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Austerity and Deficits
Dick Eastman
June 3, 2012
Krugman: As I said, this isn't a new insight. So why have so many politicians insisted on pursuing austerity in slump? And why won't they change course even as experience confirms the lessons of theory and history?
Krugman: So the austerity drive in Britain isn't really about debt and deficits at all; it's about using deficit panic as an excuse to dismantle social programs. And this is, of course, exactly the same thing that has been happening in America.
Eastman: Krugman lacks a theory of the financial elites, he does not get to how they benefit from dismantling social programs and what their overall objective is -- wealth maximization? monopoly? macro-monopoly where the bank manipulates what the nation state used to manipulate? security by weaking the opposing class of debtors? Instead he views politics -- money power lobbying - as outside of economics rather than inside where it must be part of the analysis. .
Krugman: The boom, not the slump, is the right time for austerity. So declared John Maynard Keynes 75 years ago, and he was right. Even if you have a long-run deficit problem - and who doesn't? - slashing spending while the economy is deeply depressed is a self-defeating strategy, because it just deepens the depression.
Eastman: Everything is wrong about this though it sounds good wearing Keynesian fiscal-policy glasses. The word "boom" is wrong as its its cousin "bubble" -- because economic growth and expansion is a normal condition, with startups replacing obsolecent products, production methods, industries that should go on all the time. But if you view booms-bust cycles and bubbles that must eventually collapse but can be "kept up" or restored to "up" with government fiscal spending in a bust and kept from growing too big with increased taxation in a boom -- then you will adopt Krugman's position. But the fact is that boom is the normal state of capitalism and life -- only the addition of debt-money and interest drain and a private credit monopoly that enables the leaders of one sector of the economy, finance, to manipulate macro variables of price level (inflation and deflation), employment, productivity, balance of trade all lead to the sabotage of economic development and improvement -- so that the financiers' wealth is maximized at the expense of the borrowing sectors (government, households and domestic production.) There is no need to slow down a growing economy with taxation. However, there is a need to reflate an economy in deflation and there is a need to provide money that starts to decay to nothing a month after it is borrowed and then tries to pull out even more money to pay the compound interest. All depressions are financial. It is wrong to blame borrowers when the creditors have control of the monetary "measuring rod" (the purchasing power of the dollar) in which the contract was written. .
Krugman: So why is Britain doing exactly what it shouldn't? Unlike the governments of, say, Spain or California, the British government can borrow freely, at historically low interest rates. So why is that government sharply reducing investment and eliminating hundreds of thousands of public-sector jobs, rather than waiting until the economy is stronger?
Eastman: Because they profit from deflation. Because their dollar holdings (hoardings) appreciate in value in a deflation and when the deflation has done its job and every asset of the borrowers is in receivership and flooding the market (houses, businesses, privatived public lands, utilities and other assets) they can buy up these tangible assets for pennies on the dollars that built them. The government is reducing expenditure because that speeds the deflation and hence the wealth of the creditor class - Rothschild and Rockefeller families at the top of the list of gainers. Furthermore deflation reduces total return on tangible assets in the form of capital losses in the domestic production sector, and and speculators behind the deflation have built their portfolios to gain a windfall from this. Tangible asset prices down and financial asset prices up—i.e., interest rates down. .
Krugman: Over the past few days, I've posed that question to a number of supporters of the government of Prime Minister David Cameron, sometimes in private, sometimes on TV. And all these conversations followed the same arc: They began with a bad metaphor and ended with the revelation of ulterior motives.
Eastman: Economists don't ask economic agents (or the politicians they hire) why they are pushing deflation/austerity. They don't have the whole picture -- all they know of the cow is the teat they have found -- and the few master planners/conspirators at the top are certainly not going to state their true objective function -- their real motives. But why does Krugman not have a developed theory of banking elite as economic agents within the economy. They have more control than the Fed (they created and dictate fed policy and control directly its most important levers -- and they own it) yet they are not studied -- because science, even the science of economics, has the goal of prediction and control -- and the bankers don't want people predicting and control them or understanding what they are after or how they are gaining at the expense of sectors of the economy or -- and this is most important -- how they are completely unnecessary and actually a gigantic net loss to the efficiency of market system in terms of serving consumers and the nation. .
The bad metaphor - which you've surely heard many times - equates the debt problems of a national economy with the debt problems of an individual family. A family that has run up too much debt, the story goes, must tighten its belt. So if Britain, as a whole, has run up too much debt -- which it has, although it's mostly private rather than public debt -- shouldn't it do the same? What's wrong with this comparison?
