Part One: The owners of capital compete for the opportunity to lend their capital to the fascist state

In a recent lecture, Paul Krugman explained why, in his thinking, the US is not Greece. (Hint: almost nothing to do with language differences or geography.) Krugman lecture is an argument for why a country borrowing in its own currency cannot experience a Greece-type crisis, where bond buyers force the country into default by refusing to advance it further credit:

“Are Greek-type crises likely or even possible for countries that, unlike Greece and other European debtors, retain their own currencies, borrow in those currencies, and let their exchange rates float?”

The general question is do finance capitalists have this power over the borrowers of money capital? Obviously, credit is extended to individuals based on their ability and likelihood of repaying their loans. For this reason, money lenders employ measures like FICO scores to predict whether you or I can carry our debts. But does this apply to countries that borrow money capital to finance a portion of their spending? According to Krugman, the answer to this question is, “Maybe”.

Krugman finds the answer depends greatly on whether a country has control over its own currency and whether that currency is generally recognized in the world market as a universal equivalent:

“First, countries that retain their own currencies are less vulnerable to sudden losses of confidence than members of a monetary union – a point effectively made by Paul De Grauwe (2011). Beyond that, however, even if a sudden loss of confidence does take place, countries that have their own currencies and borrow in those currencies are simply not vulnerable to the kind of crisis so widely envisaged.”

According to Krugman, what makes Greece or Spain or Portugal special cases, and vulnerable to pressure from so-called bond vigilantes, is that all three are members of the euro currency union, which strips these countries of their sovereign control of what serves as money in their territories. The control over the currency lies not with its individual members, but with the European Central Bank (ECB). All of the pundits predicting Washington is facing the potential for a Greece style meltdown suffer one significant defect:

“Remarkably, nobody seems to have laid out exactly how a Greek-style crisis is supposed to happen in a country like Britain, the United States, or Japan – and I don’t believe that there is any plausible mechanism for such a crisis.”

We could, if we wanted, take Krugman’s argument one step further: The specific question posed by the critics of US deficits is can Washington, who has exclusive ownership and control of the world reserve currency, experience a Greece-type meltdown?

Even more specific: Can the owner of the world reserve currency experience a Greece-type crisis in the middle of a crisis produced by the absolute overproduction of capital within the world market?

The answer to both questions is, of course, “No”.

Which raises a further problem: Krugman’s argument, like that of the critics of deficits, assumes Washington cruises the bond market seeking out willing lenders. Their argument, therefore, begins not with the assumption that the owners money capital must lend out their money capital, but that Washington must find a willing lender from whom it can borrow. In fact, nothing can be further from the truth: in conditions of absolute overproduction of capital, there is always an excess mass of money capital seeking every possible means to become real capital, to produce surplus value for its owner.

The actual situation in the bond market can best be summarized by a quote from Frank Newman, who, in the Clinton administration, served as Under Secretary of the Treasury for Domestic Finance for the U.S. Treasury Department. Newman explains how the bond market really works:

“In any case, the treasury can always raise money by issuing securities. The bond vigilantes really have it backwards. There is always more demand for treasuries than can be allocated from a limited supply of new issues in each auction; the winners in the auctions get to place their funds in the safest most liquid form of instrument there is for US dollars; the losers are stuck keeping some of their funds in banks, with bank risk. (I even try to avoid using the expression “borrow” when the treasury issues securities; the treasury is providing an opportunity for investors to move funds from risky banks to safe and liquid treasuries.) If critics have focused on the technical matter about the spending and issuance cycle, then we are really in great shape: they are reaching to find any issue to debate!”

From the point of view of the Treasury then, Washington does not compete against other borrowers for financing its deficits, money capitalists with excess capital compete to lend to the United States, because holding a treasury is the same as holding the world reserve currency plus it pays interest. The otherwise superfluous capital has to be lent to Washington, but Washington does not have to borrow it.

Simply put: Washington does not cruise the bond market searching for someone to lend it their excess capital. Finance capital competes to buy Washington’s treasuries.

Since Krugman and his simpleton colleagues begin not with this fact, but with the assumption that Washington needs lenders, they must approach the problem from the ass-end of the actual situation. Most of Krugman’s argument consists of moving from the assumption Washington competes to borrow from finance capital to the actual situation where finance capital competes to lend to Washington.

Why does Washington borrow in the first place?

As a result of Krugman’s defective initial assumption, the question that is never raised in this discussion is why Washington must borrow in the first place? The assumption is that Washington must borrow to pay its bills because its expenditures exceeds its revenue. In fact, a closer examination suggests the opposite is the case: Washington must run deficits because the mass of excess capital seeking an outlet for productive investment must be lent to Washington if this capital cannot find a productive outlet for investment. (In this context, I am using the term “productive” to mean productive of surplus value.) Since this capital cannot find a productive investment outlet, it cannot become real capital.

In practice, treasuries function less like debt than like a savings account for finance capital — the deficit spending and ballooning debts of the fascist state provide a safe and convenient repository for massive quantities of superfluous capital. However, lending this superfluous capital to Washington does not in any sense make it real (productive) capital simply because Washington pays interest on it. Washington itself produces nothing and, therefore, does not create surplus value. The interest it pays on its debts simply appropriates an additional portion of the existing mass of surplus value to pay out as interest.

