Meanwhile, back at the austerity ranch...

The early consequences of the much applauded efforts to battle budget deficits look umm, predictable.  The question is how deeply they will undercut the nascent EU recovery.

Europe’s economic growth weakened in the third quarter from the fastest pace in four years as governments’ austerity measures to cut record budget deficits dented the recovery.
Gross domestic product in the 16-nation euro area rose 0.4 percent from the second quarter, when it increased 1 percent, the European Union’s statistics office in Luxembourg said today. Economists expected a gain of 0.5 percent, the median of 35 estimates in a Bloomberg News survey showed. Industrial output fell 0.9 percent in September from the previous month, the largest drop in 18 months, separate data showed.
Europe’s economic expansion is cooling as leaders grapple with how to handle the sovereign-debt crisis, which has pushed Irish bond yields to records and weakened the euro on concern the EU may need to step in. Ireland and Greece have failed to restore economic growth as they contend with bloated deficits and soaring borrowing costs, while Germany’s expansion slowed from the record pace in the second quarter. [More]

I frankly don't know how austerity measures will play out, but I am not optimistic.  The "uncertainty" argument seems full of logical holes. Nor do I even think worrying about the deficit is the cause of all the uncertainty - it's worrying about growth and employment (especially your own).

“The markets hate uncertainty.”

If you wandered anywhere near a television in advance of the midterm elections, the Federal Open Market Committee meeting or October’s employment report, that cliche was unavoidable. It was the pundits’ preferred proverb.

Wall Street has a sweet tooth for such investing maxims. They infect the trading community like influenza in December. Repeat mindless dictums ad nauseam, and they soon become the accepted wisdom.

The problem with these supposed truisms is they are no more accurate than the flip of a coin. A closer look at this uncertainty meme reveals it to be a false-ism -- one of those emotionally appealing phrases that ping around trading desks. The lack of evidence supporting their premise seems to matter very little.

To recognize how meaningless these statements are, consider the opposite: Could markets function without uncertainty? It takes only a little thought to realize that markets actually thrive on doubt, imperfect information and a lack of consensus.

Uncertainty drives the market’s price-discovery mechanism. Investing requires there to be differences of opinion. When there is broad agreement as to an asset’s fair value, trading volume falls. Without any uncertainty, who would take the opposite side of your trade?

History teaches that whenever the opposite occurs -- when certainty overwhelms uncertainty -- the herd tends to be wrong. In rare instances, when there is a near-total lack of uncertainty in the market, the outcome is usually a spectacular disaster. [More]

One thing seems clear: we will have ample opportunity to see what happens when deficit reduction overpowers growth policy early in a recovery.  I"ll be watching the UK for the verdict.

I favor virtually all the measures being suggested to reduce the deficit - but not now.  We have a long term budget problem, so enacting long term solutions that kick in gradually makes more sense to me.