[THS] !!!!!! Michael Hudson: Europe's Fiscal Dystopia

[The Harder Stuff in news and commentary]

http://www.informationclearinghouse.info/article25826.htm

Europe's Fiscal Dystopia: The "New Austerity" Road

By Michael Hudson
Prof. Hudson is Chief Economic Advisor to the Reform Task Force Latvia (RTFL).
Michael Hudson is President of The Institute for the Study of Long-Term Economic
Trends (ISLET), a Wall Street Financial Analyst, Distinguished Research Professor of
Economics at the University of Missouri, Kansas City and author of Super-Imperialism:
The Economic Strategy of American Empire (1968 & 2003), Trade, Development and
Foreign Debt (1992 & 2009) and of The Myth of Aid (1971). For more of his writing
check out his website: http://michael-hudson.com.


June 27, 2010 "Eurasia Review" - - Europe is committing fiscal suicide – and will have
little trouble finding allies at this weekend’s G-20 meetings in Toronto. Despite the
deepening Great Recession threatening to bring on outright depression, European
Central Bank (ECB) president Jean-Claude Trichet and prime ministers from Britain’s
David Cameron to Greece’s George Papandreou (president of the Socialist
International) and Canada’s host, Conservative Premier Stephen Harper, are calling
for cutbacks in public spending.

The United States is playing an ambiguous role. The Obama Administration is all for
slashing Social Security and pensions, euphemized as “balancing the budget.” Wall
Street is demanding “realistic” write-downs of state and local pensions in keeping
with the “ability to pay” (that is, to pay without taxing real estate, finance or the
upper income brackets). These local pensions have been left unfunded so that
communities can cut real estate taxes, enabling site-rental values to be pledged to
the banks of interest. Without a debt write-down (by mortgage bankers or
bondholders), there is no way that any mathematical model can come up with a
means of paying these pensions. To enable workers to live “freely” after their working
days are over would require either (1) that bondholders not be paid (“unthinkable”)
or (2) that property taxes be raised, forcing even more homes into negative equity
and leading to even more walkaways and bank losses on their junk mortgages. Given
the fact that the banks are writing national economic policy these days, it doesn’t look
good for people expecting a leisure society to materialize any time soon.

The problem for U.S. officials is that Europe’s sudden passion for slashing public
pensions and other social spending will shrink European economies, slowing U.S.
export growth. U.S. officials are urging Europe not to wage its fiscal war against labor
quite yet. Best to coordinate with the United States after a modicum of recovery.

Saturday and Sunday will see the six-month mark in a carefully orchestrated financial
war against the “real” economy. The buildup began here in the United States. On
February 18, President Obama stacked his White House Deficit Commission (formally
the National Commission on Fiscal Responsibility and Reform) with the same brand of
neoliberal ideologues who comprised the notorious 1982 Greenspan Commission on
Social Security “reform.”

The pro-financial, anti-labor and anti-government restructurings since 1980 have
given the word “reform” a bad name. The commission is headed by former
Republican Wyoming Senator Alan Simpson (who explained derisively that Social
Security is for the “lesser people”) and Clinton neoliberal Erskine Bowles, who led the
fight for the Balanced Budget Act of 1997. Also on the committee are bluedog
Democrat Max Baucus of Montana (the pro-Wall Street Finance Committee
chairman). The result is an Obama anti-change dream: bipartisan advocacy for
balanced budgets, which means in practice to stop running budget deficits – the
deficits that Keynes explained were necessary to fuel economic recovery by providing
liquidity and purchasing power.

A balanced budget in an economic downturn means shrinkage for the private sector.
Coming as the Western economies move into a debt deflation, the policy means
shrinking markets for goods and services – all to support banking claims on the “real”
economy.

The exercise in managing public perceptions to imagine that all this is a good thing
was escalated in April with the manufactured Greek crisis. Newspapers throughout
the world breathlessly discovered that Greece was not taxing the wealthy classes.
They joined in a chorus to demand that workers be taxed more to make up for the
tax shift off wealth. It was their version of the Obama Plan (that is, old-time
Rubinomics).

