The New York Times’ web version ran a story this morning (January 8, 2013) entitled “Unemployment Continues to Climb in Euro Zone.”
Eurostat reports that Eurozone unemployment has reached the record rate of 11.7%, with 18.8 million unemployed (an increase of two million in a year). “[Y]outh unemployment continues to grow, with 5.8 million people under 25 classified as jobless in November, up 420,000 from a year earlier.” As youth unemployment surges it becomes common for college graduates in the periphery to emigrate. The article shows that Berlin’s insistence on inflicting austerity on Spain and Greece has forced them into Great Depression levels of unemployment. Italy’s level of youth unemployment is also at Great Depression levels.
Here are the most prominent forms of madness discussed in the article. First, “Economists surveyed by Reuters expect the E.C.B. to leave policy unchanged Thursday, as the central bank waits for a clearer picture of the economic situation to emerge.” How many millions must lose their jobs and how many kids have to emigrate before the ECB can see “a clearer picture?” How many Eurozone nations have to be forced into Great Depressions? We need a new Marshall Plan to send Windex to the ECB.
Second, the article concedes that:
“Attacking joblessness may require governments to ease back on austerity measures that many economists, including some at the International Monetary Fund, say might have gone too far.”
“Might” – “may” – “too far” – “ease back” – each of these terms is misleading. The worst possible response to the Great Recession was austerity – which is what Berlin, using the leverage of its de facto control over the ECB, inflicted on the Eurozone. Austerity is a pro-cyclical policy that makes a recession or depression worse by causing already inadequate demand to become even more inadequate. Austerity in response to the Great Recession is an act of economic malpractice equivalent to the medical practice of bleeding patients. The proper response, which economists overwhelmingly support, is counter-cyclical policies (“automatic stabilizers”) that respond to a recession by increasing private and public sector demand through a combination of tax decreases and government spending increases.
There is no “may” or “might” about austerity causing recessions to worsen – we have run a “natural experiment” and it has produced the results predicted by economic theory and repeatedly demonstrated by history. The Eurozone tried austerity and the U.S. used (a very limited stimulus). The Eurozone was promptly forced back into a gratuitous recession – with much of the periphery forced into depression. The U.S.’s policy of (modest) stimulus (relative to the size of the demand shortfall) produced a modest but persistent recovery.
The correct analysis of the Eurozone’s responding to the Great Recession with austerity is not that the Eurozone went “too far” and needs to be “ease back.” Austerity takes the economy in the opposite direction of where it needs to go. To get to a town 100 miles to the north on level ground one does not walk southward for 50 miles and then walk northward 150 miles. Here, the Eurozone didn’t walk on level ground – it followed a steep path southward that descended into a second recession and it pushed its unwilling hiking companions of the periphery into the abyss of depression.
Third, and the most delicious irony, the Eurozone austerians are now relying on the U.S. stimulus to produce sufficient growth that we will increase our purchase of imports from the Eurozone so rapidly that our economy will pull the Eurozone out of recession and depression. It gets better – the fear in Europe is that the U.S. will mimic Europe’s self-destructive austerity policies by adopting a “Grand Bargain” (sic, “Grand Betrayal”) in our ongoing budget negotiations.
“‘External demand seems to be holding up better than we had thought,” Mr. Moëc (a Deutsche Bank economist) said. “Now we are to a large extent dependent on what happens in the United States,’” he said, referring to the negotiations over the budget.”
We should pause to acknowledge that our political classes and media are so insane that there is a huge danger than the U.S. will adopt austerity and gratuitously force a second, global Great Recession. Our political classes and the media have just demanded that we avoid the “fiscal cliff” on the grounds that its austerity provisions would force the U.S. into a gratuitous recession. The same political class, cheered on by most of the media despite the self-destructive devastation that austerity has wreaked on the Eurozone, now demands hysterically that we make massive spending cuts. Yesterday, it was essential to avoid austerity. Today, it is essential to embrace it.
The EU austerians’ hope is that our economy will act like such a powerful tow truck that it will be able to overcome the “fiscal drag” of austerity on the Eurozone’s economy. This is a significantly insane idea – why shouldn’t the Eurozone stop hitching itself to the garbage truck of austerity that is pulling its economy down into the dump? The NYT article, by contrast, simply asks the Germans to slow down the speed at which the Germans are driving the Eurozone down into the dump so that it will be easier for the U.S. economy to serve as a tow truck pulling the Eurozone in the opposite direction.
Rising unemployment causes government tax revenues to fall, increased demand for social benefits and reduced consumer demand. This then gives rise to more government borrowing.
Of course, the answer is to cut benefits, so that consumer demand is further reduced, causing added increases in unemployment, which leads to further reductions in tax revenues. The jobless cannot pay their mortgages and their homes are foreclosed. Where does all this end, if present austerity policies are continued ?
It is certainly time to completely reassess our debt based monetary system, where all money is created as debt.
Interesting downward spiral.
