Home > economics, political-economy > Reinhart-Rogoff and Austerity: The math is not the problem

Reinhart-Rogoff and Austerity: The math is not the problem


After reading and commenting on David Graeber’s post at the Guardian, I feel it necessary to comment more broadly on the problem the euro-zone faces in the crisis, as well as the problem posed by the austerity regime being pursued by the member nation of the European Union. My point is to show that the errors of the bourgeois economists Reinhart and Rogoff are not, as is commonly believed, a simple math or spreadsheet error. Behind these errors is concealed the fact that the euro-zone itself is founded on a fundamental structural flaw resulting from the monetarist economic theory on which it is constructed. This flaw was nothing more than an attempt to obstruct the working class majorities of the member nations from democratic control over their economies — a flaw that is now haunting the euro-zone and will likely cause its collapse.


As events of the past two weeks show, it is easy to demonstrate the euro-zone austerity regime doesn’t work. What you can offer in its place is the question. The problem for the euro-zone countries is the structure of the euro-zone itself: it is designed to prevent member countries from employing Keynesian fiscal economic policy in a crisis. It is built on the monetarist fallacy that monetary policy alone is sufficient to manage capitalism, and that fiscal policy is unnecessary or even counterproductive.

Based as it is on the quantity theory of money, monetarist theory proposes “inflation is always and everywhere a monetary phenomenon.” But what if the problem of managing capitalism presents itself as a tendency toward depression and deflation, not inflation? For four decades now the fascist state has been managing capitalism with an eye toward the inflationary effects of its policies. What would happen if this problem should be turned on its head?

Bernanke argued in 2002 that monetarist theory could be adjusted to account for this as well. Since the quantity theory of money said “inflation is always and everywhere a monetary phenomenon”, deflation, he argued, could be fought by increasing the supply of currency in circulation. Bernanke argued the Federal Reserve had this technology called a printing press which could be used to flood the world market with currency:

“As I have mentioned, some observers have concluded that when the central bank’s policy rate falls to zero–its practical minimum–monetary policy loses its ability to further stimulate aggregate demand and the economy. At a broad conceptual level, and in my view in practice as well, this conclusion is clearly mistaken. Indeed, under a fiat (that is, paper) money system, a government (in practice, the central bank in cooperation with other agencies) should always be able to generate increased nominal spending and inflation, even when the short-term nominal interest rate is at zero.”

By flooding the world market with counterfeit currency, prices could be stabilized and a deflation could be ended. The failure of the Bank of Japan to do just this for more than a decade, Bernanke assured his audience, was due to special causes: a political crisis that prevented the policy from being fully implemented and a financial crisis that damaged the so-called ‘transmission’ of policy to the wider economy. The US, he stated, did not face either of those two problems.

Of course, this was true in 2002, but, as we all know now, it is no longer true.

A simpleton idea realized

The monetarist quantity theory of money did not just inform Bernanke’s speech, however; it also informed how the euro-zone was constructed. The very structure of the euro-zone is based on the monetarist idea that “inflation is always and everywhere a monetary phenomenon.” Which is to say, the euro-zone was constructed precisely to prevent anything but monetary policy in a depression. By removing monetary sovereignty from the member states and placing this authority in the European Central Bank, it was assumed in a depression only monetary counter-cyclical policy was necessary.

The argument the monetarists were making, therefore, was well beyond the idea “inflation is always and everywhere a monetary phenomenon.” They were arguing depression is always and everywhere a monetary phenomenon too!

Really. These fucking people got Nobel Prizes and everything for this dumb shit.

Since, in monetarist theory, the prices of commodities were said to be a function of the quantity of currency in circulation, both inflations and deflations could be fought by adjusting the quantity of currency in circulation. What is really great about this simpleton idea is not just that it is a simpleton idea, but that the simpletons who thought it up have been shaping fascist state institutions in its simple-minded image for four decades now. For four decades now all international institutions have been shaped by the prejudice that in a depression there is no role for the fascist state in a depression but to counterfeit currency.

No thought has been given to what happens to this currency once it is printed; its mere existence in the form of such programs as the European Central Bank’s Outright Monetary Transactions brings “confidence” and ends the depression. But, clearly, just printing out a crapload of currency and then placing it on the floor of a vault does not in any way add it to circulation. The counterfeiting of currency and its actual circulation within the movement of capital are two different things. The only way the newly counterfeited currency can get into circulation is by being spent directly into circulation, or by being lent to another person who then spends it into circulation.

