Rob Parenteau: Revisiting the PIIGS Led to Slaughter Perspective – Implications of a Greek Default
By Rob Parenteau, CFA, sole proprietor of MacroStrategy Edge, editor of The Richebacher Letter, and a research associate of The Levy Economics Institute
Last year we provided an analysis (on the Naked Capitalism blog and elsewhere, including the Levy Economics Institute Annual Minsky Conference, and CBC interviews), based on the financial balances approach that suggested a number of problems could arise with the eurozone’s pursuit of what are called “expansionary fiscal consolidations”. Without a large and sustained swing into a current account surplus, the financial balance approach revealed that the pursuit of fiscal consolidation would undermine the ability of the private sector to service the debt loads it had built up during the prior decade of currency union. Simply put, higher taxes and lower government spending drain cash flow from households and firms, and that increases the financial fragility of economies.
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