Eastman: This idea is not original with Keynes -- theories of underconsumption are very old. And clearly C H Douglas, John Hobson, Arthur Kitson and Soddy were way ahead of Keynes and his invisible partner Richard Khan in turning out the Keynesian model and the Keynesian soltuion of deficit-financed government spending during deflation and high taxation during inflation. The error of Keynes is that the reflation they offer is deficit-financed which means that the money will be returned to the banks taking with it compound interest so that even greater deflation must necessarily follow. Krugman refuses to look at this because doing so will blow up Keynesianism and his function as defender of the Keynesian error of neglecting long term consequences of deficit financed fiscal stimuli. .
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Krugman: The answer is that an economy is not like an indebted family. Our debt is mostly money we owe to each other; even more important, our income mostly comes from selling things to each other. Your spending is my income, and my spending is your income.
So what happens if everyone simultaneously slashes spending in an attempt to pay down debt? The answer is that everyone's income falls -- my income falls because you're spending less, and your income falls because I'm spending less. And, as our incomes plunge, our debt problem gets worse, not better.
Eastman: Krugman is seriously wrong here, and their is a long tradition of this error. Keynes and Paul Samuelson (whom Krugman has replaced as national spokesman for Keynesian economics) both stated that "we owe it to ourselves." I have developed an alternative model that much better fits the facts and yileds much better prediction. That model is that there are two distinct systems, the upper loop of creditors, banks, multinational corporations and speculators (currencies, futures, derivatives, bonds, real estate) who are the creditors and the lower loop of households (95 percent of them), government (domestic public goods) and domestic production (the tangible goods and services we produce and provide to earn our incomes). When government deficit spends the upper loop gets the contract and it also gets the interest on the deficit spending. The lower loop builds up the tangible economy in the easy money phase and they turn over ownership of those assets to the upper loop in the deflation phase -- all according to plan, the cycle of sowing and harvesting by international banking families.
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Krugman: This isn't a new insight. The great American economist Irving Fisher explained it all the way back in 1933, summarizing what he called 'debt deflation' with the pithy slogan "the more the debtors pay, the more they owe." Recent events, above all the austerity death spiral in Europe, have dramatically illustrated the truth of Fisher's insight.
Eastman: Krugman is mentioning Fisher now -- and Fisher is right. But Fisher is a monetarist (like I am) and he blamed debt and deflation together as the causes of serious non-equilibrating depressions. I have been saying in postings and in Youtubes -- with extensive quotes of whole chapters of Fisher -- that austerity leads to increased real debt, even if nominal debt goes down. Just like you real wage can go down in an inflation even if your nominal wage is going up (albeit going up slower than the prices of production goods). But Fisher advocated a monetary reflation, not the deficit-financed government spending stimulus Krugman would stick us with. .
Krugman: And there's a clear moral to this story: When the private sector is frantically trying to pay down debt, the public sector should do the opposite, spending when the private sector can't or won't. By all means, let's balance our budget once the economy has recovered ' but not now. The boom, not the slump, is the right time for austerity.
Eastman: What Krugman is saying very dishonest. I hope I can make it clear why in the next two sentences. Krugman wants government to fill in with its own borrowing when the household and business sectors are trying to pay down. This is a favor to the crediters so that they do not have a contraction of their loans outstanding. But isn't it far better to have money in the economy that is not bank-debt, that is not loans at interest that must be paid back. We need money that circulates and stays circulating and must not go back where it came from taking its Federal Reserve Note brothers and sisters with it as "interest" hostages. Because then the people go austere and the government does not but rather replaces consumer spending/borrowing with government spending /borrowing - the people do not escape debt at all -- rather they just change the means by which they will be paying the same interest burden -- they will be paying interest (on the increased national debt) through the IRS rather than through checks written to their lending banker. Krugman is no enemy of the financial sector.
Eastman: Krugman offers deficit-financed fiscal policy to keep up total lower-loop borrowing even in a deflationary depression that will get worse when principal and interest on the "stimulus" begin to drain away. If he was an economist on the side of the national economy and the people he would advocate what the populists have advocated: 1) Repudiation of debt (because it was built up in a fraudulent scam system that is inherently a deathtrap for any nation); 2) a move to pure national "thin-air" fiat money and 3) distribution of the new money directly to the household sector through national dividend that gives free-and-clear new purchasing power to all consumers so that the economy can be driven by consumer demand -- so that there can be consumer sovereignty strong enough to make the better entrepreneur profitable and the marginal entrepreneur earn "normal" profits and only the "wrong" entrepreneur make losses and go out of business. That is who a market economy should work. The only justification of a market economy is that it best serves the need of the people of the nation that regulates that economy. For that we need nationalist populist social credit economists and not Keynesians and Austrians and Neo-classicals etc who all work one way or another for the "upper loop" who from the perspective of the good of society are not better than an organized crime syndicate. .
Krugman: Well, that's where it gets interesting. For when you push 'austerians' on the badness of their metaphor, they almost always retreat to assertions along the lines of: "But it's essential that we shrink the size of the state."