But there is an additional fact to consider about the debt: The argument of the largest section of simpletons would lead us to believe that capital faces a crisis if Washington does not, over the long run, curtail its borrowing. In fact, the evidence suggests the real crisis occurs if Washington ever curtails its borrowing. The debt ceiling fiasco and the sequester demonstrate that if Washington does not borrow the excess capital, this capital will be severely devalued through a crisis.

The purpose then for the fascist state to borrow the excess capital is to avoid a general devaluation of capital.

We don’t have to employ complex mathematical formulas to demonstrate this, since the decline of GDP as a result of the debt ceiling fiasco demonstrates it already. Moreover, contrary to their theoretical arguments, the mainstream economists were almost unanimous that a catastrophe was in the offing if the debt ceiling fiasco continued — my point here does not require any confirmation beyond the words of the fascists themselves, in particular those of the economist, Mark Thoma:

“On Friday, the budget sequester is set to take effect unless Congress takes action to prevent it. If it does go into effect, and at this point that appears likely, what impact will it have on the economy and our ability to recover from the recession? The automatic budget cuts in the sequester will trim $85 billion from the government’s budget this year. Some agencies will be able to delay the cuts into future years, so the actual impact may be less than that – the CBO estimates it could fall to $44 billion – but that could still have a negative impact on economic growth at a time when the economic recovery is already recovering at a very slow rate. For example, the private forecasting firm Macroeconomic Advisers estimates that “sequestration would cost roughly 700,000 jobs (including reductions in armed forces)” and add a quarter of a point to the unemployment rate.”

The article closes with this ominous warning to the Tea Party faction of the Republican Party:

“Congress is about to make it even harder for the economy to recover, and even harder for millions of unemployed workers to find jobs.”

I must admit, however, that Thoma is a bit of a deficit dove and has never seen a deficit he does not completely support and think necessary. So let’s see if we can find someone who has a reputation for being a hard-nosed neoliberal opponent of deficit spending.

One person who could never been considered as deficit dove is Alice Mitchell Rivlin. According to the wikipedia Rivlin is an economist, a former U.S. Cabinet official, and an expert on the U.S. federal budget. She has served as the Vice Chairman of the Federal Reserve, the Director of the White House Office of Management and Budget, and the first Director of the Congressional Budget Office. In early 2010, Rivlin was appointed by President Barack Obama to his National Commission on Fiscal Responsibility and Reform.

As head of the OMB under President Clinton, Rivlin helped implement the only attempt to produce a balanced budget in the last 30 years. And as part of President Obama’s

National Commission on Fiscal Responsibility and Reform, she helped craft a draconian budget plan for the Obama administration based on the argument:

“the amount of debt held by the public is set to reach 100% of Gross Domestic Product (GDP) by 2019. Under the same trajectory, the debt would reach 400% of GDP by 2049. As Rivlin pointed out, however, this outlook is completely unrealistic. Far before the debt reached such gargantuan proportions, lenders would refuse to continue purchasing our debt and the United States would find itself in economic ruin.”

Anyone predicting Washington faces “economic ruin” if it did not curtail its deficits, might be expected to favor the sort of forced reduction of deficits as were imposed by the sequester, right? In fact, when actually faced with the prospects that deficits might be slowed or stopped altogether by the sequester and debt ceiling impasse, Rivlin responded:

“Austerity measures intended to reduce the federal debt will only hurt the economy in the short-term and hinder the ability of the United States to pay down its deficits, according to former Office of Management and Budget Director and Federal Reserve Vice Chair Alice Rivlin. Referring to the tepid, though consistent rate of economic growth, Rivlin cautioned members of Congress “not to crash it with austerity,” referring to tax hikes and spending cuts as “crazy policy.” Rivlin noted, in remarks before members of the National Economists Club, that federal debt is on “an unsustainable trajectory,” expected to stabilize over the next 10 years and then begin rising again toward the end of the decade due to rising health care costs as members of the “baby boomer” generation’s retirement phase accelerates. Regarding the continued budget standoffs in Congress, Rivlin said she believes there is “little appetite” for further brinkmanship over the debt ceiling and funding of the federal government. Rivlin was adamant about the need for Congress to replace the across-the-board cuts known as “sequestration,” scheduled to go into effect March 1 according the Budget Control of Act of 2011. “The microeconomic effects are nuts,” Rivlin said about the budget sequester.”

In other words, the so-called “deficit hawks” have exactly the same fears as the “deficit doves” when it comes to actually reducing Washington spending to bring it into line with its tax revenues:

Deficits must never actually be reduced.

They disproved their own arguments and proved their hypocrisy by their predictions of catastrophe if deficit spending stopped. Further, Krugman proves even by their own assumption that Washington could not have the sort of crisis postulated by the mainstream. Given that both labor theory and neoclassical theory suggests Washington cannot have the sort of crisis postulated, what is the argument that deficits are mortal threat to the solvency of the United States meant to accomplish?

I will address this question in part two of this series.