FRIDAY, MAY 17, 2013

Eric Sprott and David Franklin

Where is the gold coming from?

We have tried to balance supply and demand figures in the gold market to answer a 15 year old question - “where is the supply of gold coming from?” In 1998, Frank Veneroso first suggested that it was the Western Central Banks that were supplying the market and we’ve been looking for a smoking gun ever since.

We have published our research several times, but none has got more attention amongst gold-watchers than our two pieces on the activities of Western Central Banks. In the Markets at a Glance entitled “Do Western Central Banks Have Any Gold Left Part II” we surmised that more than 4,500 tonnes of gold was exported by the United States between 1991 and 2012. Further, we postulated that it must have come from the US Government as they would be the only viable provider of metal in this quantity. There is no other seller in the market that could explain the discrepancy in these import/export figures. Let’s review the updated figures and then examine some expert opinions.

On May 2nd, 2013 the U.S. Census Bureau and the U.S. Bureau of Economic Analysis, released their monthly update for the U.S. International Trade in Goods and Services. This report, which is issued through the Department of Commerce shows that from January to March 2013 the US was again a net exporter of gold.1 It shows $11.1 billion in exports of non-monetary gold and $4.1 billion in imports of the same, for a net export of $7 billion USD in non-monetary gold in the first three months of 2013. Using an average price of gold over this time period of $1,631 this equates to another 121 tonnes of gold that left the United States. Annualised, this first quarter figure would equate to $28 billion or approximately 486 tonnes of gold. Again it must be conceded that the only plausible seller of that much bullion is the US Government. We look forward to April’s figures as they may provide a new perspective on these gold flows given the extreme price drop gold experienced.

Last week, Chris Martenson, a favorite gold watcher of ours’, tried to answer some of these questions. In a piece entitled “Why There May Be a Lot Less Gold than We Realize” published via Casey Research2 he considers some of the implications of research showing a 4,500 tonne gold deficit in U.S. public accounts. As Mr. Martenson points out, both the Fed and the Treasury show this reserve amount of gold on their balance sheets. It’s an accounting mystery how both the Fed and the Treasury can claim ownership of the same 261 million ounces of gold. It has been suggested that there is an offsetting entry that balances the books, but we haven’t been able to find it yet. If 4,500 tonnes of gold was leased out by the Federal Reserve it could not have been done without the Federal Reserve leasing out gold belonging to the U.S. treasury or belonging to other countries, he concludes. “Where there's smoke there's fire, and there is a lot of smoke in the bullion world right now. I am more certain than ever that holding physical bullion is a must-do for everyone who wishes to preserve their purchasing power.”

Others simply suggest the data published by the US Government is faulty. In fact it appears that the import/export data from the US confounds the Federal Reserve itself. An exchange between Alan Greenspan and members of the Federal Reserve on December 22nd, 1992, outline his confusion regarding the ‘accounting path’ that imports and exports of gold travel from the Federal Reserve. Fed minutes reveal that Mr. Greenspan struggled to understand this ‘gold export’ phenomenon, stating: “Did I hear you correctly when you said that the gold exports in October appear to have come from the coffers of the Federal Reserve Bank of New York? Has anyone looked lately?” Given the implications of the Fed leasing out gold that it owns, or is held in trust for other countries, Mr. Greenspan asks the question we all want answered; ‘Has anyone looked lately?’. A full audit of the Federal Reserve’s holdings might be the only proof that will once and for all answer the question, ‘Do Western Central Banks have any gold left?’.