Modern money theory suggests the fascist state spends currency directly into circulation by crediting the account of a vendor or employee. The Federal Reserve system, on the other hand, creates new currency only by crediting the account of a borrower. The borrower then spends the money into circulation. In either case there is no actual increase in the quantity of money in circulation until the newly counterfeited currency is actually spent.

The monetarist quantity theory of money which proposes the amount of currency in circulation can be increased merely by creating it is wrong. Currency no more circulates as capital simply because it has been created, than gold circulates as capital simply because it has been dug out of the ground. Bernanke acknowledged this in his 2002 speech when he proposed not simply the counterfeiting of currency, but also that this newly counterfeited currency would be used to actually purchase assets. But here he engaged in a further fallacy: the purchasing of assets like treasuries have no impact on economic activity. Treasuries, like any other asset, is dead labor and cannot produce surplus value. Since surplus value is only produced by living labor, the purchase of dead labor at a markup in the form of assets does nothing whatsoever to increase the mass of profits.

Let’s see how this works in an example:

It is true that, having purchased my treasuries at a significant markup, the Fed gives me in return a considerable quantity of cash over what I paid for these assets. I now have this massive windfall in my possession and can do with it as I please. But what do I please to do with it? Since I am a capitalist, I want to invest it and increase its mass still further. The condition for the increase in the mass of capital I have at my disposal and the condition for its further increase are not the same. The existing mass of capital in my possession comes into existence through the counterfeiting of currency, its further increase depends on the production of surplus value.

Fiscal policy plays a critical role in managing national capitals. It did not simply place counterfeit currency in circulation, but also withdrew a portion of the excess capital from circulation. What Keynes realized that simpletons like Friedman never did is that the problem is the overproduction of capital, not a lack of currency. The introduction of counterfeit currency into circulation is not even important in this function of fascist state management except that it makes the withdrawal of excess capital from circulation possible. Keynes proposed the fascist state purchase the excess capital and put it to work for its own purposes until conditions of excess ended. This would ameliorate the problem of overproduction during the Great Depression, he opined.

The long-term problem of full employment

This, however, was only a short-term solution to the problem of overproduction — overproduction would continue to make itself felt. This is because, as Keynes argued, it resulted from an overproduction of means of production arising from constantly improved productivity. In the long run, Keynes suggested, hours of work would have to be reduced. He called this the long term solution to unemployment: once the economy recovered, society would have to encourage leisure. Keynes stated:

“10. As the third phase comes into sight; the problem stressed by Sir H. Henderson begins to be pressing. It becomes necessary to encourage wise consumption and discourage saving,-and to absorb some part of the unwanted surplus by increased leisure, more holidays (which are a wonderfully good way of getting rid of money) and shorter hours.”

Keynes did not believe, as Keynesians and post-Keynesians want YOU to believe, that stimulus was a long term solution to overaccumulation of capital. People like Paul Krugman who try to leave this impression are deliberately and knowingly lying about Keynes’s theory. And I want to be clear about this: PAUL KRUGMAN AND THE KEYNESIANS ARE BAREFACED LIARS. The only long-term solution in Keynesian theory to overaccumulation of capital is reduction of hours of labor. It is the same and only solution that labor theory recommends.

Monetarism arose as a response to Keynesian theory precisely because it proposes reduction of hours will not be necessary. In response to the Keynesian critique of the Great Depression as caused by overproduction, monetarism proposes it is cause by insufficient currency in circulation. It is an attempt to reframe the problem posed by Keynes, made possible because his own framework was flawed. Although Keynes knew the problem in the Great Depression was overproduction, as everyone else knew, he reframed the problem as “insufficient demand” for the excess commodities produced. This insufficient demand, of course, was insufficient money demand, i.e., insufficient demand in the form of money to purchase excess commodities produced by capitals.

His solution was to go off the gold standard and counterfeit currency to absorb the excess capital. The state would do this because it could legally determine what was money. In other words, Keynes, in his very proposal, made the problem appear resolvable by counterfeiting money. All Friedman did was extend this argument to assert this could be done more or less permanently.

