Austerity and Class War

The Republican's filibuster of the "tax extenders" bill will have severe economic consequences.
Moody's is predicting the loss of 200,000 jobs. Nomura Securities says it will knock 0.4% off of the GDP.
A good 2 million unemployed families will have their last financial lifeline cut by the second week of July. The suffering of these families is about to increase many fold.

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In midst of the outcry from the struggling working class, came this statement from Sen. Debbie Stabenow (D-Mich.):

"It is very clear that the Republicans in the Senate want this economy to fail. They see that things are beginning to turn around.... In cynical political terms, it doesn't serve them in terms of their election interests if things are beginning to turn around."

Now I like conspiracy theories more than most, maybe even too much, but I also recognize that describing a political opponent in 2-dimensional terms with evil intent is usually an indication of something missing from your theory.

What is missing here is the concept of class interests.

Paul Krugman's latest article was surprisingly frank and honest.

We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.

Most people focused on the first sentence of this paragraph, and for good reason. "Depression" is not a word that mainstream economists use very often. However, I'm a little weird, because I focused on the second sentence.

“coal-black steed named Panic” quickly “thundered riderless down Wall Street,” where “a monstrous yell went up and seemed to literally shake the building in which all these mad brokers were for the moment confined.”
- Robert Sobel, September 1873

Very few people know about, or are interested, in the history behind the Long Depression of the 1870's. Those that do know something about the era tend to focus on the Panic of 1873, which caused the closure of Wall Street for 10 days. The Long Depression was 65 months of economic contraction (even longer than during the Great Depression) and led to a 14.5% unemployment rate.
One element leading to the Long Depression was the extreme amounts of debt created by the easy credit of the Greenbacks. But the ultimate cause of the Long Depression was the Coinage Act of 1873, or as it was known in the western states, the Crime of 1873.

The Crime of 1873

From 1792 until 1873, except for during the Civil War, America had been under the bimetallic standard, meaning that both gold and silver was money. The dollar was defined as consisting of either 22.5 grains of gold or 270 grains of silver. The country grew and prospered under a monetary standard specified in the U.S. Constitution.
Then in 1859 the Comstock Lode was discovered. Within a few years an enormous amount of silver was pouring out of Nevada, increasing the money supply. This was great news for debtors, the working class, and new entrepreneurs. What it wasn't good news for was Eastern Banks, who mostly held gold.

In February 1873, silver was demonetized. Now only gold would be money. The immediate effect of the law was the bankrutpcy of many western silver miners. But the long term effects were far more destructive.

The result was that the dollar (and so the American monetary mass and ultimately output and employment) was linked to a metal that was getting scarcer and scarcer, because between 1879 and 1897 the rate of increase in gold output slowed, and the demand increased at the same time. The monetary mass could not keep pace with the strongly expanding economy, and price measured in gold declined strongly.
We see between 1875 and 1896 a deflation of about 1% a year in the general CPI....On the monetary side, this deflation made many bank loans turn sour, as the debtors struggled to honor their obligations with rising real value of their debts.

The deflation that hindered general prosperity for working Americans for 23 years didn't end until the Witwatersrand Gold Rush in South Africa and the 1898-99 Klondike Gold Rush when the monetary supply began expanding again. On the other hand, those same 23 years saw the upper class in America expand both power and riches until they dominated every sector of society.
The lesson to be learned here is that deflation is a good thing if you already have lots of money. It's a bad thing if you work for a living.

Which brings us to present-day Toronto.

Worldwide Austerity

It isn't just American politicians that suddenly care about budget deficits. European politicians do to.

The United States, however, joined other countries at the summit meeting, which was met by protests and several hundred arrests, by endorsing a goal of cutting government deficits in half by 2013 and stabilizing the ratio of public debt to gross domestic product by 2016.

The ECB is about to cut off credit despite the fact that Spain's banking system is hanging on by a thread. A failure of Spain's banking system would have catastrophic results.

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The politicians never gave deficits a care when they were busy bailing out the multinational banks and hedge fund assets so important to the world's wealthy. By coincidence, the G20 couldn't agree to a global bank tax.
Now that the bankers have been saved, and the wealthy have been taken care of, the bill must be paid for those bailouts. That means the working class must endure lower pay, higher taxes, and fewer government services.