As we go to print, this article came across our desk highlighting a one billion dollar shipment of gold from the USA to South Africa. Why would one of the largest gold producing countries need 20 tonnes of gold? Again we ask, where is this gold coming from?3

1 U.S. International Trade in Goods and Services March 2013. Retrieved on May 17, 2013 from:, pg19
2 Why There May Be a Lot Less Gold than We Realize. Retrieved on May 17, 2013 from:
3 $1 billion of gold has been shipped from New York to South Africa this year. Retrieved on May 17, 2013 fom:

Financial Euphoria


May 18, 2013

Tepper stokes the melt-up. “I am definitely bullish. The budget deficit is shrinking massively. Guys who are short, they better have a shovel to get out of the grave.” Hedge fund manager David Tepper, CNBC, May 14, 2013

Mr. Tepper has every reason to be euphoric. His $7bn estimated net worth places him #53 on the Forbes U.S. Billionaires list (and ascending briskly). Few have profited more from central bank monetary largess and attendant asset inflation. Few are currently benefiting as much from the Fed’s $85bn monthly quantitative easing program.

I’ll view Tepper’s Tuesday CNBC appearance as confirmation of the U.S. stock market officially attaining “Financial Euphoria.” So it’s not an inopportune time to reread John Kenneth Galbraith’s little gem “A Short History of Financial Euphoria.” There is a long history of manias and, as Galbraith points out, there are common themes and common conclusions.

The commonly accepted view sees manias as episodes of irrational crowd behavior (i.e. a bunch of lunatics running around trading tulip bulbs). Mr. Galbraith sees the “mass escape from sanity by people in pursuit of profit.” Fair enough, though I tend to view perfectly rational behavior as the more typical yet unappreciated theme of major financial Bubbles. Bouts of irrationality would be far less dangerous.

Sure, speculative episodes do in fact appear irrational; though, I would argue, mostly in hindsight. Mr. Tepper doesn’t seem to be a raving mad speculator. Now a full-fledged market legend of our gilded age, Tepper is a bit manic, sort of annoying, incredibly successful at speculating and definitely rational. He and those of his fortunate ilk are at the precipice of potentially adding billions more to their colossal treasure troves. And what if they’re wrong about the markets and the all-powerful cadre of global central banks? Well, they could lose an enormous amount of money and survive with more than ample resources for the “good life” (with, perhaps, fewer collectables and trophy properties). The point is, at this stage of a long inflationary asset market boom, it’s perfectly rational to double-down with the “house’s money” and play for the spectacular big win. They’re just electronic chips, for heaven’s sake.

Today, with markets at all-time highs, Tepper exudes unequivocal financial genius. Having enjoyed years to master their craft, it’s perfectly rational for the successful market operators these days to use this bout of unprecedented ultra-loose finance and government backstops to accumulate as much financial wealth as possible. That’s the norm for speculators going back centuries. It’s worth noting, however, that when filthy rich market speculators were in the past celebrated for their brilliance and extraordinary market acumen – well, it proved a decent juncture to start worrying about the future. This spectacular cycle of speculator wealth accumulation has been going on for so long now that everyone has simply stopped worrying.

Understanding the dynamics of market euphoria and crowd behavior remain a fascinating and worthwhile endeavor. From an analytical perspective, however, I’ve always focused more on the finance underpinning the boom. Show me a manic Bubble period in the markets and I’ll show you underlying monetary disorder. And perhaps it’s easy to see and perhaps it’s not. And throughout about every historic Bubble episode, there inevitably reaches a manic point of Financial Euphoria that corresponds to an unsustainable manic expansion of suspect finance. Financial Euphoria and unstable finance make dicey bedfellows.

Euphoria has reached the point where the markets have become largely immune to bad news and negative fundamental developments. Actually, negatives are nowadays welcomed to the party. On a macro basis, weak economic data ensures a longer period of aggressive global monetary stimulus. On a micro stock basis, deteriorating fundamentals equate with larger short positions. And right now, nothing has the equities markets more ebullient than squeezing the shorts. No reason to fret stagnant earnings, a stronger dollar, faltering global growth and myriad developments that could bring this party to a rapid conclusion.

Yet bullish market pundits these days argue that market speculation has not yet reached dangerous levels. Some admit to “pockets of froth.” “No sign of public exuberance.” Heck, the public hasn’t even succumbed yet. Market excess is “certainly not at 1999 levels.”

