It's too bad the slow learners in Congress couldn't hear what the market just said: government cutbacks are bad for business, just as Ellen Brown said in her recent article.
As Ellen, Paul (Krugman) and Robert (Reich) and many economists point out, the government needs to spend more, not less, if sufficient numbers of jobs are to be created.
Sufficient? Sufficient for what? Sufficient for generating enough in the way of tax revenues to pay down the debt long term! Fortunately, there are viable ways to create these jobs while still balancing the budget (in the long term).
The market apparently understands what politicians don't: the Obama-Boehner debt deal is a slow death deal for the economy. Reducing government spending by $2.2 trillion over a decade, as Congress just agreed to do, will slowly kill any hopes of economic recovery. Double-dip here we come.
Like Ellen says, economists estimate the "multiplier" from government spending at about 1.5. That means for every $1 cut in government spending, about $1.5 dollars are taken out of the economy. The first year of government spending cuts will therefore result in $375 billion to $400 billion being taken out of the economy. Ironically, that's about equal to the spending increase from Obama's 2009 initial stimulus package. In other words, we are about to extract from the economy -- now showing multiple signs of weakening badly -- the original spending stimulus of 2009! (Aren't the Republicans just great at coming up with strategies and plans for making our lives better?!)
As Ellen and others have pointed out, that magnitude of spending contraction will also result in 1.5 million to 2 million more jobs lost. That's also about all the jobs created since the trough of the recession in June 2009. In other words, the job market will be thrown back two years as well. Brilliant!
So, we're not moving forward, we're moving backward. The hand-wringing is all about the "debt crisis," but the national debt is not what has stalled the economy, and the crisis was not created by payouts from Social Security or Medicare, and yet it is those programs that are being set up to take the fall. The crisis was created by Wall Street, which has squeezed trillions in bailout money from the government and the taxpayers -- and was also caused by the military, which has squeezed trillions more for a bogus, amorphous and unending "War on Terror," the only real purpose of which is to make billions in profits for the military industrial complex while cowing ordinary citizens into accepting the gutting of the Bill of Rights and the gradual lowering of most citizens' wages and entitlements. Yes, many of the coming hits are slated to fall on the so-called "entitlements" -- a social safety net that we the people are actually entitled to, because we paid for them with taxes.
As Robert Reich says in his recent article , the most important step in policy making is to correctly understand the problem. We are slouching toward a double dip because we "don't get" the problem. Regardless of U.S. budget projections years from now -- our current crisis is jobs, wages, and growth -- we do not now have a debt crisis. And if enough people go back to work, the additional taxes they will pay will be more than enough to avert the debt crisis that will otherwise wait for us some years down the road.
As Reich says, every time you hear an American politician analogize the nation's budget to a family budget (as, sadly, even President Obama has done), you should know the politician is not telling the truth. The truth is just the opposite: Our national budget can and should counteract the shrinkage of family budgets by running larger deficits when families cannot.
Americans are more frightened, economically insecure, and angrier than at any time since the Great Depression. If our lawmakers continue to obsess about the wrong thing and fail to do what must be done -- and they don't explain it to the nation -- Americans will only become more fearful, insecure, and angry.
We are slouching toward a double dip, with all the human costs that implies. And we don't have to be doing that. That is the tragedy of our time.
The Problem Is Not Debt, But a Shrinking Money Supply and Too Few Jobs
The markets are not reacting to a "debt crisis." They are reacting to a jobs crisis and a "demand' crisis. They "look' at present indicators of jobs and sales, which have turned persistently negative. Problem is, most pundits and pols don't understand that jobs and sales are both dependent on "demand," which means getting money into the pockets of consumers, most of whom have been robbed blind by Wall Street, the banksters, and the failing economy.
In addition, the money supply today has shrunk. But we don't see this shrinkage because it is primarily in the "shadow banking system," the thing that collapsed in 2008.
The shadow banking system used to be reflected in M3 , but the Fed no longer reports it. In July 2010, however, the New York Fed posted on its website a staff report titled "Shadow Banking." It said that the shadow banking system had shrunk by $5 trillion since its peak in March 2008, when it was valued at about $20 trillion -- actually larger than the traditional banking system. In July 2010, the shadow system was down to about $15 trillion, compared to $13 trillion for the traditional banking system. (Click here for source article.)
Only about $2 trillion of this shrinkage has been replaced with the Fed's quantitative easing programs, leaving a $3 trillion monetary hole to be filled; and only the government is in a position to fill it.
In short, we have been sold the idea that there is a "debt crisis" when there is really a liquidity crisis. And paying down the federal debt when money is already scarce just makes matters worse. Historically, when the deficit has been reduced, the money supply has been reduced along with it, throwing the economy into recession. And likely that's exactly what the Republicans want, for no other reason than to increase the likelihood that Obama will be defeated by a Republican in 2012.
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