On June 3, the World Bank reiterated the New Austerity doctrine, as if it were a new
discovery: The way to prosperity is via austerity. “Rich counties can help developing
economies grow faster by rapidly cutting government spending or raising taxes.” The
New Fiscal Conservatism aims to corral all countries to scale back social spending in
order to “stabilize” economies by a balanced budget. This is to be achieved by
impoverishing labor, slashing wages, reducing social spending and rolling back the
clock to the good old class war as it flourished before the Progressive Era.

The rationale is the discredited “crowding out” theory:

Budget deficits mean more borrowing, which bids up interest rates. Lower interest
rates are supposed to help countries – or would, if borrowing was for productive
capital formation. But this is not how financial markets operate in today’s world.
Lower interest rates simply make it cheaper and easier for corporate raiders or
speculators to capitalize a given flow of earnings at a higher multiple, loading the
economy down with even more debt!

Alan Greenspan parroted the World Bank announcement almost word for word in a
June 18 Wall Street Journal op-ed. Running deficits is supposed to increase interest
rates. It looks like the stage is being set for a big interest-rate jump – and
corresponding stock and bond market crash as the “suckers’ rally” comes to an
abrupt end in months to come.

The idea is to create an artificial financial crisis, to come in and “save” it by imposing
on Europe and North America a “Greek-style” cutbacks in social security and
pensions. For the United States, state and local pensions in particular are to be cut
back by “emergency” measures to “free” government budgets.

All this is  an inversion of the social philosophy that most voters hold. This is the
political problem inherent in the neoliberal worldview. It is diametrically opposed to
the original liberalism of Adam Smith and his successors. The idea of a free market in
the 19th century was one free from predatory rentier financial and property claims.
Today, an Ayn-Rand-style “free market” is a market free for predators. The world is
being treated to a travesty of liberalism and free markets.

This shows the usual ignorance of how interest rates are really set – a blind spot
which is a precondition for being approved for the post of central banker these days.
Ignored is the fact that central banks determine interest rates by creating credit.
Under the ECB rules, central banks cannot do this. Yet that is precisely what central
banks were created to do. European governments are obliged to borrow from
commercial banks.

This financial stranglehold threatens either to break up Europe or to plunge it into
the same kind of poverty that the EU is imposing on the Baltics. Latvia is the prime
example. Despite a plunge of over 20 per cent in its GDP, its central bankers are
running a budget surplus, in the hope of lowering wage rates. Public-sector wages
have been driven down by over 30 per cent, and the government expresses the hope
for yet further cuts – spreading to the private sector. Spending on hospitals,
ambulance care and schooling has been drastically cut back.

What is missing from this argument? The cost of labor can be lowered by a classical
restoration of progressive taxes and a tax shift back onto property – land and rentier
income. Instead, the cost of living is to be raised, by shifting the tax burden further
onto labor and off real estate and finance. The idea is for the economic surplus to be
pledged for debt service.

In England, Ambrose Evans-Pritchard has described a “euro mutiny” against
regressive fiscal policy. But it is more than that. Beyond merely shrinking the
economy, the neoliberal aim is to change the shape of the trajectory along which
Western civilization has been moving for the past two centuries. It is nothing less
than to roll back Social Security and pensions for labor, health care, education and
other public spending, to dismantle the social welfare state, the Progressive Era and
even classical liberalism.

So we are witnessing a policy long in the planning, now being unleashed in a full-
court press. The rentier interests, the vested interests that a century of Progressive
Era, New Deal and kindred reforms sought to subordinate to the economy at large,
are fighting back. And they are in control, with their own representatives in power –
ironically, as Social Democrats and Labor party leaders, from President Obama here
to President Papandreou in Greece and President Jose Luis Rodriguez Zapatero in
Spain.

Having bided their time for the past few years the global predatory class is now
making its move to “free” economies from the social philosophy long thought to have
been irreversibly built into the economic system: Social Security and old-age pensions
so that labor didn’t have to be paid higher wages to save for its own retirement;
public education and health care to raise labor productivity; basic infrastructure
spending to lower the costs of doing business; anti-monopoly price regulation to
prevent prices from rising above the necessary costs of production; and central
banking to stabilize economies by monetizing government deficits rather than forcing
the economy to rely on commercial bank credit under conditions where property and
income are collateralized to pay the interest-bearing debts, culminating in forfeitures
as the logical culmination of the Miracle of Compound Interest.

