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.
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.
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.
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.
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.
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."
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.
[Update: Senator Stabenow has proposed a stand-alone unemployment extension bill in the Senate. But unfortunately it isn't going to make a difference.
Get this. The House just rejected extending unemployment benefits.
The House has rejected an extension of unemployment benefits because of concerns about the growing national debt, meaning payments will continue to phase out for more than 200,000 people a week....
Democrats brought up the bill under a special procedure in which no amendments were allowed and debate was limited. Under the procedure, the bill needed a two-thirds majority to pass.
It's done for the moment. I don't expect Congress to take up the measure again until after the July 4th break (i.e. July 12 at the earliest).