But isn’t that their purpose? To control and contract the money supply on a global basis, hence the austerity programs in Europe, earlier in parts of Asia, and the present attempt to foist such in America?
Peter G. Peterson’s group, with the New America Foundation, as previously mentioned on several occasions at this highly intelligent site, and since Peterson is the lifelong lackey of David Rockefeller, who promoted NAFTA, GATT, and WTO (Rockefeller’s Council on the Americas was the original NAFTA lobbyist group), it stands to reason that this is the agenda of the super-rich, as much control of the monetary supply by the senior capital pool owners and holders.
Still, the majority (probably the vast majority) of Americans are clueless as to the causes and origins of the economic meltdown, with no help, only disinformation from Fox and NPR, etc.
Truly, when HSBC can get away scot-free with money laundering in the vicinity of over one-quarter of a trillion to almost half-trillion dollars per year, for a period of many years, we are assured we exist in a national, and global. lawless culture.
You’ve confused different issues there, I think. It is true that “all money is created as debt”. To be more accurate, about 95% of money in circulation originates with PRIVATE banks rather than with central banks or governments, and for every dollar of privately created money, there is a dollar of debt.
Some advocates of full reserve banking (a system under which only central banks create money) get very worked up about the fact that private banks create money as debt. They argue that since people pay interest on debt, they are effectively paying interest for the privilege of having money. Or they argue that the private “debt/money” system increases total debts.
I actually favour full reserve, but I don’t think the latter two arguments hold much water.
BUT QUITE QUITE SEPARATE from all that is the fact that (as you rightly say) government debt tends to rise in a recession. And I’d add that it will rise particularly fast if a government deals with that recession by stimulus funded by government debt. Of course everyone gets worked up about the word “debt” because of the overtones or nuances behind the word. Actually there is no problem in having government debt rise in a recession and fall when the economy is more boyant.
And yet another separate issue is whether stimulus should be funded by government debt or new money. Keynes said there isn’t much difference between the two, and quite right. Friedman argued for a zero government debt regime (which I agree with). I.e. I think stimulus should funded just with new money.
The Federal Reserve is owned by a consortium of private banks. Therefore the total money supply of the US is privatized. Under the fractional reserve banking system, all money is created as debt. No debts = no money.
The banks create money out of thin air as a multiple of their assets, which is times 14 according to the Basle Accords.
Why should this privilege be accorded to private banks? In my view it is the US government, who should create the money out of thin air and then lend it to the banks at interest.
In the words of Meyer Amschel Rothschild:
” Give me control of a nation’s money supply and I care not who makes its laws.”
Sort of a garbage truck tug of war. If the US chooses to go with austerity, both trucks will be pulling in the same direction and we’ll all end up in the same dump. Whoopee!
Why do you say “insane”? They are achieving great success. Drive the people down to desperation and then…? Read Agenda 21. Look at who controls, advises in the White House and congress. Every subgroup protects and works to advance the interests of their own. Now that this subgroup (one that you must be born into, i.e.a ‘closed system’), they do what they do because they are what they are.
And they are doing it on all levels. Now San Pablo and Richmond, Ca is to build stack and pack units on four earthquake faults. I call it Palestine on the Bay. Kill the low income, the poor. No need for workers to create wealth. Do it with robots and exploitation of foreign workers. Very clever. The people are slow and confused. but they are loading up with guns and ammo. They can not win against the newly militarized police and drones, but expect…more chaos, at the least. Wiemar Republic again? Likely, but with more info, more destruction and across the world.
I suspect the Wiemar Republic will appear idyllic by comparison at some near future date…..
East Bay native, completely with you for part 1.
However, I’m not sure what you mean by your Weimar Republic remark. That government collapsed not because of inflation, but because France and Russia had confiscated Germany’s industrial base, literally disassembling factories and moving them out of the country, and because the excessive reparations they demanded were required to be rendered in gold. For some reason the certain knowledge that that quantity of gold simply did not exist in Germany did not affect the language of the treaty.
Russia signed a separate peace treaty with Germany in 1917 on very unfavorable terms for Russia. I don’t believe they got any further spoils from Germany in Paris. Your are right about reparations in gold, however, with both France and Great Britain extracting heavy payments. Italy may have gotten some too as it was an allied nation.
He was off the deep end at sentence #4
The rise in unemployment levels, especially for unskilled labour, is mainly due to increased efficiency in manufacturing and administration by using computers and robots to do repetitive work. Add the that the policy of offshoring production to cheap labor countries makes the situation even worse. This results in more profits being accumulated by fewer people, who park their money offshore and do not spend it into the real economy, but instead use it to speculate in the stock, bond and commodity markets, which results in higher prices for consumers.
This could be redressed to a degree by government spending on infrastructure projects to create employment and which would result in something tangible from the expenditure. In the US the unemployment level is 18.8 % of the workforce, which means that 32 million people’s talents are going to waste. This is no way to run a country.
