Deficit Terrorists strike in UK. Austerity akin to 1937 "balanced budget" which aborted recovery
(1) Deficit Terrorists Strike in UK: USA Next? - Ellen Brown
(2) As the State is captured by Corporate interests, workers turn against it - James Petras
(3) Greenspan calls for Austerity
(4) Krugman says Austerity akin to 1937 "balanced budget" which aborted recovery
(1) Deficit Terrorists Strike in UK: USA Next? - Ellen Brown
From: Ellen Brown <email@example.com> Date: 18.06.2010 05:04 PM
Deficit Terrorists Strike in the United Kingdom: United States of America Next?
Posted: June 17, 2010 04:57 PM
Last week, England's new government said it would abandon the previous government's stimulus program and introduce the austerity measures required to pay down its estimated $1 trillion in debts. That means cutting public spending, laying off workers, reducing consumption, and increasing unemployment and bankruptcies. It also means shrinking the money supply, since virtually all "money" today originates as loans or debt. Reducing the outstanding debt will reduce the amount of money available to pay workers and buy goods, precipitating depression and further more economic pain.
The financial sector has sometimes been accused of shrinking the money supply intentionally, in order to increase the demand for its own products. Bankers are in the debt business, and if governments are allowed to create enough money to keep themselves and their constituents out of debt, lenders will be out of business. The central banks charged with maintaining the banking business therefore insist on a "stable currency" at all costs, even if it means slashing services, laying off workers, and soaring debt and interest burdens. For the financial business to continue to boom, governments must not be allowed to create money themselves, either by printing it outright or by borrowing it into existence from their own government-owned banks.
Today this financial goal has largely been achieved. In most countries, 95% or more of the money supply is created by banks as loans (or "credit"). The small portion issued by the government is usually created just to replace lost or worn out bills or coins, not to fund new government programs. Early in the twentieth century, about 30% of the British currency was issued by the government as pounds sterling or coins, versus only about 3% today. In the U.S., only coins are now issued by the government. Dollar bills (Federal Reserve Notes) are issued by the Federal Reserve, which is privately owned by a consortium of banks.
Banks advance the principal but not the interest necessary to pay off their loans; and since bank loans are now virtually the only source of new money in the economy, the interest can only come from additional debt. For the banks, that means business continues to boom; while for the rest of the economy, it means cutbacks, belt-tightening and austerity. Since more must always be paid back than was advanced as credit, however, the system is inherently unstable. When the debt bubble becomes too large to be sustained, a recession or depression is precipitated, wiping out a major portion of the debt and allowing the whole process to begin again. This is called the "business cycle," and it causes markets to vacillate wildly, allowing the monied interests that triggered the cycle to pick up real estate and other assets very cheaply on the down-swing.
The financial sector, which controls the money supply and can easily capture the media, cajoles the populace into compliance by selling its agenda as a "balanced budget," "fiscal responsibility," and saving future generations from a massive debt burden by suffering austerity measures now. Bill Mitchell, Professor of Economics at the University of New Castle in Australia, calls this "deficit terrorism." Bank-created debt becomes more important than schools, medical care or infrastructure. Rather than "providing for the general welfare," the purpose of government becomes to maintain the value of the investments of the government's creditors.
England Dons the Hair Shirt
England's new coalition government has just bought into this agenda, imposing on itself the sort of fiscal austerity that the International Monetary Fund (IMF) has long imposed on Third World countries, and has more recently imposed on European countries, including Latvia, Iceland, Ireland and Greece. Where those countries were forced into compliance by their creditors, however, England has tightened the screws voluntarily, having succumbed to the argument that it must pay down its debts to maintain the market for its bonds.
