Europe vs the USA: Stimulus vs austerity

A short post, a significant event occurred this past weekend that will not be noted all that much now, but I suspect the history books may make note of it (it will be at least a point of debate). To date, the major players in the world have been in unison pushing stimulus money into their respective economies to try to jump start them again.  Now some will argue that it is working (siting increased spending, leveling off of house prices, strengthening GDP, etc) while the flip side will just point to the national debt and ask what about that?

So what happened?  G-20 Clash Over Recovery Risks ’Sub-Potential’ Growth.  In short, Europe has altered course, and no longer subscribes to the stimulus idea whereas the USA continues to push that as the road to recovery.  I think both sides of the coin will agree that it is bad if we all do not play the same game.

What happens now?  European governments will begin cutting back on their spending.  This will inevitably lead to layoffs, and all the bad things that occur when one is afraid for their job.  However, it will mean that investors should continue to support the government debt loads.  This does assume that the governments have the fortitude to actually cut back on spending. 

Fine, Europe is going one way, the USA can continue our method.  Well... not exactly.  Soon (soon being months - year, maybe two years) the European governments may be in better shape and investors will compare their sovereign debt to that of the USA.  Since I love analogies, picture 2 houses with machine guns firing at the zombies coming out of the forest.  Neither has an unlimited supply of ammo, but as long as both fire at equal rates it does not matter.  Say the European house slows down its fire rate to a trickle, thus conserving ammo.  What should the USA house do?  Go out in a blaze of glory?  If you had a box of ammo to contribute, whose house would you back?

We all committed to this path, its not fair that Europe has reversed course, but from their standpoint, Greece is next to bankrupt and Spain and others are headed down the same path.  They have to do something as stimulus is not working

History should note that at this moment Europe lost faith, and will likely ponder if they continued with stimulus might a depression have been avoided?  In the end it really does not matter, someone had to flinch.  The only question left now is when does the USA start to impose austerity measures?

And by the way, it does not matter all that much.  The zombies are going to win in the end regardless.  Happy hunting!

Patrick