From an economic perspective, austerity makes no sense if your objective is to boost the economy. Food stamps and unemployment extensions have the most bang for the buck, while tax cuts that benefit the wealthy have the least. Yet the Senate Republicans want to do the most inefficient of the two.

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Whether someone agrees with Keynesian economics or not, only a moron would deny that cutting wages, and services, while increasing regressive taxes in middle of a depression won't hurt economic growth. What's more, indicators are increasingly pointing towards deflation and a double-dip.

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The Economic Cycle Research Institute(ECRI) Weekly Indicators is now equal to the early recession levels, and dropping. Even in the Federal Reserve there is a recognition that the economic and monetary indicators point to deep trouble.

Key members of the five-man Board are quietly mulling a fresh burst of asset purchases, if necessary by pushing the Fed's balance sheet from $2.4 trillion (£1.6 trillion) to uncharted levels of $5 trillion. But they are certain to face intense scepticism from regional hardliners. The dispute has echoes of the early 1930s when the Chicago Fed stymied rescue efforts.
"We're heading towards a double-dip recession," said Chris Whalen, a former Fed official and now head of Institutional Risk Analystics. "The party is over from fiscal support. These hard-money men are fighting the last war: they don't recognise that money velocity has slowed and we are going into deflation. The only default option left is to crank up the printing presses again."

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It's no longer a joke - we are staring into the face of deflation. Austerity at this time would ensure it happens.

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 insitutional 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...
"Fiscal policy does not work. The US has just tried the biggest fiscal experiment in history and it has failed. What matters is the quantity of money and in extremis that can be increased easily by quantititave easing. If the Fed doesn’t act, a double-dip recession is a virtual certainty," he said.

Leading this double-dip is the housing sector.
What most people fail to remember from the Long Depression is that deflation isn't a scary thing to certain upper-class segments of society. Deflation is preferable to other alternatives.

The Senate Republicans who filibustered the unemployment extensions are right to be concerned about the deficits. They are alarming and unsustainable. They aren't evil for being concerned.
The problem is that the Republicans want the working class to pay the price for something the wealthy benefited from. It's called class warfare, and you are losing.



state GDP estimates, SF Fed

by way of Calculated Risk. Not only are the GDP reductions about 0.25% of GDP. CR is estimating about a 0.5% drag on GDP from just the "Stimulus" winding down.

(I have no looked at "Stimulus" because to me it wasn't the right type and the spin was so severe from the White house..ignoring money pouring overseas and not to U.S. workers)...

But the SF Fed is putting on warnings as well.

The GOP wants to offshore outsource your job

That's why they blocked the UI extension. The corporate tax subsidies to offshore outsource our jobs was removed in the House version.

They spun it claiming it "raised taxes", uh, yes it deincentivized large multinational corporations from committing labor arbitrage and moving production and thus jobs offshore...

I think we should be screaming this from the rooftops. Everybody in America is pissed these large companies who use our nation and our taxes offshore outsource American's jobs. That is bi-partisan outrage and if they realize this I am sure they will be screaming bloody murder.

They already are. I'm seeing a host of anonymous drive-bys claiming to be lifelong Republicans completely pissed as hell.

I'm seeing that too

They already are. I'm seeing a host of anonymous drive-bys claiming to be lifelong Republicans completely pissed as hell.

I've seen it on several other blogs. I'm not sure what to believe.
I mean, we are talking about the Republican Party here. What did these people really expect?

Amazing - And to think that we won the Cold War

Looks like the commies only had to wait until our Economic Elites trashed our own system. But instead of a red flag, we are seeing the Jolly Roger being hoisted. "What is to be done?" as someone once wrote.

Frank T.

Howz that austerity goin' fer ya? Ireland shows the way

via Calculated Risk. It's a horror show, their unemployment is above 13% and no end in sight.

While we're all about econ, I think it's worth a mention that the Nazis as well as Mussolini came into power due to economic conditions originally. Germany was a disaster, hyperinflation and some of the economic programs actually worked...

of course the evil and horror that followed is unfathomable, but just sayin' a lot of human suffering, revolutions and wars are preceded with economic disaster.

