Sunday, 17 April 2011

My Contribution to the Discourse on the U.S. National Debt Reduction

You all know of the “Elephant Man”.

The society ladies and gentlemen of the London Victorian era discovered a man with severe physical deformities and turned him into the object and evidence of their compassion.

Their newspapers made sure that the rabbles were not kept in the dark about the magnanimity of the upper classes. Fine ladies of London dining with that poor thing. Imagine!

That is how you know of the Elephant Man, which goes to show the meaning of news: it is what the powerful want you to know, follow and have an opinion about. Yes, they will give you the opinion too. You could keep it, as if it were yours.

The latest Elephant Man is the national debt. By now, you know everything about this deformity, how horrible it is. It mortgages the future, saddles unborn babies with legal obligations. And those “bond vigilantes”, ready to rip the economy into pieces if they see the slightest lack of resolve to reduce the debt.

After the European countries, now it is the U.S.’s turn to put its house in order. You heard the man on Wednesday: it is debt reduction or bust.

But I was talking about the Elephant Man. Let us continue with the analogy, which naturally takes us to the society parties. Gillian Tett writing in the Financial Times of December 20, 2010:
Why has Britain managed to boldly go into fiscal territory which the US has hitherto ducked? That is the $800bn question in the air in New York this weekend, after George Osborne, British chancellor, visited the city.

During his whistle-stop tour, Mr. Osborne met a host of Wall Street and New York luminaries, at a breakfast hosted by Tina Brown, the media icon, and a dinner arranged by Michael Bloomberg, the mayor. As he schmoozed he was greeted with emotions ranging from respect to rapturous applause.

That has nothing to do with Britain’s treatment of bankers: Wall Street is horrified by the ideal of a new UK bonus tax. What does provoke respect is the way London has not only created a multi-year fiscal reform plan, entailing a striking £110bn ($170bn) worth of adjustment – but, more importantly, starting to implement it.
Here we have a society girl, Tina Brown, and a society boy, Mike Bloomberg, giving parties in the honor of another society boy, George Osborne, in which he receives “rapturous applause” from the society people for his planned “adjustments”.

Adjustment is the FT word for cuts.

You are asking yourself: What the fuck do the-ladies-who-eat-lunch know about the UK budget cuts? More to the point, why would they care so passionately about the subject as to give Osborne rapturous applause?

But gentle reader, it is you who does not know – or rather, fail to instinctively grasp – your interests.

When the absolute value of the wealth of a society declines, either every group’s proportionate share of that wealth has to decline or, if one group is to keep the absolute value of its share intact, the share of other groups would have to decline. It is the inexorable mathematical logic.

The absolute value of the wealth generated each year in the U.S. has been declining for the past 40 or so years. The collapse of the Bretton Woods system in 1973 is the reference point.

The rich refused to accept a smaller share. They wanted the absolute value of their share of the wealth to remain intact. Naturally, then, the share of all others had to decline.

That is exactly what has been happening in the U.S. in the past 30 or so years. Ronald Reagan’s presidency is a good reference point. He cut the taxes for the rich and thus, helped maintain their wealth at the cost of reducing the government’s revenues.

His leitmotif that a “rising tide lifts all boats” said it all. “Rising tide” was the economic “recovery” that was supposed to result in increasing the absolute value of the national wealth pie in consequence of which every group’s share would also increase. And there was the con, the idea that giving more money to the rich would increase the country’s total wealth by invigorating the economy. In truth, the rich had begun demanding a bigger share of income – and got it in the form of tax cuts – precisely because the country’s total wealth and with that, the absolute value of their share of that wealth, had declined. Such a decline would not be stopped or reversed with tax cuts.

Regardless, the fix was in.

If the government’s revenues are reduced, it must either borrow money or cut the expenses – or a combination of both.

That is precisely what has been happening in the past 35 years with the successive Democratic or Republican administrations alike. The government borrowed money and cut from the poor and the middle class whenever it could; remember Bill Clinton’s “changing welfare as we know it”?

Thirty years later, the debt stands at $14 trillion. Bill Gross counts all the government commitments and says it is $75 trillion. His comments are given wide publicity. The more the better. It scares the pants off the rabble and sets the stage for even more ambitious projects on privatization.

The point to keep in mind is that all this was planned. It was part of the starving the beast strategy put into effect in the later 1970s:

  • cut the taxes to the rich to reduce the government revenue;
  • reduce spending and keep borrowing because the revenues have fallen;
  • begin the truly savage cuts after the debt has ballooned.

It is the third stage that we are in now. With the astronomical numbers being thrown around, deep cuts could conveniently be put on the agenda. It is only a matter of softening the ground of the public opinion. And what an easy task that is in the U.S.

That is why suddenly everybody has become interested in the “real issue” of the national debt reduction. It is a sign of sophistication. The society ladies applauding George Osborne, construction workers reading Murdoch’s New York Post, commuters stuck in traffic listening to demented talk show hosts, mothers on welfare – all want something to be done about the debt. (All are shouting ”the donkey is gone”.)

Observe, for example, this story from the FT’s front page under the heading US lacks credibility on debt, says IMF:

In an unusually stern rebuke to its largest shareholder, the IMF said the US was the only advanced economy to be increasing its underlying budget deficit in 2011 at a time when its economy was growing fast enough to reduce borrowing.

Carlo Cottarelli, the head of fiscal affairs at the Fund, was quoted as saying: “It is a risk that if it is materialized would have very important consequences … for the rest of the world.”
The thing you should know is that the IMF is encouraged, if not instructed, to issue an unusually stern rebuke to its largest shareholder. Else, it would not dare do that. Carlo Cottarelli, too, is a fool, a pawn. He comes out and ties the U.S. debt reduction to the well being of the world – maybe the Solar System or even the Milky Way Galaxy – without knowing what the shot is.

The fix is in.

Meanwhile, returning after several weeks from Europe, with the heightened sensitivity of a traveler, one finds the “look” of the New Yorkers in the subway and supermarkets decidedly downtrodden. They are are noticeably poor.

One question remains in all this. Why has the absolute value of the wealth in the country been declining?

Google the “tendency of the rate of profit to fall”, or wait for Vol. 4