STOCK MARKET WATCH -- Thursday, 27 December 2012

[Demeter]

41. Fueled by Deficit Hysteria, Obama and the Republicans Are Choosing the Path of “Economicide”

http://neweconomicperspectives.org/2012/12/fueled-by-deficit-hysteria-obama-and-the-republicans-are-choosing-the-path-of-economicide.html#more-4060

In the “fiscal cliff” negotiations and the subsequent debt limit talks between Obama and the Republican leadership of the House of Representatives, it appears that there will be no “good guys” because the talks and policy framework within which they are operating are at odds with the welfare of the American people. Set up by a series of interactions over the last four years between Obama and his nominal opponents in the Republican Party, the framework of the negotiations ignores the way that the US government finances itself as well as the only known economic policy orientation which will allow our economy to thrive; the proposed policies and negotiations have been to date economically illiterate. The biggest losers in these talks if they “succeed” according to the self-evaluations of the Republican and Democratic leaderships will be the American people and politically the Democrats who go along with a framework that demands cuts in federal budget deficits at all costs.

The 2011 Budget Control Act, initiated by the Republican controlled House, is one of the most foolish pieces of legislation ever passed into law by Congress, as it forces the government to attempt to “balance” its budget and reduce the budget deficit. National government budget deficits, which are the net contribution of government spending to economic growth, are actually integral to economic growth, contrary to the anti-scientific conventional budget lore upon which deficit hysteria has been built. Without government budget deficits, the economies of nations with trade deficits CANNOT grow in monetary terms due a matter of simple arithmetic; those few nations (China, Germany, not the US) with large trade surpluses MIGHT be able to grow without a budget deficit but always with the cooperation of other nations financing those surpluses through trade and, in most cases, government budget deficits on the side of the net-importing nation.

A fiat currency-issuing national government, unlike a local government, business or a household, does not depend upon tax or other income and therefore is not and should not pretend to be bound by conventional balance sheet accounting, which was perhaps a more applicable, though not particularly successful, means of national government accounting during the gold standard era. The reasons for transitioning away from the gold-standard, the rigidities which it imposed on aggregate demand and the money supply, have been suppressed from public discourse in an era in which deficit hysterics like those at “Fix the Debt” hold honored seats at the policymaking and policy advocacy tables. These deficit hysterics, funded by Wall Street tycoons freelancing as economic pundits, would like Washington insiders and the media to believe that the gold-standard never went away, specifically for the purpose of cutting social programs that stand in the way of Wall Street’s expansion into new markets.

I have recently proposed that we rename the so-called budget deficits specifically of currency-issuing governments, the government’s “net contribution to monetary/economic growth” so that the confusion no longer persists that these so-called deficits are by their nature “bad” and to be avoided. The fiat currency issuer can never run out of its own money, can never be in “deficit” in it; “net contribution” is a better formal description of the excess of spending over taxes for specifically a fiat currency-issuing government. The government spending over taxes collected becomes the incremental increase in the money supply for the real economy as it grows in real terms, underneath the pro-cyclical expansion and contraction of money available from bank credit (i.e. expands in a boom and collapses in a bust). Too much price inflation is a possibility with too much government spending over-and-above taxes collected but demand-led inflation in our current situation would be a “high quality problem” indicating that we have reached full capacity in our economy, which is not nearly the case. Right now we have a very large output gap as well as high demand for government-led expenditures on things like infrastructure, public services and education, making increased government expenditures very unlikely to cause inflation.

The foolishness of the 2011 Budget Control Act has been compounded by its timing...

MAGNIFICENT SLAPDOWN--MUST READ!