, is causing more people to feel insecure about their jobs. We've already had a massive turn around in consumption in Australia - savings rate from 0 to 10% in just a couple of years - that was shielded by the sky high terms of trade. Now that shield is failing, what next? Credit growth is stagnant, businesses are not borrowing for investment.

With the media always happy to report of job losses, though you don't hear about the 150 jobs created with each new masters or bunnings opening, I have a real fear that Australia is going to hit its own paradox of thrift wall in 2013.

With 21 years of economic growth maybe it's time for a recession to help with the restructuring of the economy, along the lines of the "recession we had to have"?
 
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we are probably already in recession, it just take a year or so for the figures to come, and unemployment figures are not relevant anymore in this country since part time jobs are excluded and the army of trademen/self employed are never counted in.
But all is good says JG
Amazingly it should soon be time to invest heavily in our stockmarket based on previous experience as this would be a possible sign of a bottom and we have not raised much since the GFC downs.
my opinion only
 
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Personally the problems are more deeper for Europe, more macro er if you will. Like you said about Japan, Europe might be in for lost decades. Parts of Europe now have population compositions similar to Japan in the early 90's with peak working population in the mid 2000's. Therefore the number of people that were accumulating wealth and working and hence driving growth is on the decline.

Add to this the fact that many countries still have very generous old style pension systems whose obligations are going to be very hard to fulfil, they have one of two choice.

1) Austerity to keep status-quo. Bad for growth but no guarantee that growth will happen anyway. Fixes the ill's of the system if you will. Things will seem normal after the population composition returns to normal, lots of pain in the meantime.

2) The Fed's fix. Print print print. Get inflation and growth. No idea what will happen in the future.

I some sketchy views....
 
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we are probably already in recession, it just take a year or so for the figures to come, and unemployment figures are not relevant anymore in this country since part time jobs are excluded and the army of trademen/self employed are never counted in.
But all is good says JG
Amazingly it should soon be time to invest heavily in our stockmarket based on previous experience as this would be a possible sign of a bottom and we have not raised much since the GFC downs.
my opinion only
While I don't think things are quite as good as some of the economic statics lead us to believe, I can't see them being too bad over the last year.

How bad can it be when people are buying record numbers of 4WDs and taking a record number of domestic and international holidays?

I'm starting to think whoever gets their flabby asses on the treasury benches is going to have a hell of a time.

I doubt we're going to hear any cold hard truths from either side - no votes in cutting middle class welfare. Just lots of bold promises, but we all should know by now that at best there's just a budgie smuggler on the emperor, or (for kath and kim fans) a t bar on the empress.

As for a good time to invest, I think it's nearly always a good time to invest. I'll gladly buy a well run company will to give me 6%+ fully franked dividends. It's not exciting, I wont be rich any time soon, but boring investments have done right for me
 

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