Well, one has to go all be way back to 1999 for an environment so rife with short squeezes. Indeed, no game in the markets these days is as remotely profitable as buying heavily shorted stocks and forcing the shorts to buy back their borrowed shares (and bonds?) at higher prices. Squeezing shorts has become the hot topic on day-trading discussion boards. It has become popular sport throughout the leveraged speculating community. And I suspect that buying baskets of heavily shorted stocks has become a hot venue for algorithmic (“algo”) trading. Why not just buy a basket of heavily shorted stocks at the open and then gun the S&P futures?

Short squeezes can play a major role in destabilizing markets – equities and fixed income. On the one hand, widespread buying (short covering) provides a powerful boost to marketplace liquidity. This is the proverbial “throwing gas on a fire” – for markets already gorging on liquidity and speculative excess. As for market psychology, having the bears on the run helps jolt sentiment past optimism to exuberance and then Euphoria. With the depleted bears largely out of the way, a potential source of selling pressure is removed from the marketplace. And as market dislocations see an increasing number of stocks experience spikes and upside gaps, long sellers are prone to think twice before selling. A short seller panic and attendant sellers’ strike is the stuff of Financial Euphoria.

Why did Nasdaq collapse in 2000? Because of several years of excess that culminated in a historic market squeeze and speculative free-for-all in 1999. It’s “funny” how market dynamics work. With industry fundamentals turning increasingly problematic in 1999 and stock prices diverging markedly from underlying fundamentals, short positions were expanding. But in the post-LTCM bailout backdrop the Fed was incentivizing long-side speculation, while impairing the bears.

With short positions in “weak hands,” a Fed-induced market rally evolved into a powerful short squeeze and precarious bout of Financial Euphoria. Along the way, myriad hedging strategies combined with leveraged long-side speculation in a bustling derivatives marketplace. As the market broke loose on the upside, those on the wrong side of derivative trades were forced to buy stocks into a frantically advancing market.

Deteriorating fundamentals were easily disregarded, as stocks marched ever higher on an almost daily basis. When the speculative Bubble eventually burst, the crisis of confidence in the market was exacerbated by virtually collapsing fundamentals. The gulf that had widened dramatically during Financial Euphoria was quickly rectified by a panic collapse in stock prices.

Abruptly, buyers disappeared and sellers were left wondering how the liquidity backdrop had been so transformed almost overnight. Well, the liquidity surge from short squeezes and panic covering had set the stage for payback time. Derivatives trading that had helped fuel market melt-up suddenly was fueling meltdown. And as it has accomplished so often in history, Financial Euphoria ensured that virtually everyone found themselves with too much long (not enough short) exposure come the inevitable abrupt market reversal. The technology stock crash was then exacerbated by shorts pouncing on what were clearly unsustainable stock prices and a bursting industry Bubble.

Investors, the equities marketplace, corporate debt, the technology industry and the U.S. economy were in a much weaker position because of 1999 market Euphoria. And at risk of blasphemy, it’s worth noting that some of the most sophisticated market operators were punished by a Bubble that had somehow burst prematurely.

I don’t mean to imply that today’s environment is comparable to 1999. The U.S. economy was sounder in 1999 – and the global economy was a whole lot more stable. Global imbalances in 1999 were insignificant compared to the present. The U.S. economic and Credit systems had yet to be degraded by a doubling of mortgage debt and a massive misallocation of resources. The federal government hadn’t doubled its debt load in four years. Europe had not yet terribly impaired itself with a decade of runaway non-productive debt growth. China and the “developing” economies had not yet succumbed to historic Credit booms, overinvestment and economic maladjustment. Central banks hadn’t yet resorted to really dangerous measures.

In “A Short History…,” Galbraith so eloquently describes the rebuke and vitriol lavished upon naysayers during periods of Financial Euphoria. These are the despicable folks who not only dare to challenge conventional wisdom – they simply refuse to accept that they’ve categorically been proven wrong. I will temporarily remove the dunce cap and calmly place it over in the corner – and then move to explain that I see nothing in this environment inconsistent with my view that this is the biggest, most precarious Bubble in history.