Deficit hawks point ominously to Greece, which has been virtually squeezed out of the private bond market because nobody wants its bonds. Greece has been forced to borrow from the IMF and the European Monetary Union (EMU), which have imposed draconian austerity measures as conditions for the loans. Like a Third World country owing money in a foreign currency, Greece cannot print Euros or borrow them from its own central bank, since those alternatives are forbidden under EMU rules. In a desperate attempt to save the Euro, the European Central Bank recently bent the rules by buying Greek bonds on the secondary market rather than lending to the Greek government directly, but the ECB has said it would "sterilize" these purchases by withdrawing an equivalent amount of liquidity from the market, making the deal a wash. (More on that below.)
Greece is stuck in the debt trap, but the UK is not a member of the EMU. Although it belongs to the European Union, it still trades in its own national currency, which it has the power to issue directly or to borrow from its own central bank. Like all central banks, the Bank of England is a "lender of last resort," which means it can create money on its books without borrowing first. The government owns the Bank of England, so loans from the bank to the government would effectively be interest-free; and as long as the Bank of England is available to buy the bonds that don't get sold on the private market, there need be no fear of a collapse of the value of the UK's bonds.
The "deficit terrorists," however, will have none of this obvious solution, ostensibly because of the fear of "hyperinflation." A June 9 guest post by "Cameroni" on Rick Ackerman's financial website takes this position. Titled "Britain Becomes the First to Choose Deflation," it begins:
David Cameron's new Government in England announced Tuesday that it will introduce austerity measures to begin paying down the estimated one trillion (U.S. value) in debts held by the British Government. ... [T]hat being said, we have just received the signal to an end to global stimulus measures -- one that puts a nail in the coffin of the debate on whether or not Britain would 'print' her way out of the debt crisis. ... This is actually a celebratory moment although it will not feel like it for most. ... Debts will have to be paid. ... [S]tandards of living will decline . . . [but] it is a better future than what a hyperinflation would bring us all.
Hyperinflation or Deflation?
The dreaded threat of hyperinflation is invariably trotted out to defeat proposals to solve the budget crises of governments by simply issuing the necessary funds, whether as debt (bonds) or as currency. What the deficit terrorists generally fail to mention is that before an economy can be threatened with hyperinflation, it has to pass through simple inflation; and governments everywhere have failed to get to that stage today, although trying mightily. Cameroni observes:
[G]overnments all over the globe have already tried stimulating their way out of the recent credit crisis and recession to little avail. They have attempted fruitlessly to generate even mild inflation despite huge stimulus efforts and pointless spending.
In fact, the money supply has been shrinking at an alarming rate. In a May 26 article in The Financial Times titled "US Money Supply Plunges at 1930s Pace as Obama Eyes Fresh Stimulus," Ambrose Evans-Pritchard writes:
The stock of money fell from $14.2 trillion to $13.9 trillion in the three months to April, amounting to an annual rate of contraction of 9.6pc. The assets of institutional money market funds fell at a 37pc rate, the sharpest drop ever.
"It's frightening," said Professor Tim Congdon from International Monetary Research. "The plunge in M3 has no precedent since the Great Depression. The dominant reason for this is that regulators across the world are pressing banks to raise capital asset ratios and to shrink their risk assets. This is why the US is not recovering properly," he said.
Too much money can hardly have been pumped into an economy in which the money supply is shrinking. But Cameroni concludes that since the stimulus efforts have failed to put needed money back into the money supply, the stimulus program should be abandoned in favor of its diametrical opposite -- belt-tightening austerity. He admits that the result will be devastating:
[I]t will mean a long, slow and deliberate winding down until solvency is within reach. It will mean cities, states and counties will go bankrupt and not be rescued. And it will be painful. Public spending will be cut. Consumption could decline precipitously. Unemployment numbers may skyrocket and bankruptcies will stun readers of daily blogs like this one. It will put the brakes on growth around the world. ... The Dow will crash and there will be ripple effects across the European union and eventually the globe. ... Aid programs to the Third world will be gutted, and I cannot yet imagine the consequences that will bring to the poorest people on earth.
But it will be "worth it," says Cameroni, because it beats the inevitable hyperinflationary alternative, which "is just too distressing to consider."
