James Montier: The 'Austerians' will destroy the recovery and usher in deflation

Influential global strategist James Montier warns that those desperate to attack budget  deficits could be prolonging the agony for the global economy and increasing the chances of deflation. 

Montier, now with Boston-based GMO, is increasingly worried by the rise of the 'Austerians'; those he says are hell-bent on an austerity drive to eliminate what they see as profligate government spending as quickly as possible.

Warnings from history

He thinks Japan's economic slump of the past two decades and the Great Depression of the 1930s should give the Austerians food for thought and that fiscal tightening will inevitably lead to a relapse into recession.

Aiming for thrift is a paradox, he says: 'If consumers are not spending, then those who depend on them for a source of income won't be spending either.  And if there is less demand for a firm's products, they won't be investing, and the whole viscious spiral continues downwards.'

Montier points to a keynote speech given by the chair of the Council of Economic Advisors, Christina Romer in 2009, setting out the six lessons from the Great Depression to back up his arguement.

The six are:

1: Small fiscal expansion has only small effects.

2: Monetary expansion can help to heal an economy even when interest rates are near zero.

3: Beware of cutting back on stimulus too soon.

5: Worldwide expansionary policy shares the burdens and the benefits of recovery.

6: The Great Depression did eventually end.