Default vs Austerity

Last week I asked:

So will America continue to tread the bone-ridden road of austerity, high taxation and crushing economic contraction, leading to excessive money-printing, and ending in the death of the dollar and an inflationary firestorm? Or will it choose the sustainable route of default, low taxes, a return to productive, organic growth, and the opportunity to decrease reliance on foreign energy and goods?

Today I present a case study in austerity (Latvia) vs default (Iceland). And I think it’s clear which is the path that clears the way for new growth and prosperity.

Here’s GDP:

And here’s unemployment:

Iceland is a shining example of a nation willing to shun the narrow interests of creditors in the name of its people’s prosperity.

Austerity (the bankers get their pound of flesh) is a nonsense path to misery — it is rather like expecting a heroin addict to go cold turkey. If your patient is hooked on government intervention and handouts, withdrawing those handouts will lead to riots, and just as significantly, a crushing contraction in both confidence and GDP. Getting junkies off their fix of government intervention requires organic growth and prosperity — hard to achieve in an economy strangled by excessive levels of public debt, and high taxation to pay interest on that debt.

The free market alternative to austerity is default — all lending, even lending to “Quadruple A” debtors — has risks, and the chief risk is that the debtor can’t afford to pay its debts. And if the debtor can’t afford to pay the debt, then either the debt should be renegotiated, or tough nuts. The people of the nation who have come (for better or worse) to depend on government services shouldn’t suffer for the malinvestment of bond traders and foreign creditors. Should the time come, it is the bond traders and creditors who must take a haircut.