Take A Hike!
It looks like we're approaching an inflection point of great danger in working through problems in creating Economic Recovery. The inflection point is coming because there has been little economic recovery both internationally and domestically, with some nations continuing to run large deficits, and a growing chorus from many, calling for austerity and Governmental budget balancing even though it's well known that the consequences of these policies will be economic contraction and further hardship for all of us but the rich. The big question is: which way will nations that have debts held in their own sovereign currency like the United States, the United Kingdom, Japan, and Australia go? Will they listen to the domestic and international deficit hawks (e.g. the ratings agencies, the IMF, the European Commission (EC), and various currency traders and hedge fund managers) and cause further contraction and hardship for their citizens, or will they tell the deficit hawks to “take a hike,” create demand from the public sector, where private sector demand is falling short, full employment, and healthy economies?
I can't answer this question, but what they ought to do is stated quite clearly in a recent blog post by L. Randall Wray and Yeva Nersisyan. Here's an extensive sampling of their views along with some comments.
”It is very hard to avoid the conclusion that the Neoliberals at the EU (which seems to act on these matters as a front for the Bundesbank), the IMF, and the ratings agencies are trying to do to the UK and US what they already did to Greece. A real conspiracy theorist might even wonder whether they are trying to succeed where the Third Reich could not—destruction of the US and UK economies in a bid to annihilate the nations themselves. Obviously, that is not a view we suggest. But if one were to adopt it, it could be noted that Neoliberals in Germany have been picking off its neighbors one-by-one, first Greece, then Portugal and Spain, then on to Italy and finally France . . . These Neoliberals use a combination of mercantilism—trade surpluses that suck demand and jobs out of its fellow EU nations—and then “market discipline” that punishes any nation that tries to fill resulting demand gaps with government spending. . . . However, a more charitable interpretation is that it is the Teutonic Calvinism that guides EU prognostication on government deficits: today’s “excesses” must surely impose a tradeoff in the form of tomorrow’s costs. But when the EC begins to criticize UK and US policy, that is certainly a step that goes too far—even if it is simply due to muddled thought rather than to a nefarious agenda.”
And by the way, US-China relations have something in common with this pattern. First, China manipulates its currency to accumulate giant surpluses with the United States, and then it begins to express its alarm at US stimulus policies designed to awaken our economy, while at the same time it brings its own economy back by creating a giant Government stimulus to ensure its own continued expansion. Fortunately, China is not in a position to force us to adopt “market discipline,” and vindicate its own mercantilism, unless our leaders foolishly conclude that the interests of the Chinese and American investors in China, are more important than those of most Americans. Unlike the EC, which, even if it cannot force the UK to retrench, is in a position to force Greece, Portugal, and some other of its weaker members to inflict pain on their populations, if they wish to remain in the EU and retain the Euro. Wray and Nersisyan go on:
”The ratings agencies are another matter altogether. These blessed every kind of Wall Street excess with triple A ratings. They never saw a NINJA loan they did not love. Yet, they are engaged in an ugly form of deficit terrorism, attacking one country after another, downgrading debt, raising interest rates and causing budget deficits to rise, which then pushes up credit default swap prices and triggers further downgrades. Ratings agencies serve no public purpose. They are thoroughly incompetent, and probably irredeemably fraudulent. They should be shut down, investigated, and prosecuted.”
Indeed they should. Their function is to enforce the interests of Wall Street and the global elite. It is not to support the financial stability and growth of the Main Streets of the world. And there's every reason to believe that their ratings now have no objective basis in economic theory, but simply reflect the false idea that Governments are like families or households when it comes to assessing their financial capability
”President Obama and PM Brown should “just say no” to the attempted intervention by these fundamentally misguided deficit hawks into their economic and political affairs. Not only would fiscal tightening now or even within the next several years be a monumental mistake, the notion that continued deficits threaten our economies is unsound. . . . What these Neoliberals do not understand is that the UK and US operate with sovereign currencies—that is both of these nations issue their own non-convertible (floating exchange rate) currencies. For this reason the comparison with any nation that uses the Euro (such as Greece), or with a nation that pegs to precious metals or foreign currencies is invalid. In other words, there is no question of solvency or sustainability of deficits for the US and UK. Sovereign debt of these nations never carries default risk and hence cannot be rated below triple A.”
It is amazing how many discussions comparing the situations of nations don't recognize the vital distinction between nations that issue their own fiat currencies and nations that use the Euro or otherwise tie the value of their currency to a commodity like gold or some foreign currency. The simple fact is that nations whose currency is tied to something external can only create currency by borrowing money, or raising it through taxation, while nations that retain currency sovereignty are not operationally limited in their ability to spend, which is why their deficits are never unsustainable.
”Further, budget deficits are largely endogenously determined by economic performance, so that even if the US and UK adopted the Neoliberal recommendations, the budgetary outcome is not discretionary—indeed, tight fiscal policy would probably increase budget deficits by killing nascent economic recovery. Again, this would not raise any questions about solvency, but it certainly would impose unnecessary pain and sacrifice on the populations of the countries. Since we find it very difficult to believe that the ratings agencies, the IMF and the EU do not understand this, it is equally hard to avoid the conclusion that their policy recommendations are designed to subvert the economies of the US and UK. To what end we can only wonder.”
The ratings agencies are in bed with the big banks and the traders. If they bring down the US and UK economies these actors will advance the “shock doctrine” and solidify the victory of corporate globalism over the authority of National Governments, that are somewhat subject to democratic influences. If the ratings agencies could do this, it would be a significant victory for corporatism in the battle between it and democracy. However, we need not give corporatism that victory, because:
”Actually, there are always two ways to achieve the same budget deficit ratio: the ugly (Japanese) way and the virtuous way. If fiscal policy remains chronically too tight even in recession, economic growth is destroyed, tax revenues plummet, and a deficit opens up. So far, that is—unfortunately—the US path in this recession, a path already well-worn by two decades of Japanese experiments with belt-tightening. The alternative (let us call it the Chinese example) is that a downturn is met with an aggressive and appropriately-sized discretionary response. In that case, growth is quickly restored, tax revenue begins to grow, and the budget deficit is reduced.”
That is, the Chinese have shown us the way. Spend as necessary to employ your productive resources. Worry about growth; not about deficits.
”We emphasize that the deficit outcome is of no consequence for a sovereign nation. What is important is that the “ugly” Neoliberal path means chronically insufficient demand, high unemployment, and lots of suffering. The virtuous path—which is always available to a sovereign government—means less loss of output and employment, and relatively rapid resumption of economic growth. So it is not the deficit outcome that matters, rather it is the real suffering imposed by slow growth that results when fiscal policy is too tight.
”In conclusion, the Neoliberal agenda would impose the ugly path on the US and UK. President Obama and Prime Minister Brown should tell the Neoliberals to take a hike.”
In fact, if we don't tell them to take a hike, we will all be taking a very long journey ourselves: back to 1932 and the worst depression in American History.