The Market Has Spoken: Austerity Is Bad for Business

It used to be that when the Fed Chairman spoke, the market listened; but the Chairman has lost his mystique.  Now when the market speaks, politicians listen.  Hopefully they heard what the market just said: government cutbacks are bad for business.  The government needs to spend more, not less.  Fortunately, there are viable ways to do this while still balancing the budget.

On Thursday, August 4, the Dow Jones Industrial Average fell 512 points, the biggest stock market drop since the collapse of September 2008.   Why?  Weren’t the markets supposed to rebound after the debt ceiling agreement was reached on Monday, avoiding U.S. default and a downgrade of U.S. debt?  So we were told, but the market apparently understands what politicians don’t: the debt deal is a death deal for the economy.  Reducing government spending by $2.2 trillion over a decade, as Congress just agreed to do, will kill any hopes of economic recovery.  We’re looking at a double-dip recession.

The figure is actually more than $2.2 trillion.  As Jack Rasmus pointed out on Truthout on August 4th:

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 cuts are therefore $375 billion to $400 billion in terms of their economic effect. 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!

As others have pointed out, that magnitude of spending contraction will 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.

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 Social Security or Medicare, which are being set up to take the fall.  It was created by Wall Street, which has squeezed trillions in bailout money from the government and the taxpayers; and by the military, which has squeezed trillions more for an amorphous and unending “War on Terror.”  But the 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.

The Problem Is Not Debt But a Shrinking Money Supply

The markets are not reacting to a “debt crisis.”  They do not look at charts ten years out.  They look at present indicators of jobs and sales, which have turned persistently negative.  Jobs and sales are both dependent on “demand,” which means getting money into the pockets of consumers; and the money supply today has shrunk.

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.

Only about $2 trillion of this shrinkage has been replaced with the Fed’s quantitative easing programs, leaving a $3 trillion hole to be filled; and only the government is in a position to fill it.  We have been sold the idea that there is a “debt crisis” when there is really a liquidity crisis.  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.

Most of our money now comes into the world as debt, which is created on the books of banks and lent into the economy. If there were no debt, there would be no money to run the economy; and today, private debt has collapsed.  Encouraged by Fed policy, banks have tightened up lending and are sitting on their money, shrinking the circulating money supply and the economy.

Creative Ways to Balance the Budget

The federal debt has not been paid off since the days of Andrew Jackson, and it does not need to be paid off. It is just rolled over from year to year. The only real danger posed by a growing federal debt is the interest burden, but that has not been a problem yet.  The Congressional Budget Office reported in December 2010:

[A] sharp drop in interest rates has held down the amount of interest that the government pays on [the national] debt. In 2010, net interest outlays totaled $197 billion, or 1.4 percent of GDP–a smaller share of GDP than they accounted for during most of the past decade.

The interest burden will increase if the federal debt continues to grow, but that problem can be solved by mandating the Federal Reserve to buy the government’s debt.  The Fed rebates its profits to the government after deducting its costs, making the money nearly interest-free.  The Fed is already doing this with its quantitative easing programs and now holds nearly $1.7 trillion in federal securities.

If Congress must maintain its debt ceiling, there are other ways to balance the budget and avoid a growing debt.  Ron Paul has brought a creative bill that would eliminate the $1.7 trillion deficit simply by having the Fed tear up its federal securities.  No creditors would be harmed, since the money was generated with a computer keystroke in the first place. The government would just be canceling a debt to itself and saving the interest.

The Trillion Dollar Coin Alternative

The most direct solution to the debt problem is for the government to fund its budget with government-issued money.  One alternative would be for the Treasury to issue U.S. Notes, as  was done in the Civil War by President Lincoln.

Another alternative was suggested in my book Web of Debt in 2007: the government could simply mint some trillion dollar coins.  Congress has the Constitutional power to “coin money,”  and no limit is put on the value of the coins it creates, as was pointed out by a chairman of the House Coinage Subcommittee in the 1980s.

This idea is now getting some attention from economists.  According to a July 29th article in the Johnsville News titled “Coin Trick: The Trillion Dollar Coin”:

 The idea just started to get serious traction the last few days as the debt stalemate has grown more intense and partisan. Yale constitutional law professor Jack Balkin floated it as an option in a CNN op-ed yesterday (July 28th).

Today the idea has gone mainstream. It is covered by NY MagazineCNBC, and The Economist. Even Nobel economist Paul Krugman of the NY Times has weighed in. Annie Lowrey of Slate discusses it as one of several gimmicks the government could use to resolve the debt-ceiling debacle. Krugman added:

“These things [like coin seigniorage] sound ridiculous — but so is the behavior of Congressional Republicans. So why not fight back using legal tricks?”