Eastman: Yes, they do. And they are wrong. It is essential that we shrink the power of the financial sector over money creation (and destruction) and credit expansion and contraction. The state must be the regulator of the economy in the national interest. The international bankers do not run the financial sector in the national interest -- they feed on the lower loop, they do not serve it. Government as regulator of the economy should be above all markets and especially above the banks and speculators. That is not the case today. That is what constitutions are for. As for the providing of public goods like power, water, airports, bridges, roads, social security -- that is a decision of the houshold sector through their elected representatives and their own political participation out of a sence of public duty (this is absent from more hireling politicians) - the people decide what mix of public and private goods they want. But the pound of flesh exacted by the usury system of debt-money has to come from either households or business or government services -- because not politican or group of politicians is willing to stand up and declare that the financial sector is completely under government regulation - that the lenders are not above the government of the people. That is what you will never hear from Paul Krugman. All he wants it to make sure that when the people are going bankrupt and can't borrow any more from the upper loop that the government will step in and continue the level of borrowing - so the creditors will have a safe market for their loanable funds to replace the unsafe and shrinking private sector borrowing. .
Krugman: Now, these assertions often go along with claims that the economic crisis itself demonstrates the need to shrink government. But that's manifestly not true. Look at the countries in Europe that have weathered the storm best, and near the top of the list you'll find big-government nations like Sweden and Austria.
Eastman: The more Austerity in the household sector the more banks can borrow from their favorate debtor -- the US government, backed by the power to tax and sell government land and other public assets. Of course the anti-government Austrian economists and the conservatives are for government borrowing and for taxes, like the VAT and cigarettes and property, that hit the lower loop households the hardest. The debate between Keynesians and Austrians/conservatives/libertarians is itself fraudulent - because both represent service to the upper-loop creditor class at the expense of the household, domestic production, and public services sectors. .
Krugman: And if you look, on the other hand, at the nations conservatives admired before the crisis, you'll find George Osborne, Britain's chancellor of the Exchequer and the architect of the country's current economic policy, describing Ireland as "a shining example of the art of the possible." Meanwhile, the Cato Institute was praising Iceland's low taxes and hoping that other industrial nations "will learn from Iceland's success."
Eastman: Yes, but I explain why and Krugman doesn't. The elites tauted the easy money "building phase" the bankers initiated in those countries - cheap loans from the switch to the Euro -- making the Irish think they can borrow to build a Gaelic Empire by borrowing cheap and building -- but then the deflation began and everything that was built and a lot of the treasure of land and beauty and wealth of Ireland had to go to pay the interest in a super deflation - a deflation deliberately engineered for such a harvest of Irish assets. Krugman doesn't go there. He writes for the New York Times. .
Krugman: So the austerity drive in Britain isn't really about debt and deficits at all; it's about using deficit panic as an excuse to dismantle social programs. And this is, of course, exactly the same thing that has been happening in America.
Eastman: And it isn't really about dismantling social programs as it is about extracting purchasing power from Ireland's lower loop to enable the bankers to buy up the medical industry, the government utilities, the businesses that were built up by the Irish in their moment of large amounts of credit. The credit itself was not at fault -- it was the fact that the piper would have to be paid in principal and interest and the fact that the international lenders could start the deflationary depression at any moment they choose by simply calling in loans to get the downward spiral started. Krugman would have you believe that the masters of this scam just don't like social services -- that is absurd. Krugman has failed to explain their behavior as I have done. He is not an economist of the people -- he is a shill propagandist for the money power. .
Krugman: In fairness to Britain's conservatives, they aren't quite as crude as their American counterparts. They don't rail against the evils of deficits in one breath, then demand huge tax cuts for the wealthy in the next (although the Cameron government has, in fact, significantly cut the top tax rate). And, in general, they seem less determined than America's right to aid the rich and punish the poor. Still, the direction of policy is the same -- and so is the fundamental insincerity of the calls for austerity.
Eastman: Krugman pretends he smells like a rose - but he is merely ensuring there will be a next time - by getting government to go into debt -- so the total debt drain will not be diminished. The Money Power needs Keynesians to set up the next round. Krugman does this admirably. .
Krugman: The big question here is whether the evident failure of austerity to produce an economic recovery will lead to a "Plan B." Maybe. But my guess is that even if such a plan is announced, it won't amount to much. For economic recovery was never the point; the drive for austerity was about using the crisis, not solving it. And it still is.
Eastman: And notice that Krugman does not offer you a "B" plan, other than deficit spending. His solution is as lethal and as upper-loop-serving as the Austrians call for austerity and deflationary gold standard or competing currencies so that our debts payable in paper can be changed into debts payable in gold.
The US dollar is no longer the international currency. The plan is for the old Rothschild directed international gold standard. The same booms and busts obtain under such a standard -- all of the great depressions of the 19th and 20th century were under gold standards. Ron Paul is not the answer to Paul Krugman or Geithner or Bernanke. Only populist Houshold Dividend and debt repudiation are the answers.