One of Italy's problems was a massive trade deficit > 5% GDP which cost a huge amount of jobs, created unemployment.

Yes, already under way.

Krugman pointing to something of a third depression (not as bad as the 1930s but still destructive) and Roubini pointing to looming slowdown in US and worse in Eurozone.

What is really interesting is that one can see the conditions of "mass society" developing here --lack of availability of elites (as in "they just don't get it") and increasing isolation/ powerlessness of non-elites (that's us, folks). Tea Party movement is somewhat chaotic response to conditions, and "mass society" is fertile ground for totalitarianism. Policy makers are counting on recovery to bail them out. The real threat to political stability is sense of economic injustice and diminished hope for the future.

Frank T.

The Reserve Dilemma

M3 has been falling, and for a while there is still single digit M1, M2 growth. The danger here is that Bernanke believes the theory that all is well if M1 is still growing. So for a period of time you have M1 pushing on a rope with no significant expansion of M2 or M3.

So what do banks do? Do they continue to keep the money in mattresses making insignificant returns of put the money to work, somehow. This scenario occurred at the end of WWII when many believed we were heading back to depression. This period may be like the End of WWII not 1933 as Krugman says.

The facile answer is 'you can't make the banks lend'. True but you can make the Fed do their work for them. or use the Treasury, and Commerce lending facilities. Looking at banks from the standpoint of usefulness, they are increasingly irrelevant if they do not lend, so who needs to save them?

Burton Leed


If the Fed is committed to "rebuilding capital," our focus should not be on the capital of banks, but rebuilding the capital of the American people. A direct lending facility could create mortgages using the low medium term rates (3% for the 10 year), mark them up enough to cover costs and provide a loss reserve, and refinance existing mortgages without all the "false fees" of the banksters. Servicing could be outsourced to banks and properly regulated. Properly conceived, these new mortgage pools could be more efficient and, as bank foreclosure inventories are absorbed, allow more American families to keep their homes, rebuild their capital (equity), and thus become mobile. No, this is not a simple problem, but the Treasury and the Fed should not exist for the convenience and wealth of Wall Street and commercial banks. The direct mortgage lending idea does not solve the problem of scarcity of commercial lending, but it might take a significant chunk of the housing dilemma off the table and lead to reallocation of bank activity into more productive areas.

Frank T.

another common sense great idea by Frank T.

Yup. Instead of tallying massive losses and foreclosures, they assuredly could cut out the middle man and offer essentially zero interest rate refinancing and even principle hair cuts to keep people in their homes...

but oops, that would affect the Banksters as well as overall prices (as if massive foreclosures and high unemployment does not!)

You keep coming up with these practical common sense "why nots" and if you notice, the Banksters and their inane profits machine, middle class squeeze seems to somehow right there in the middle of it.


"What is really interesting is that one can see the conditions of "mass society" developing here --lack of availability of elites (as in "they just don't get it") and increasing isolation/ powerlessness of non-elites (that's us, folks). Tea Party movement is somewhat chaotic response to conditions, and "mass society" is fertile ground for totalitarianism."

A School of thinkers from Marcuse ('One Dimensional Man') to Orwell have claimed the U.S. has been moving towards totalitarianism since the late '40s. The refusal to end the endless wars, the economic superstate trade zone of the Americas, the loss of privacy, Kill Switch and general loss of liberties of all kinds are the evidence.
The proofs are best understood in terms of the inability to mount any resistance to what can be seen as a host of
disasters created entirely by undemocratic elites.

Much of this is culture. Keep a society medicated by narcotics, mass media, bread and circuses, and you really get some effective control of behavior. How else do we account for 'Health Care Reform' before the desperate need to fix the economy? Keep them medicated. Afghanistan War underwrites a flow of heroin 10 times the crop size in 2001. Just as the Cambodian Junta in 1970 supported itself entirely through heroin trade.

Burton Leed

"Bonddad still sees a 'chicken in every pot"

Bonddad and NDD are up today with their usual 'chicken in every pot' world view. Below is a comment that I submitted that EP readers may be interested in.