I’ve briefly addressed excesses that led to the 2000 collapse. Well, there’s a bevy of relatively recent (from a historical perspective) booms and busts to compare to: the stock market crash of 1987; the late-eighties Japanese Bubble; the 1992/3 bond Bubble; Mexico; SE Asia; Russia; Argentina, Brazil and Latin America; Iceland; U.S. mortgage finance; European debt, etc. Nothing, however, even remotely compares to the current global Bubble environment.

From my perspective, the global nature of excesses and fragilities is the most worrying aspect to the current Financial Euphoria. Essentially, the entire world faces acute financial and economic instability. The entire world suffers from a widening gulf between inflating asset prices and mounting economic vulnerabilities. Seemingly the entire world suffers from an increasingly protracted period of near-zero rates, aggressive central bank monetary stimulus and a desperate search for market returns. The entire global financial “system” is an over-liquefied speculative Bubble – stoked by central bankers responding desperately to acute financial and economic fragilities.

As noted above, find a speculative Bubble and there will be an underlying source of monetary disorder. From my perspective, Bubbles are at their core about a self-reinforcing over-issuance of mispriced finance. Major market misperceptions are integral to fueling Bubbles – and these misperceptions are often associated with some form of government support/backing of the underlying Credit financing the boom.

These days, the dynamic of over-issued, mispriced finance is a global phenomenon – the U.S., Europe, Japan, China, Asia and the “developing” economies. The perception that central bankers will ensure ongoing asset inflation is an unprecedented global phenomenon. The collapse in yields and risk premiums in debt markets across the globe is unlike anything I’ve ever witnessed or studied historically. These days, asset inflation, speculation and Bubbles prevail virtually everywhere. Moreover, the gulfs between inflating assets and weakening economic fundamentals seemingly widen everywhere, as Financial Euphoria engulfs debt and equity securities markets around the world. As noted this week by the great market watcher and historian Art Cashin: This market is unlike anything we’ve ever experienced.

Heroic Spain is damned if it does, and damned if it doesn't

My colleague Jeremy Warner has set off a storm in the Spanish press and something close to a diplomatic incident by asserting in a blog that Spain is insolvent.

By Ambrose Evans-Pritchard

15 May 2013

The Telegraph has been accused by Spanish newspapers of launching a "brutal attack", succumbing to "Hispanophobia", leading an Anglo-Saxon assault, and otherwise trying to divert attention away from Britain's own lamentable condition. Spanish readers might be comforted to know that we are even more brutal with our own leaders.

Since I was in Madrid last week as a guest of the Spanish government, let me add my half-penny to the debate. Spain has already done all that can reasonably be expected of any nation, enduring its "calvario" with dignity and fortitude. It has slashed internal consumption by 16 percentage points of GDP without triggering a social explosion - "no mean feat", said one minister.

Whether the country proves to be solvent or insolvent by mid-decade depends almost entirely on the future actions of the European Central Bank and the northern creditor powers. Nothing is pre-determined.

Data released on Wednesday shows that Euroland is in even an deeper double-dip recession than feared, with the risk of a Japanese-style slump stretching on for years. There was no outside shock to explain this relapse. It was caused by policy error, and those policies have not been corrected.

If Euroland sticks to its grim path of synchronized contraction on all fronts - fiscal, monetary and bank deleveraging - and if it continues to impose all the burden of intra-EMU adjustment on the deficit states in a replay of the early 1930s, then it will push Spain, Portugal and others over a cliff.

There has been much talk of retreat from austerity but all this means is that Europe no longer insists on chasing its own tail in a downward spiral. It will not demand extra cuts to make up deficit shortfalls created by recession itself. Pro-cyclical fiscal tightening will continue.

The ECB has a special duty of care to Spain. It played its role in causing the crisis, holding interest rates too low in the early years of EMU to nurse Germany through its post-unification bust. The result was a double-digit surge in the eurozone's M3 money supply and uncontrollable credit booms as northern banks flooded the South with cheap capital. Spain was as much sinned against as sinner.