Hyperinflation, however, is a bogus threat, and before we reject the stimulus idea, we might ask why these programs have failed. Perhaps because they have been stimulating the wrong sector of the economy, the non-producing financial middlemen who precipitated the crisis in the first place. Governments have tried to "reflate" their flagging economies by throwing budget-crippling sums at the banks, but the banks have not deigned to pass those funds on to businesses and consumers as loans. Instead, they have used the cheap funds to speculate, buy up smaller banks, or buy safe government bonds, collecting a tidy interest from the very taxpayers who provided them with this cheap bailout money. Indeed, banks are required by their business models to pursue those profits over risky loans. Like all private corporations, they are there not to serve the public interest but to make money for their shareholders.
The alternative to throwing massive amounts of money at the banks is not to further starve and punish businesses and individuals but to feed some stimulus to them directly, with public projects that provide needed services while creating jobs. There are many successful precedents for this approach, including the public works programs of England, Canada, Australia and New Zealand in the 1930s, 1940s and 1950s, which were funded with government-issued money either borrowed from their central banks or printed directly. The Bank of England was nationalized in 1946 by a strong Labor government that funded the National Health Service, a national railway service, and many other cost-effective public programs that served the economy well for decades afterwards.
In Australia during the current crisis, a stimulus package in which a cash handout was given directly to the people has worked temporarily, with no negative growth (recession) for two quarters, and unemployment held at around 5%. The government, however, borrowed the extra money privately rather than issuing it publicly, out of a misguided fear of hyperinflation. Better would have been to give interest-free credit through its own government-owned central bank to individuals and businesses agreeing to invest the money productively.
The Chinese have done better, expanding their economy at over 9% throughout the crisis by creating extra money that was mainly invested in public infrastructure.
The EMU countries are trapped in a deadly pyramid scheme, because they have abandoned their sovereign currencies for a Euro controlled by the ECB. Their deficits can only be funded with more debt, which is interest-bearing, so more must always be paid back than was borrowed. The ECB could provide some relief by engaging in "quantitative easing" (creating new Euros), but it has insisted it would do so only with "sterilization" -- taking as much money out of the system as it puts back in. The EMU model is mathematically unsustainable and doomed to fail unless it is modified in some way, either by returning economic sovereignty to its member countries, or by consolidating them into one country with one government.
A third possibility, suggested by Professor Randall Wray and Jan Kregel, would be to assign the ECB the role of "employer of last resort," using "quantitative easing" to hire the unemployed at a basic wage.
A fourth possibility would be for member countries to set up publicly-owned "development banks" on the Chinese model. These banks could issue credit in Euros for public projects, creating jobs and expanding the money supply in the same way that private banks do every day when they make loans. Private banks today are limited in their loan-generating potential by the capital requirement, toxic assets cluttering their books, a lack of creditworthy borrowers, and a business model that puts shareholder profit over the public interest. Publicly-owned banks would have the assets of the state to draw on for capital, a clean set of books, a mandate to serve the public, and a creditworthy borrower in the form of the nation itself, backed by the power to tax.
Unlike the EMU countries, the governments of England, the United States, and other sovereign nations can still borrow from their own central banks, funding much-needed programs essentially interest-free. They can but they probably won't, because they have been deceived into relinquishing that sovereign power to an overreaching financial sector bent on controlling the money systems of the world privately and autocratically. Professor Carroll Quigley, an insider groomed by the international bankers, revealed this plan in 1966, writing in Tragedy and Hope:
[T]he powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent private meetings and conferences.
Just as the EMU appeared to be on the verge of achieving that goal, however, it has started to come apart at the seams. Sovereignty may yet prevail.
(2) As the State is captured by Corporate interests, workers turn against it - James Petras
From: James Petras <firstname.lastname@example.org> Date: 17.06.2010 10:06 PM
Twenty-Two Reasons Why American Working People Hate the State
By James Petras
Why does the rightwing attack on "Big Government" increasingly resonate with working people? Liberals claim wage and salaried workers are acting against their "self-interest", citing government welfare programs like social security and unemployment payments. Progressives argue that workers hostile to the state are "racists", "fundamentalists" and/or irrational, blinded by misplaced fears of threats to individual freedoms.
