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

The most pertinent for Europe's would-be Austerians is what happened in Japan in 1997 when the authorities raised consumption tax by 2% and the economy fell straight back into recession.

Montier also highlights research on 107 fiscal retrenchments in the OECD countries between 1970 and 2007. Just 26 of them occur with growth, while the remainder are all deflationary.

As Montier puts it: 'The minority essentially share the hallmark of being adjustments occurring in small, open economies with weak currencies at a time of generally healthy global growth. These are about as far removed as one can imagine from the circumstances the world faces currently.

If all these examples of histroy are ignored then Montier expects that 'policy error' to lead to a serious source of deflationary pressure - the last thing debt-laden economies need - especially debt -laden economies already perilously close to deflation.

While Montier thinks the Austerian arguement in Europe seems to be holding sway, in the US at least,  he thinks Ben Bernanke understands the serious consequences posed by deflation on debt laden economies.  

With Fed chairman Bernanke laying out a range of policy options in the event of deflation risk, Montier argues that his last resort option- a rapid reintroduction of quantitative and qualitative easing- would be the only 'good news' arising from an Austerian victory.

This, he says, would unltimately lead from short-term deflation to long-term inflationary pressures.