Is austerity going out of fashion?

Across Europe, hundreds of thousands of protesters in 23 countries let their leaders know how they feel about severe job and budget cuts. Mark Phillips reports the people of Spain feel they've lost control of their destiny; they have resorted to protesting as one of the only options they have left. David Ramos

(MoneyWatch) Is austerity going out of fashion?

As if it weren't bad enough that the academic underpinning for austerity turned out to be faulty (the Excel spreadsheet at fault again) now bondholders are starting to question whether governments struggling to maintain their bond ratings are doing the right thing.

Bill Gross, who runs the world's largest bond fund for Pimco, has started to question whether tightening the fiscal belt is the right way to grow national economies. The public, of course, has been protesting austerity measures for years now. But when the bond market weighs in, governments sit up and pay attention. This is, one might say, a curious feature of our so-called democracies.

In 2010, Gross argued, for example, that U.K. debt was too high and spending needed to be reined in. Now he's changed his mind: "Bond investors want growth much like equity investors," Mr. Gross told the Financial Times. "In the long term it is important to be fiscal and austere. It is important to have a relatively average or low rate of debt to GDP. The question . . . is how quickly to do it." And he went on to suggest that cutting spending was, perhaps, not the best way to create the conditions for a recovery.

At the same time, the IMF is starting to ask whether austerity really is the road to prosperity. You have to wonder at all of these highly qualified economists taking so long -- at such immense human cost -- to discover what every entrepreneur knows: namely, that you can't save your way to wealth. Increasingly, economics is starting to look like the movie business, an industry in which, as William Goldman famously put it, no one knows anything.

  • Margaret Heffernan On Twitter»

    Margaret Heffernan has been CEO of five businesses in the United States and United Kingdom. A speaker and writer, her most recent book Willful Blindness was shortlisted for the Financial Times Best Business Book 2011. Visit her on www.MHeffernan.com.

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