"You guys should really reflect on the old and true adage: “Lies, Damn Lies and Statistics”.

There is a preponderance of evidence in the papers every day (labor; state, municipal school budgets; cost of college, health services; asset and pension depreciation; etc, etc, etc) all indicating that the “chicken in every pot” statistics you are so fond of reporting on ad infinitum are not measuring the reality of the life for people in the 75 percentile W-2 income category. Their standard of living is dropping precipitously, but you won’t see it if all you do is keep looking at the post WW II economic statistics.

The paradigm has changed! To project the economic future based on 1945-2008 data is like a 1950 economist projecting the future based on pre-WW II statistics."

you need to get over your Bonddad thing

The statistics I'm reporting? I'm overviewing the government statistics and overall, they do not say there is a chicken in every pot. I think I've been on the "economic malaise" double dip camp for a long time and I know I have shown over and over again there is not enough real economic growth to recovery the jobs we need.

The entire Bonddad/NDD being clearly dead wrong on this great "V" recovery has left the station a long time ago. It's truly beating a dead horse.

Come on Tom, over on the left are a host of economics blogs and there are dozens more which are credible to read. The point is to read the statistics accurately, which is what I keep attempting to do and drag a few along with me in the process.

Recovering right along

I did a quick search. When Bonddad and NDD were successfully calling the 2009 bounce they were looking at the leading indicators. They were right to do so.
Now the leading indicators are pointing down again. I checked out Bonddad's web site and they haven't mentioned anything about leading indicators.
It's like when I posted "Bonddad versus Bonddad". Before we went into recession he rightly talked about issues like debt. Now he doesn't anymore, eventhough debt is still relevant.

The "bounce"

They were not calling it a pull out of economic Armageddon, as I recall it was a "V" full scale "recovery" esp. in denial on the unemployment stats.

So, claiming we have a "bounce", which I'm starting to feel undervalued here, because I certainly wrote up many an analysis showing the "trough" was over. But by absolutes I would never call a "pull back from the abyss" a recovery. whine.

If anyone is noticing, to explain my comments here

I am still very pissed that Bonddad choose to attack the entire site by name because he didn't like one person's post. So, as far as I'm concerned he can rot in hell for that. Here we are, all writing and working for free in so many words, doing our best and myself at least, I pay close attention to the data, statistics, equations and trends.....and take enormous time checking and looking at raw data...
so that unjustified slanderous attack really pissed me off in case no one noticed.


You have my sympathies Robert. Keep writing.

Krugman, Iceland Miracle, must read

Remember how Iceland said screw you we're not paying for the Banksters? Some macro economic stats are out and Paul Krugman overviews them. You have to see this, I guess it really helps to live in a Democracy.

The IMF thinks they are God

Talk about class warfare. The IMF has put on their blog the 10 commandments of advanced fiscal economies.

Thou Shalt and then inane dictates to basically screw workers and the middle classes.

Somebody please do a nice history of the IMF. I haven't paid that much attention but it seems the neo-cons have elevated themselves to new levels of grandiosity.

Green Energy - Icelandic Edge

Countries like Iceland and Brazil have weathered the crisis with lower than average unemployment in part because of very low energy trade deficits. Unlike our $300 billion oil import bill, Iceland powers itself almost entirely on geothermal. A raised middle finger to the banksters does not hurt either.

Brazil does a different but effective move with sugar cane ethanol. It is worth repeating because Oil is 60 percent of the U.S. trade deficit. How can comparatively insignificant countries do better than the U.S.? Trade is shaving at least 0.6 percent off GDP, never mind the job losses and human misery.

Burton Leed

Iceland vs US

Has anyone quantified anything different from the 0.6 percent of U.S. GDP loss from the trade deficit? 0.6 Percent of GDP drag from trade always sounded low.

Burton Leed

Class war and austerity

Very fine article, except that I object to ascribing austerity to just the Republicans.

It is ludicrous to say that only the Republican party benefits/is interested in austerity; Clinton also cut taxes.

The true class war austerity struggle bestrides both parties - the ongoing attempts to pass cap and trade as well as failure to reform health care are indicative of this.