I will argue there are many sound, rational, material reasons for working people to be in revolt against the state
Twenty-Two Reasons Why Working People Hate the State
1.) Most wage and salaried workers pay disportionately higher taxes than the corporate rich and therefore, millions of Americans work in the “underground economy” to make ends meet; thus subjecting themselves to arrest, and prosecution by the state for trying to make a living by avoiding onerous taxes.
2.) The state provides generous multi-year tax exemptions for corporations thus raising the tax rate for wage and salaried workers or eliminating vital services. The state’s inequitable tax revenue policies provoke resentment,.
3.) High taxes combined with fewer and more expensive public services, include growing costs of public higher education and higher health charges, feed popular antagonism and frustration that they and their children are being denied opportunities to get ahead and stay healthy.
4.) Many working people resent the fact that their tax money is being spent by the state on endless distant wars and to finance bailouts of Wall Street instead of investing it in reindustrializing America to create well paying jobs or to aid unemployed or underemployed workers unable to meet mortgage payments and facing eviction or homelessness. Most workers reject the inequitable budget expenditures that privilege the rich and deny the working people.
5.) Working people are appalled by the state's hypocrisy and double standards in prosecuting "welfare cheats" for taking hundreds but overlooking corporate and banking swindlers, and Pentagon military cost overruns of hundreds of billions. Few working people believe there is equality before the law, implicitly rejecting its claims of legitimacy.
6.) Many working class families resent the fact that the state recruits their sons and daughters for wars, leading to death and crippling injuries instead of public service jobs, while the children of the rich and affluent pursue civilian careers.
7.) The state subsidizes and upgrades public infrastructure – roads, parks and utilities in upper end neighborhoods while ignoring the demands for improvements of low income communities. Moreover the state locates contaminants – incinerators, high polluting industries etc. – in close proximity to workers housing and schools.
8.) The state holds the minimum wage below increases in the cost of living but encourages and promotes excess profits.
9.) Law enforcement is strict in high end neighborhoods and lax in low income communities resulting in higher rates of homicides and robberies.
10.) State imposes constraints on labor organizations struggling to secure wages and benefits and ignores corporate intimidation and arbitrary firings of workers. The state encourages corporate mergers and acquisitions leading to monopolies but discourages collective action from below.
11.) State economic institutions recruit policymakers from banks and financial houses who make decisions favoring their former employers, while wage and salaried workers are excluded and have no representation in economic policy positions.
12.) The state increasingly infringes on individual freedoms of social activists via the Patriot Act, arbitrary arrests, and grants impunity to police violence and punishes whistle blowers, rejecting citizen reviews with punitive powers.
13.) The state is highly responsive to and increases funding for the military-industrial complex, the relocation of MNC overseas and the high income Israel lobby while cutting funding for public investment in productive activity, applied technology and high tech job training for US workers and salaried employees and their children.
14.) State policies have increased inequalities between the top 10% and the bottom 50% for decades, turning the US into the industrial country with the greatest inequalities.
15.) State policies have led to declining living standards as wage and salary earners work longer hours with less job security,for a greater number of years before receiving pensions and social security and under greater environmental hazards.
16.)Elected state officials break most campaign promises to working people while fulfilling promises for the upper class/corporate banking elite.
17.) State officials pay greater attention and are more responsive to a few big financial contributors than to millions of voters.
18.) State officials are more responsive to payoffs from corporate lobbies protecting corporate profits than to the health, educational and income needs of the electorate.
19.) State-corporate links lead to deregulation, which results in contamination of the environment leading to the bankruptcy of small businesses and loss of many jobs, as well as the loss of recreational areas, spoiling rest and recreation for working people.
20.)The state increases the retirement age rather than increase the social security payments by the rich, with the result that workers in unhealthy work environments will enjoy fewer years of retirement in good health.