The ECB has now swung from too loose to too tight, allowing M3 to stagnate for the whole of Euroland, with EMU-wide loans contracting, and deflation gaining a foothold in a string of countries. The ECB's latest quarter point cut in rates does not keep pace. Real rates are rising.

Frankfurt has the monetary tools to reverse this. It could pursue a reflationary policy that would help lift Spain and others off the reefs. It chooses not to do so.

The consequence of the EU policy mix for Spain is a contraction in "nominal" GDP, down 1.8pc last year. This means the national debt stock of around 320pc of GDP - 212pc private, and 86pc public, plus other arrears - is rising on a shrinking base.

Britain's debt levels are roughly the same. But the UK's nominal GDP is growing at nearly 4pc as a result of covert monetisation by the Bank of England. The debt sits on an expanding base. The compound effect spells two different destinies.

The European Commission refers repeatedly to this as the "denominator effect" in its "In-Depth Review" of Spain's imbalances last month. It is why Spain's net international investment position (NIIP) deteriorated from minus 89.5pc to minus 91.7pc of GDP in 2011, even though the country is paying off foreign debts. The report described the level as "very high", far above the safe threshold of 35pc.

Spain is making heroic efforts to adjust. Officials are rightly proud that exports are flourishing, keeping pace with those of Germany. Shipments have risen 15pc to Africa and 13pc to Asia over the past year, as struggling firms scour the world for a lifeline.

For the first time in living memory, the country is clawing its way back to competitiveness without a devaluation. Total exports in January and February were up 5pc from a year before, a startling contrast to the 3.2pc fall in Britain, where the long-awaited fruit of devaluation never seems to arrive.

The roots of Spanish export success lie in the high productivity of its world class companies Iberdola, Telefonica and Santander, so like the "dualism" of Japan where the exporting "Samurai" seem decoupled from the internal economy.

Spain's car industry has clearly turned the corner. Ford is closing its Genk car plant in Belgium and shifting the work to Valencia. Volkswagen is to invest €785m in Pamplona to build Polos. France's Renault is to boost output by 30pc at its plants in Valladolid and Palencia by 2015.

They are betting on Spain because Spanish workers have agreed to keep plants open seven days a week, to toil on Sundays without overtime pay, and to accept wage deals below inflation. A blast of Iberian Thatcherism is at last blowing away the thickets of the 1970s.

The reforms are patchy. The Commission says labour markets are still "overly rigid". Yet there is no doubt that Spain is becoming a different country. Officials at the infrastructure group FCC said they have five teams of workers operating seven cement factories around the country to cut costs, so amenable these days that they are willing to carry out shifts 200 miles from their homes. "We couldn't think think of doing that at our plant in Austria," said one manager.

Spain has closed much of the gap in unit labour costs (ULC) with the eurozone core built up in the early years of EMU, though part of this is a statistical illusion caused by the property crash. More than 1.6m low productivity jobs in construction have disappeared, boosting the average productivity level.

The Commission says Spain lost 20pc in exchange rate competitiveness from 2000 to 2008, and has gained back 7pc so far. "The adjustment of ULC has been largely driven by the economic recession and very high unemployment, and it could partly reverse once the cyclical conditions improve."

The elemental problem for Spain is that if does manage to pull off an "internal devaluation" by cutting wages back to parity, it will make its debt burden worse. It is damned if it does, and damned if it doesn't.

The country is already in deflation. Prices fell 0.6pc last month, stripping out the one-off effects of higher VAT and levies. Officials appear delighted by victory over inflation but they should be careful what they wish for. The "denominator effect" is going to bite even deeper.

Raoul Ruparel from Open Europe said Spain's export boom is impressive but from a low base. Exports are just 30pc of GDP, compared with 105pc for Ireland, 91pc for Estonia, 84pc for Belgium, 83pc for Holland, 59pc for Latvia or 50pc for Germany. The economic gearing is far lower. "We don't think exports can offset the collapse in internal demand," he said.