“This results in more profits being accumulated by fewer people, who park their money offshore and do not spend it into the real economy, but instead use it to speculate in the stock, bond and commodity markets, which results in higher prices for consumers.”
Eventually they eat their own tails, though. Evisceration of tangible goods markets eventually must exact its due.
Yep, austerity is terrible. What we need to do is give $ Billions to bankers to they can keep their $ Million + bonuses. Let the bankers borrow money from the Fed at near zero interest rate and loan it out (oh come on guys please loan some out!) at some higher interest so they can make more money to give themselves some more $ Million bonuses. Then when some of the loans fail they can sue the Fed for “forcing” them to borrow money and extract even more $ Millions from the government.
Yes indeed, bankers are our friends.
The irony is that these banks about which you complain, own the Federal Reserve. And since the Federal Reserve creates the money out of thin air, so that in lending to these the banks they get a double benefit. I think they collect 6% interest from the Fed. So the Fed takes a loss ? Well, not really, because the Fed created the money out of nowhere to begin with.
“This then gives rise to more government borrowing”
This is a highly misleading framing of what Government borrowing actually is…i.e. net money creation.
Government “borrowing” results in an increase in net assets of the non-government. It is mathematically impossible to create something new through borrowing of the same thing. Borrow some money from yourself and see if you end up with an increase in assets, or even interest. The government “prints” new net dollar assets into the non-government when it “borrows”.
Government “debt” amounts to paying interest on some of the money already created to encourage saving. The public isn’t buying bonds with it funds it intended to spend anyway.
If there is a debt it is the interest payment…which the government will always be able to pay. The principal is ours and we get to keep it…with interest. This debt is a little thing that does not warrant the attention being given to it.
I do not disagree that US government borrowing from the Federal Reserve creates money, which the government spends into the economy. You assert that this also creates a net asset in the private sector. Again I do not disagree, but these net assets accrue to the banks, who never did anything to create the money beyond making an entry on the bank’s computer.
What I object to is this private banking monopoly, which creates money out of thin air. It should in fact be the prorogative of the US Treasury and then all government debt would be avoided. (In any case it is the taxpayer, who pays the interest and principal for the government.) Taxation would then be a way of controlling the rate of inflation and redressing the extreme concentration of wealth. The US government does not need to go into debt to create money, neither does it need taxation to fund its activities for the common good.
“But these net assets accrue to banks” – Frank
Sorry, but this is wrong…the funds accrue to bank accounts of private agents in the non-government…public employees, soldiers, road and bridge builders, etc.
Banks see none of it except they do have to pay interest on deposits placed in interest-bearing accounts.
First, I want to say that I really enjoy Mr. Black’s writing. He presents arguments in a very organized manner with supporting evidence and with a healthy dose of good humor. My only criticism is that although he acknowledges that the system is infested with cronyism and fraud, he doesn’t extend the criticism to its’ logical precondition – the original fraud occurs when apparent equals are being exchanged – labor-power for wages. All the other fraud that Mr. Black so eloquently exposes, could not exist if it weren’t for the exploitation that is ubiquitous in present social relations.
The austerity drive, which is really a euphemism for poverty, is perfectly rationale if one considers the class kernel of events. The ruling elites know that the greatest threat to them are workers. Workers have created conditions which threaten the elites – rising wages threaten their profits, jobs give workers dignity, and education, a double-edged sword, give us clarity to refute neo-liberal/free-market dogma and could inspire us to become independent of the corporate class and its’ state, rather than having to constantly beg them for a few more crumbs. Therefore, the ruling elites impose increasing poverty upon us to crush us both spiritually and materially.
But we workers must accept some share of the blame, too. Although this depression is not the product of workers’ profligacy, it is the product of our cowardice. We think now that we get what we want, materially, through credit, not by joining a union and putting in a pay claim. In borrowing rather than fighting we assist in our own ideological corruption.
The wider problem, of our cowardice, is social democracy – always looking for reforms to generate a ‘kindler’, ‘gentler’ capitalism. Our class’s history is one of struggle, never making peace with capitalism yet hardly ever accepting the necessity of overthrowing it. A policy of survival within capitalism which gave birth to its’ ideology – social democracy. In our struggle we must understand the peculiar wisdom and present uselessness of such a course. Today, when to accept the constraints of capitalism is to accept defeat, social democracy has been transformed from an ideology of survival to one of destruction. It should be totally discarded. We should break the stranglehold of social democracy. By allowing capitalism to restrain us we allow unions to become another weapon of the system and a part of the corporate state.
The following is an alleged quotation by Thomas Jefferson:
“If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered.”
Some people refute it, but the message it contains is nevertheless true.
Merkel, Monti, et al, know that austerity is economically disastrous. But the economy is not their priority. Tearing up the social contract, destroying social rights for workers, gutting the welfare state and privitizing the public domain are their main goals. The economy is simply collateral damage. As long as the banks are cranking out bonuses who cares about the irrelevant populace…?