21.)The state judicial system is more likely to render favorable decisions to wealthy plaintiffs with high paid, politically connected lawyers against workers defended by inexperienced public defenders.
22.) State tax collectors are more likely to pursue wage and salary tax payers than upper class corporate executives employing accountants with expert knowledge in tax loopholes and tax free shelters.
The state in its multiple activities, whether in law enforcement, military recruitment, tax and expenditure polices, environmental, pension and retirement legislation and administration, systematically favors the upper class and corporate elite against wage, salaried and small business people.
The state is permissive with the rich and repressive of the working and salaried employees, defending the privileges of the corporations and the impunity of the police state while infringing on the individual freedoms of the working people.
State policies increasingly extract more from the workers in terms of tax revenues and provide less in social payments, while lessening tax payments from Wall Street and inflating state transfers.
Popular perceptions of a hostile and exploitative state correspond to their everyday practical experiences; their anti-state behavior is selective and rational; most wage and salaried workers support social security and unemployment benefits and oppose higher taxes because they know or intuit that they are unfair.
Liberal academics and experts who claim workers are “irrational” are themselves practioners of highly selective criticisms – pointing to (shrinking) state social benefits while ignoring the unjust, inequitable tax system and the biased behavior of the judicial, law enforcement, legislative and regulatory system.
State personnel, policy makers and enforcement officials are attentive to and responsive and deferential to the rich and hostile and indifferent or arrogant toward workers.
In summary the real issue is not that people are anti-state, but that the state is anti the majority of the people. In the face of the economic crises and prolonged imperial wars, the state becomes more brazenly aggressive in slashing living standards in order to channel record levels of public funds toward Wall Street speculators and the military industrial complex.
While liberal-progressives’ remain embedded in ‘neo-keynsian’ statest ideology, outmoded in the face of a state thoroughly embedded in corporate networks, the New Right’s “anti-statest” rhetoric resonates with the feelings, experiences and reasoning of important sectors of wage and salaried workers and small businesspeople.
The attempt by liberals and progressives to discredit this popular revolt against the state, by pointing to the corporate financing and rightwing manipulation behind the anti-statist movement is doomed to failure, because it fails to deal with the profound injustices experienced by working people today in their daily dealings with a state, largely administered by liberal corporate-militarists. The absence of an anti-statist left has opened the door for the rise of a mass based ‘New Right’.
A ‘new left’will emerge from civil society when it recognizes the pernicious exploitative role of the state, and is capable of dealing with the powerful ties between liberalism-militarism-corporate “welfarism”. The revival and expansion of the debilitated public welfare programs for working people can only take place by dismantling the current state apparatus, and that depends on a complete break with both corporate parties and an agenda that ‘revolutionizes’ the way in which politics works in America.
(3) Greenspan calls for Austerity
Secondary Sources: Greenspan v. Krugman, Bubbles, Euro Bailouts
By Phil Izzo
JUNE 18, 2010, 9:20 AM ET
A roundup of economic news from around the Web.
–Greenspan, Krugman and Deficits: Alan Greenspan warns about deficits.
“The United States, and most of the rest of the developed world, is in need of a tectonic shift in fiscal policy. Incremental change will not be adequate. In the past decade the U.S. has been unable to cut any federal spending programs of significance. I believe the fears of budget contraction inducing a renewed decline of economic activity are misplaced. The current spending momentum is so pressing that it is highly unlikely that any politically feasible fiscal constraint will unleash new deflationary forces. I do not believe that our lawmakers or others are aware of the degree of impairment of our fiscal brakes. If we contained the amount of issuance of Treasury securities, pressures on private capital markets would be eased.”
Paul Krugman argues that this focus on austerity is a mistake. “It raises memories of 1937, when F.D.R.’s premature attempt to balance the budget helped plunge a recovering economy back into severe recession. And here in Germany, a few scholars see parallels to the policies of Heinrich Brüning, the chancellor from 1930 to 1932, whose devotion to financial orthodoxy ended up sealing the doom of the Weimar Republic.”
