Stimulate the economy or choose for spending cuts...?

The big question of today in the Netherlands (and perhaps also the world) is whether we should try to further stimulate the economy, encouraging the consumer to spend or whether we should cut (government) spending to ensure that in the future, the Dutch government can still cary its own weight?

I think that the answer may be suprisingly simple, but I don't hear it coming up in the debate in the Netherlands. And the answer is that we know from research that, although there are only 1 million citizens that have some stock in the stock markets, all 16 million inhabitants of the Netherlands become nervous when the stock markets fall. And consumers quickly react by saving money and not spending it.

Now, if we look ahead, the chances are very considerable that there will be more turbulence on the financial markets, leading to a consumer that is unwilling to spend. In that situation, one might find an argument for the Keynesian approach in which governments should increase spending. But, one could also say that experience from other countries tells us that cutting deep and quickly is far more beneficial than waiting and muddling through. So, let's not be afraid to let the recession bite and choose for and anticipate subdued government and consumer spending.

An additional argument for cutting government spending is that in practice, not much of the initial cutting proposals are being effected properly. They often sound tough, but are then modified by later compromises, ideas and newer insight. So the best bet in my opinion would be to choose for spending cuts and letting the citizens take care of themselves and their savings for a while.

You're welcome.

Banks stow away more money than during Lehman-crisis and politicians appear to remain unaware

Financial Times reports that the European banks now deposited more than 320 billion euro at the ECB, afraid of lending it to one another. This amount is higher than during the Lehman episode. And as a surprise, weblog Geenstijl is alert and reports about this matter. The AEX has plunged a bit and the Dow fell through the 10.000.

Today we were also informed that the consumer spending in April in Europe dropped considerably as a result of the European crisis. Everyone immediately started saving again. Which means that spending will indeed fall this year, when the eurocrisis continues (quite likely as Greece is completely unable to pay back).

It is surprising to note that this market reality hasn't reached the Dutch politicians. The economic crisis is still here. Yet, we see Emile Roemer -leader of the leftwing Socialistische Partij- claiming that he is going the redistribute the profits of Dutch banks of last year as if Robin Hood himself.

Well, dream on Emile, have a look at the P&Ls of last year and you'll see no profits there...