traders watching stocks.
(photo credit: Rafael Marchante/Reuters)
The phrase in the headline, although perhaps not especially familiar to many readers, has in recent months become a buzzword among economic analysts – especially those outside the cheer-leading ranks of governments and major financial institutions. It is the shorthand used to explain what is happening in many parts of the global economy – including the various anomalies noted in last week’s column.
In essence, “extend and pretend” describes a mind-set that is determined to avoid coming to grips with the deep-seated fundamental problems besetting the developed economies. This negative aim of steering clear of the hard and nasty things leads naturally to the adoption of a set of economic policies that help politicians achieve that goal – and conversely to avoid adopting policies that address the entrenched problems.
Every day brings examples of “extend and pretend” at work in different countries and regions. An outstanding example is the supposed “drama” taking place in the US over raising the debt ceiling for the federal government’s total indebtedness. In this slow-burning political soap opera, which is now reaching its predictable and hence boring climax, the Republican majority in Congress is demanding that the Democrats, in Congress and in the administration, agree to spending cuts well in excess of those defined in the current budget.
Only if their demands are accepted will the Republicans pass the necessary legislation that raises the debt ceiling and allows the federal government to continue expanding its debt. If the ceiling is not raised, the government will have a “shutdown,” at least in part, with pursuant administrative and bureaucratic mayhem, as well as some impact on real life outside of the government.
This spiel is being hyped by the media as if it was meaningful, but the truth is that both sides are merely posturing. Everyone knows that a compromise will be reached, probably after a brief period of “shutdown” that is sufficient for both sides to claim that they have displayed their resolve, but insufficient to do any real harm.
More importantly, the accompanying haggling over the amount of spending cuts that will be accepted by the Democrats is almost entirely meaningless: The absolute amount sounds like big money to the average citizen (some tens of billions of dollars), but in the context of a budget deficit of about 1,600 billion dollars (that’s $1.6 trillion, if that means anything to you), 40, 50 or 60 billion is loose change.
The real game in the US remains as it has been for many years: spend more, tax less if at all possible and let the deficits and the debts mount up. So long as the markets buy the flood of new debt Uncle Sam incessantly spews out, no one in either party is going to do any of the things that might have a serious impact on the size of the deficit, such as reducing entitlements and raising taxes – especially slapping a tax on gasoline.
But they play extend and pretend in Europe as well, and perhaps better than the Americans do. After all, how else can one explain the seemingly surreal spectacle of the last few days, in which Portugal finally admits to being unable to meet its obligations falling due in the next two to three months and asks for a bailout from the European Union – while simultaneously, the European Central Bank raises interest rates to head off rising inflation, although these higher rates make it more certain that Greece and Ireland will be unable to meet their (overly ambitious) targets in terms of getting their houses in shape by reducing their budget deficits.
The display of economic orthodoxy by the fanatical high priests of
central banking ensconced in their temple in Frankfurt also makes it
more likely that Spain will be the next country to be forced to “seek
help” – although Belgium might yet beat it to that mark.
To wit: Spain’s finance minister on Thursday issued another and more
fervent assurance that no such thing would happen and that Spain is much
stronger than Portugal, which indicates, if anything, strong evidence
that Spain is well on the way to joining the bailout brigade – because
firm denials are a key component of the extend and pretend game. By
denying, you buy time (at great cost, as it later turns out) and thereby
extend the pretension that you are sound. But the denial itself is the
These are merely the most glaring and the most current examples; many
more are available all around the globe. Nor is extend and pretend
limited to governments; corporations, especially banks, are equally
adept at it. Anyone can play, most people do, and it’s great fun – until
reality makes its unwelcome presence felt.