Deficits, deficits, deficits. The world economy has gone hollow – and daily do we hear the echo… ‘deficits’.
Deficits are bad, we’re told. Common sense is appealed to – you don’t want to spend yourself into the red, apparently… as long as banks and financial speculators aren’t making a killing off you, anyway. When you suggest – gently at first, as if you’re trying to charm a woman – that maybe, under certain circumstances, deficits aren’t so bad, you’ll usually get a pre-programmed response: your interlocutor’s facial expression will turn to shock… you might even, if the person’s economic sensibilities are particularly easily offended, walk away with a big red glove-mark on your face.
Just the other day I had this rather pointless argument with a person in the comments section of YouTube – exciting, huh?, I’ll bet you’re jealous. For many people the argument simply doesn’t compute – “You want more debt to solve a debt crisis!?,” they exclaim. Even when you try you begin to realise that their mind simply works in a different manner to yours.
Aggregate demand, they assume, is a given. You point to deflation – no dice… “is deflation even a real word?,” they ask, “perhaps,” they suggest, “you’re referring to INflation” – which your debt-fueled mania will apparently cause. So, you try another tack: employment. You point out that productivity and employment are linked – you point out that when there’s a serious economic downturn, unemployment may be producing a serious drag effect on productivity. Nope… that’s a tautology, apparently. So, you give up.
It’s no surprise that this ‘common sense’ view of the world is so prevalent and so deeply ingrained these days. Dean Baker points out, in the US Senator Alan Simpson and Erskine Bowles, of the Deficit Commision, will delay their budget cuts until 2012. But there is every reason to suppose that unemployment will be around the same then as it is now.
As Baker points out, Simpson and Bowles are less likely to consider the rather more obvious means by which they could cut their budget: namely, a restructuring of the healthcare system and a Financial Speculation Tax (FST) on the Wall Street fatcats – you know, tax the shit out of the bastards that ruined the country…
Simpson’s and Bowle’s evasions are a specifically American malady… Ireland suffers from an altogether different sickness. And that sickness is the current EU and her institutions. The EU needs to be extending massive debts to the Eurozone countries in the most trouble – the so-called PIIGS – through the ECB. This debt could then be used to fill the deficit gap and create public works projects to push employment levels and get the economy moving.
“But wait!!!” shrieks my YouTube interlocutor, “You’re just passing the debt off – you’re not clearing it.” That’s true, but there’s a few things to be remembered here:
(1) The ECB is far better equipped to handle a large debt burden than any small sovereign EU nation.
(2) The current budget cuts are going to destroy the Irish economy. And once Ireland is in a smoldering heap, the anti-EU feeling might well go toward breaking up the single currency. This would be bad news for the other Eurozone countries, as faith would be lost in the Euro as a currency. Translation: The EU needs to consider its own long-term policy goals when it pushes austerity measure on the PIIGS.
(3) This is the single most important point – and I’ll let Dean Baker make it:
“There is no reason that the Fed can’t just buy this debt (as it is largely doing) and hold it indefinitely if need be, the Fed can use other tools at its disposal to ensure that this expansion of the monetary base does not lead to inflation. This creates no interest burden for the country, since the Fed refunds its interest earnings to the Treasury every year. Last year the Fed refunded almost $80 billion in interest to the Treasury, nearly 40 percent of the country’s net interest burden.”
Well, the ECB could do something very similar. This is because the ECB is a central bank – and when a central bank owns the debt, the interest comes back to said central bank, so the debt can be held indefinitely… magic, right? The risk of inflation is negligible – indeed, the PIIGS currently are threatened by significant deflation.
But Ireland needs the ECB to do this – and I believe that the ECB has a responsibility to do it.
When we moved to the Euro, we gave up our national central bank. This means that we’re unable to produce credit on our own – essentially we don’t have an institution in this country any more that can print money. So, we rely on the ECB.
There are solutions to this crisis. But these solutions need to echo throughout the Irish and European media – they need to drown out the voices preaching austerity.
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