Nor is it clear whether Spain can keep up the export momentum based on running down old plant. Fixed investment fell 9.1pc last year, and is expected to fall another 7.6pc this year.

Smaller firms are facing an acute credit crunch, forced to pay 250 basis points more for credit than core-EMU rivals, if they can raise money at all. The ECB's bond purchase lifeline for Spain has brough down bond spreads and eliminated the risk of a sovereign funding crisis for now, but it has yet to filter through to the frontline.

The Commission said part of the export surge is "cyclical". The switch to a healthy trade balance "remains incomplete". The current account sould be in balance this year but the fact that Spain is still near deficit with 27pc unemployment begs the question of how many lives must be blighted for Spain to generate big enough surpluses to pay down external debt.

The level of pain still to come depends on the housing market, the great disaster that has infected everything. Prices are down 33pc from the peak so far, or 45pc in real terms. The government's stress test for the banks is premised on a real fall of 50pc. If that proves correct, Spain is nearly there.

If the dissenters are right, Spain is nowhere near bottom. Madrid consultants RR de Acuna have a report coming out this month warning that the glut of unsold properties has risen to a fresh peak of 2.25m homes, including those in the hands of builders and banks, or in the eviction process.

"It will take 10 years to get rid of the stock. We're pretty sure that prices will bleed another 15pc," said Fernando Rodriguez de Acuna. "The market is broken, and the quoted prices in many areas are a fiction. You can't sell even if you offer a 50pc haircut. A lot of buildings will have to be knocked down and land is going to revert to farmland, or just to nothing."

If he is right, it is going to be a long hard struggle for Spain. As the Commission says, the Spanish people have "gradually exhausted their financial asset buffers".

The hot dispute over Jeremy Warner's blog is a surprise since the pro-EU chief economist of Citigroup, Willem Buiter, has been arguing for some time that Spain will need debt restructuring, as have others. The issue is standard debate in financial circles.

Mr Buiter's latest report says there will be "no light at the end of the tunnel" for another two to three years, predicting that Spain's economy will shrink by a further 2.1pc in 2014. That would play havoc with debt dynamics. "If it happens we're in serious trouble," said a senior official.

At the end of the day, the question for the Spanish people is not whether they can hold their place in EMU for year after year by further sacrifice, but whether it is in their national and human interest to do so.
They are a great nation. They can demand different terms from Europe, and sooner or later they will.

Learning About Growth from Austerity

Michael Spence

18 May 2013

MILAN – In a recent set of studies, Carmen Reinhart and Kenneth Rogoff used a vast array of historical data to show that the accumulation of high levels of public (and private) debt relative to GDP has an extended negative effect on growth. The size of the effect incited debate about errors in their calculations. Few, however, doubt the validity of the pattern.

This should not be surprising. Accumulating excessive debt usually entails moving some part of domestic aggregate demand forward in time, so the exit from that debt must include more savings and diminished demand. The negative shock adversely impacts the non-tradable sector, which is large (roughly two-thirds of an advanced economy) and wholly dependent on domestic demand. As a result, growth and employment rates fall during the deleveraging period.

In an open economy, deleveraging does not necessarily impair the tradable sector so thoroughly. But, even in such an economy, years of debt-fueled domestic demand may produce a loss of competitiveness and structural distortions. And the crises that often divide the leveraging and deleveraging phases cause additional balance-sheet damage and prolong the healing process.

Thanks in part to research by Reinhart and Rogoff, we know that excessive leverage is unsustainable, and that restoring balance takes time. As a result, questions and doubts remain about an eventual return to the pre-crisis trend line for GDP, and especially for employment.

What this line of research explicitly does not tell us is that deleveraging will restore growth by itself. No one believes that fiscal balance is the whole growth model anywhere.

Consider southern Europe. From the standpoint of growth and employment, public and private debt masked an absence of productivity growth, declining competitiveness in the tradable sector, and a range of underlying structural shortcomings – including labor-market rigidities, deficiencies in education and skills training, and underinvestment in infrastructure. Debt drove growth, creating aggregate demand that would not have existed otherwise. (The same is true of the United States and Japan, though the details differ.)