(4) Krugman says Austerity akin to 1937 "balanced budget" which aborted recovery
That ’30s Feeling
By PAUL KRUGMAN
Published: June 17, 2010
Suddenly, creating jobs is out, inflicting pain is in. Condemning deficits and refusing to help a still-struggling economy has become the new fashion everywhere, including the United States, where 52 senators voted against extending aid to the unemployed despite the highest rate of long-term joblessness since the 1930s.
Many economists, myself included, regard this turn to austerity as a huge mistake. It raises memories of 1937, when F.D.R.’s premature attempt to balance the budget helped plunge a recovering economy back into severe recession. And here in Germany, a few scholars see parallels to the policies of Heinrich Brüning, the chancellor from 1930 to 1932, whose devotion to financial orthodoxy ended up sealing the doom of the Weimar Republic.
But despite these warnings, the deficit hawks are prevailing in most places — and nowhere more than here, where the government has pledged 80 billion euros, almost $100 billion, in tax increases and spending cuts even though the economy continues to operate far below capacity.
What’s the economic logic behind the government’s moves? The answer, as far as I can tell, is that there isn’t any. Press German officials to explain why they need to impose austerity on a depressed economy, and you get rationales that don’t add up. Point this out, and they come up with different rationales, which also don’t add up. Arguing with German deficit hawks feels more than a bit like arguing with U.S. Iraq hawks back in 2002: They know what they want to do, and every time you refute one argument, they just come up with another.
Here’s roughly how the typical conversation goes (this is based both on my own experience and that of other American economists):
German hawk: “We must cut deficits immediately, because we have to deal with the fiscal burden of an aging population.”
Ugly American: “But that doesn’t make sense. Even if you manage to save 80 billion euros — which you won’t, because the budget cuts will hurt your economy and reduce revenues — the interest payments on that much debt would be less than a tenth of a percent of your G.D.P. So the austerity you’re pursuing will threaten economic recovery while doing next to nothing to improve your long-run budget position.”
German hawk: “I won’t try to argue the arithmetic. You have to take into account the market reaction.”
Ugly American: “But how do you know how the market will react? And anyway, why should the market be moved by policies that have almost no impact on the long-run fiscal position?”
German hawk: “You just don’t understand our situation.”
The key point is that while the advocates of austerity pose as hardheaded realists, doing what has to be done, they can’t and won’t justify their stance with actual numbers — because the numbers do not, in fact, support their position. Nor can they claim that markets are demanding austerity. On the contrary, the German government remains able to borrow at rock-bottom interest rates.
So the real motivations for their obsession with austerity lie somewhere else.
In America, many self-described deficit hawks are hypocrites, pure and simple: They’re eager to slash benefits for those in need, but their concerns about red ink vanish when it comes to tax breaks for the wealthy. Thus, Senator Ben Nelson, who sanctimoniously declared that we can’t afford $77 billion in aid to the unemployed, was instrumental in passing the first Bush tax cut, which cost a cool $1.3 trillion.
German deficit hawkery seems more sincere. But it still has nothing to do with fiscal realism. Instead, it’s about moralizing and posturing. Germans tend to think of running deficits as being morally wrong, while balancing budgets is considered virtuous, never mind the circumstances or economic logic. “The last few hours were a singular show of strength,” declared Angela Merkel, the German chancellor, after a special cabinet meeting agreed on the austerity plan. And showing strength — or what is perceived as strength — is what it’s all about.
There will, of course, be a price for this posturing. Only part of that price will fall on Germany: German austerity will worsen the crisis in the euro area, making it that much harder for Spain and other troubled economies to recover. Europe’s troubles are also leading to a weak euro, which perversely helps German manufacturing, but also exports the consequences of German austerity to the rest of the world, including the United States.
But German politicians seem determined to prove their strength by imposing suffering — and politicians around the world are following their lead.
How bad will it be? Will it really be 1937 all over again? I don’t know. What I do know is that economic policy around the world has taken a major wrong turn, and that the odds of a prolonged slump are rising by the day.