This is the Junk Economics that financial lobbyists are trying to sell to voters:
“Prosperity requires austerity.” “An independent central bank is the hallmark of
democracy.” “Governments are just like families: they have to balance the budget.”
“It is all the result of aging populations, not debt overload.” These are the oxymorons
to which the world will be treated during the coming week in Toronto.

It is the rhetoric of fiscal and financial class war. The problem is that there is not
enough economic surplus available to pay the financial sector on its bad loans while
also paying pensions and social security. Something has to give. The commission is to
provide a cover story for a revived Rubinomics, this time aimed not at the former
Soviet Union but here at home. Its aim is to scale back Social Security while reviving
George Bush’s aborted privatization plan to send FICA paycheck withholding into the
stock market – that is, into the hands of money managers to stick into an array of
junk financial packages designed to skim off labor’s savings.

So Obama is hypocritical in warning Europe not to go too far too fast to shrink its
economy and squeeze out a rising army of the unemployed. His idea at home is to do
the same thing. The strategy is to panic voters about the federal debt – panic them
enough to oppose spending on the social programs designed to help them. The fiscal
crisis is being blamed on demographic mathematics of an aging population – not on
the exponentially soaring debt overhead, junk loans and massive financial fraud that
the government is bailing out.

What really is causing the financial and fiscal squeeze, of course, is the fact that that
government funding is now needed to compensate the financial sector for what
promises to be year after year of losses as loans go bad in economies that are all
loaned up and sinking into negative equity.

When politicians let the financial sector run the show, their natural preference is to
turn the economy into a grab bag. And they usually come out ahead. That’s what the
words “foreclosure,” “forfeiture” and “liquidate” mean – along with “sound money,”
“business confidence” and the usual consequences, “debt deflation” and “debt
peonage.”

Somebody must take a loss on the economy’s bad loans – and bankers want the
economy to take the loss, to “save the financial system.” From the financial sector’s
vantage point, the economy is to be managed to preserve bank liquidity, rather than
the financial system run to serve the economy. Government social spending (on
everything apart from bank bailouts and financial subsidies), disposable personal
income are to be cut back to keep the debt overhead from being written down.
Corporate cash flow is to be used to pay creditors, not employ more labor and make
long-term capital investment.

The economy is to be sacrificed to subsidize the fantasy that debts can be paid, if
only banks can be “made whole” to begin lending again – that is, to resume loading
the economy down with even more debt, causing yet more intrusive debt deflation.

This is not the familiar old 19th-century class war of industrial employers against
labor, although that is part of what is happening. It is above all a war of the financial
sector against the “real” economy: industry as well as labor.

The underlying reality is indeed that pensions cannot be paid – at least, not paid out
of financial gains. For the past fifty years the Western economies have indulged the
fantasy of paying retirees out of purely financial gains (M-M’ as Marxists would put it),
not out of an expanding economy (M-C-M’, employing labor to produce more
output). The myth was that finance would take the form of productive loans to
increase capital formation and hiring. The reality is that finance takes the form of
debt – and gambling. Its gains were therefore made from the economy at large.
They were extractive, not productive. Wealth at the rentier top of the economic
pyramid shrank the base below. So something has to give. The question is, what
form will the “give” take? And who will do the giving – and be the recipients?

The Greek government has been unwilling to tax the rich. So labor must make up the
fiscal gap, by permitting its socialist government to cut back pensions, health care,
education and other social spending – all to bail out the financial sector from an
exponential growth that is impossible to realize in practice. The economy is being
sacrificed to an impossible dream. Yet instead of blaming the problem on the
exponential growth in bank claims that cannot be paid, bank lobbyists – and the G-20
politicians dependent on their campaign funding – are promoting the myth that the
problem is demographic: an aging population expecting Social Security and employer
pensions. Instead of paying these, governments are being told to use their taxing
and credit-creating power to bail out the financial sector’s claims for payment.

Latvia has been held out as the poster child for what the EU is recommending for
Greece and the other southern EU countries in trouble: Slashing public spending on
education and health has reduced public-sector wages by 30 per cent, and they are
still falling. Property prices have fallen by 70 percent – and homeowners and their
extended family of co-signers are liable for the negative equity, plunging them into a
life of debt peonage if they do not take the hint and emigrate.