Government is not the sole actor in this. When the deleveraging cycle begins, the private sector starts to adjust structurally – a pattern clearly seen in the data on growth in the tradable side of the US economy. Muted wage growth increases competitiveness, and underutilized labor and capital are redeployed.

How fast this happens partly depends on the private sector’s flexibility and dynamism. But it also depends on the ability and willingness of government to provide a bridging function for the deficiency in aggregate demand, and to pursue reforms and investments that boost long-term growth prospects.

If public-sector deleveraging is not a complete growth policy – and it isn’t – why is there so much attention on fiscal austerity and so little action (as opposed to lip service) on growth and employment?

Several possibilities – not mutually exclusive – come to mind. One is that some policymakers think that fiscal balance really is the main pillar in a growth strategy: Deleverage quickly and get on with it.

The belief that the fiscal multiplier is usually low may have contributed to underestimation of the short-run economic costs of austerity policies – and thus to persistently optimistic forecasts of growth and employment. Recent research by the International Monetary Fund on the context-specific variability of fiscal multipliers has raised serious questions about the costs and effectiveness of rapid fiscal consolidation.

Estimates of the fiscal multiplier must be based on an assumption or a model that says what would have happened in the absence of government spending of some type. If the assumption or the model is wrong, so is the estimate. The counterfactual needs to be made explicit and assessed carefully and in context.

In some countries with high levels of debt and impaired growth, fiscal stimulus could raise the risk premium on sovereign debt and be counterproductive; others have more flexibility. Countries vary widely in terms of household balance-sheet damage, which clearly affects the propensity to save – and hence the multiplier effect. Uncertainty is a reality, and judgment is required.

Then there is the time dimension. If infrastructure investment, for example, generates some growth and employment in the short to medium term and higher sustainable growth in the longer term, should we rule it out because some estimates of the multiplier are less than one? Similarly, if fiscal stimulus has a muted effect because the recipients of the income are saving to restore damaged household balance sheets, it is not clear we want to discount the accelerated deleveraging benefit, even if it shows up in domestic demand only later.

Policymakers (and perhaps financial markets) may have believed that central banks would provide an adequate bridging function through aggressive unconventional monetary policy designed to hold down short- and long-term interest rates. Certainly central banks have played a critical role. But central banks have stated that they do not have the policy instruments to accelerate the pace of economic recovery.

Among the costs and risks of their low-interest-rate policies are a return to the leveraged growth pattern and growing uncertainty about the limits of a central bank’s balance-sheet expansion. In other words, will the elevated asset values caused by low discount rates suddenly reset downward at some point? No one knows.

Countries are subject to varying degrees of fiscal constraint, assuming (especially in the case of Europe) a limited appetite for unlimited, unconditional cross-border transfers. Those that have some flexibility can and should use it to protect the unemployed and the young, accelerate deleveraging, and implement reforms designed to support growth and employment; others’ options – and thus their medium-term growth prospects – are more constrained.

All countries – and policymakers – face difficult choices concerning the timing of austerity, perceived sovereign-credit risk, growth-oriented reforms, and equitable sharing of the costs of restoring growth. So far, the burden-sharing challenge, along with naive and incomplete growth models, may have contributed to gridlock and inaction.

Experience can be a harsh, though necessary, teacher. Growth will not be restored easily or quickly. Perhaps we needed the preoccupation with austerity to teach us the value of a balanced growth agenda.

Michael Spence, a Nobel laureate in economics, is Professor of Economics at NYU’s Stern School of Business, Distinguished Visiting Fellow at the Council on Foreign Relations, Senior Fellow at the Hoover Institution at Stanford University, and Academic Board Chairman of the Fung Global Institute in Hong Kong. He was the chairman of the independent Commission on Growth and Development, an international body that from 2006-2010 analyzed opportunities for global economic growth.