But, and this is the fucking fascinating part, he did this by arguing the Great Depression itself was caused by this. Friedman, in order to make his argument, overthrew Keynes’s argument that depressions are caused by excess unsold commodities. It was not an excess production of commodities that could not be sold, but too little money in circulation to pay for these commodities. It would be a mistake to blame Friedman alone for this, however, just as it would be a mistake to blame only Reinhart and Rogoff for theirs. The fascist state was actively looking for a way to avoid reducing hours of labor in the 1960s, and Friedman was part of this effort. He was simply the one who “discovered” (“lo’ and behold!”) the Great Depression itself was caused by too little money in circulation. Just as Reinhart and Rogoff “discovered” for fascist state managers of today, that (“lo’ and behold!”) too much debt is bad for capitalism. It didn’t matter in either case whether this was right or wrong, it mattered that it fit the narrative for austerity.

Unfortunately for the monetarists, in the mean time an entire new currency zone – the euro-zone — was created, encompassing 350 or so million people and 17 nations based on this silly theory. This currency zone created meticulously according to monetarist theory consumes about 28 percent of global GDP and it is crashing. And the EU itself is unable to prevent it from crashing because all the little fascist mini-states are structurally committed to pro-cyclical policies in a downturn. Which is to say, when the economy goes into a recession, the state reduces its expenditures and tries to balance its budget.

But — and this is the absolutely fucking rich part — they do this even though they know it accelerates the collapse of economic activity. They have no choice — this is how they designed the currency to work, because they hate and fear working people. They designed the currency so that no amount of working class activism could protect it from the reduction of its wages in a crisis.

The problem with this is that the working class provides the overwhelming consumer demand in the economy and the other great source of demand, the fascist state, is forced to reduce its expenditures. There is no one left to buy all those excess commodities being built in Germany.

All it needs now is a push

Believe me, the problem the euro-zone faces is not as easy as realizing that Reinhart and Rogoff suck at math or some shit. You have an entire currency zone built on Reinhart-Rogoff and Friedman bullshit that is teetering on the edge of collapse. All it needs is a fucking push.

But the euro-zone problem is part of a larger problem: The edifice of post-Great Depression bourgeois economics has been erected on a single question: how can we avoid reducing hours of labor? The overproduction of commodities that Keynes identified is nothing but the overproduction of capital, the overproduction of capital in the form of commodities, but not only this: it is also the overproduction of means of production, and an excess population of workers who can be employed productively to produce surplus value.

The central concern of bourgeois economics since the Great Depression is how to avoid this all encompassing overaccumulation of capital from being expressed in an irreversible collapse of economic activity. This has been accomplished by continuously diverting the production of surplus value into the unproductive consumption of the fascist state. State debt has served the necessary function of absorbing the output of capitalist production as Robert Kurz explained:

“At a very high level of the rationalization and concentration of capital, the overhead costs and infrastructure expenses of the value creation process begin to impinge on value creation itself, which becomes evident in a paradoxical inversion of the relation between State and Society: it is no longer Society which feeds the State, so that the latter assumes responsibility for “overhead costs”, but it is the State which, to the contrary, must feed Society with “fictitious capital”, so that the latter can maintain itself in its now-obsolete form of a system of commodity production. The process by which increasingly larger masses of future labor are mortgaged and “capitalized”, this vampiric feeding off the future, now includes the reproduction of capital as well as that of the State, and the two forms of credit-dependency are interwoven.”

But, as is obvious in the euro-zone crisis, having stripped the member states of their monetary sovereignty, they are no longer able to absorb excess capital or employ the excess population of workers. Instead, these states respond to a depression by trying to reduce their expenditures to the level of taxes and other revenues. However, since they compose such a large part of their economies, and since the problem is overaccumulation of capital, the hit is two-fold.

First as they reduce the size of their expenditures, they directly reduce the size of their economies in proportion to the size of these expenditures to the size of their economies. This can be half or more of these economies, since they have fairly lavish social safety nets. Second, despite the state reductions of expenditures, newly produce capital is constantly entering circulation adding to the problem of overaccumulation, which overaccumulation is not being addressed.

To these two problems is the attempt, in the middle of the crisis, to reduce the wages of the working class and extend hours of labor. This so-called “restructuring of the labor force will only add to the crisis through which the euro-zone is now passing. It is entirely likely it will not survive.

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  1. September 9, 2013 at 2:46 pm

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