The bizarre pretense for government budget cutbacks in the face of a post-bubble
economic downturn is that the supposed aim is to rebuild “confidence.” It is as if
fiscal self-destruction can instill confidence rather than prompting investors to flee the
euro. The logic seems to be the familiar old class war, rolling back the clock to the
hard-line tax philosophy of a bygone era – rolling back Social Security and public
pensions, rolling back public spending on education and other basic needs, and
above all, increasing unemployment to drive down wage levels. This was made
explicit by Latvia’s central bank – which EU central bankers hold up as a “model” of
economic shrinkage for other countries to follow.

It is a self-destructive logic. Exacerbating the economic downturn will reduce tax
revenues, making budget deficits even worse in a declining spiral. Latvia’s experience
shows that the response to economic shrinkage is emigration of skilled labor and
capital flight. Europe’s policy of planned economic shrinkage in fact controverts the
prime assumption of political and economic textbooks: the axiom that voters act in
their self-interest, and that economies choose to grow, not to destroy themselves.
Today, European democracies – and even the Social Democratic, Socialist and labour
Parties – are running for office on a fiscal and financial policy platform that opposes
the interests of most voters, and even industry.

The explanation, of course, is that today’s economic planning is not being done by
elected representatives. Planning authority has been relinquished to the hands of
“independent” central banks, which in turn act as the lobbyists for commercial banks
selling their product – debt. From the central bank’s vantage point, the “economic
problem” is how to keep commercial banks and other financial institutions solvent in a
post-bubble economy. How can they get paid for debts that are beyond the ability of
many people to pay, in an environment of rising defaults?

The answer is that creditors can get paid only at the economy’s expense. The
remaining economic surplus must go to them, not to capital investment, employment
or social spending.

This is the problem with the financial view. It is short-term – and predatory. Given a
choice between operating the banks to promote the economy, or running the
economy to benefit the banks, bankers always will choose the latter alternative. And
so will the politicians they support.

Governments need huge sums to bail out the banks from their bad loans. But they
cannot borrow more, because of the debt squeeze. So the bad-debt loss must be
passed onto labor and industry. The cover story is that government bailouts will
permit the banks to start lending again, to reflate the Bubble Economy’s Ponzi-
borrowing. But there is already too much negative equity and there is no leeway left
to restart the bubble. Economies are all “loaned up.” Real estate rents, corporate
cash flow and public taxing power cannot support further borrowing – no matter how
wealth the government gives to banks. Asset prices have plunged into negative
equity territory. Debt deflation is shrinking markets, corporate profits and cash flow.
The Miracle of Compound Interest dynamic has culminated in defaults, reflecting the
inability of debtors to sustain the exponential rise in carrying charges that “financial
solvency” requires.

If the financial sector can be rescued only by cutting back social spending on Social
Security, health care and education, bolstered by more privatization sell-offs, is it
worth the price? To sacrifice the economy in this way would violate most peoples’
social values of equity and fairness rooted deep in Enlightenment philosophy.

That is the political problem: How can bankers persuade voters to approve this under
a democratic system? It is necessary to orchestrate and manage their perceptions.
Their poverty must be portrayed as desirable – as a step toward future prosperity.

A half-century of failed IMF austerity plans imposed on hapless Third World debtors
should have dispelled forever the idea that the way to prosperity is via austerity. The
ground has been paved for this attitude by a generation of purging the academic
curriculum of knowledge that there ever was an alternative economic philosophy to
that sponsored by the rentier Counter-Enlightenment. Classical value and price theory
reflected John Locke’s labor theory of property: A person’s wealth should be what he
or she creates with their own labor and enterprise, not by insider dealing or special
privilege.

This is why I say that Europe is dying. If its trajectory is not changed, the EU must
succumb to a financial coup d’êtat rolling back the past three centuries of
Enlightenment social philosophy. The question is whether a break-up is now the only
way to recover its social democratic ideals from the banks that have taken over its
central planning organs.

Michael Hudson



Prof. Hudson is Chief Economic Advisor to the Reform Task Force Latvia (RTFL).
Michael Hudson is President of The Institute for the Study of Long-Term Economic
Trends (ISLET), a Wall Street Financial Analyst, Distinguished Research Professor of
Economics at the University of Missouri, Kansas City and author of Super-Imperialism:
The Economic Strategy of American Empire (1968 & 2003), Trade, Development and
Foreign Debt (1992 & 2009) and of The Myth of Aid (1971). For more of his writing
check out his website: http://michael-hudson.com.