The debt ceiling itself was a legal trick, a form of extortion based on a century-old statute that conflicts with the Constitution.  However, said the Johnsville News article, “coin seigniorage is not a scam. It is legal . . . . This plan looks like it might be Obama’s ace in the hole . . . .”

The article cites Warren Mosler, founder of MMT (Modern Monetary Theory), who reviewed the idea in a January 20th blog post and concluded it would work operationally.

Scott Fullwiler, associate professor of economics at Wartburg College, also did a comprehensive analysis and concluded that the trillion dollar coin alternative was unlikely to result in inflation.  Comparing it to Ron Paul’s plan, he wrote:

This option is much like Ron Paul’s proposal—actually identical in terms of the effect on the debt ceiling and the Treasury—except that his proposal would destroy all of the Fed’s capital (and then some), which is a potential problem politically . . . though not operationally, and which the Fed is therefore very unlikely to agree to.

On the inflation question, just because the Treasury has money in its account doesn’t mean it can spend the funds.  It needs the usual Congressional approval.  To keep a lid on spending, Congress just needs to be instructed in basic economics.  They can spend on goods and services up to full employment without creating price inflation (since supply and demand will rise together).  After that, they need to tax — not to fund the budget, but to pull excess money back in and avoid driving up prices.

Spending More While Borrowing Less

In an economic downturn, the government needs to spend more, not less, as history shows.  This can be done while still balancing the budget, simply by taking back the government’s Constitutional power to issue money.

The budget crisis is an artificial one, and the current “solution” will only guarantee a deeper recession and more widespread suffering.  Rather than obsessing over deficits and debt, the government needs to turn its focus to jobs, sales and quality of life.


Ellen Brown is president of the Public Banking Institute and the author of eleven books.  She developed her research skills as an attorney practicing civil litigation in Los Angeles.  In Web of Debt, she turns those skills to an analysis of the Federal Reserve and “the money trust.”  Her websites are and

18 Responses

  1. [...] The Market Has Spoken: Austerity Is Bad for Business [...]

  2. Ellen, how about a word on HR 6550? How about connecting coining money with energy inputs into society? I see a change from your frequent BND endorsements. Any change here?

  3. I love this Blog and I love Ellen Brown.

  4. Hi Ellen, I wonder if you’ve run across my work on coin seigniorage at Correntewire? It’s also linked to in one of the Johnsville posts. Lately I’ve been writing about the impact of using extremely high face value proof platinum coins to change the climate of debate from the drive toward austerity to discussions of our real economic problems. Here are links to recent posts:

    Also Seneca Doane at DailyKos also offered a post on this subject that got quite a bit of attention there:

    People following the MMT approach like myself only recently found out that you suggested using coin seigniorage some time ago, One of a number of exchanges on the provenance of the idea crediting you is here:

    Clonal Antibody has been most active in informing people about this.

    • Have you sent your proposal to the White House? A bunch of
      academics sitting around spinning theories are not going to
      affect the politics without voter action. I already posted a message
      there with a link to your article above. They will only pay attention
      if there are a sufficient number of people demanding it.

      That goes for everyone else posting here.

  5. “This plan looks like it might be Obama’s ace in the hole . . . .”.

    For once, I disagree with Ellen. Coin seigniorage or any affirmative economic ideas are quite the opposite of what the Obama administration hoped to achieve with the legislation signed August 2nd. The phoney debt crisis was ginned up by both the Republicans and the Democrats as an excuse to slash social spending programs (Medicare, Medicaid and Social Security) until they bled to death. The executive branch was hip deep in this particular cesspit.

    The new law reeks of backroom deals and unconstitutionality with its grants of largesse to the military, no taxes for wealthy Americans and a questionable “super congress” structure that stifles debate or choice for legistators. If legislators, responding to their constituents refuse to cut social spending, automatic spending cuts are mandated by this dubious law. This was a cynical ploy by both parties to evade responsibility over spending cuts, especially when there are no convenient third, fourth or fifth parties through which American voters can express their will.

    Debt Crisis theatrics were a triumph of ideology over common sense. It was a breaking of a social contract with the American people that held that the people had a right to tax themselves to provide a decent retirement and healthcare when they were no longer able to work. It was a contract that held that government would act in the best interests of flesh and blood citizens instead of pandering to ficticious persons such as corporations.

    The Obama administration has been open and eager to break those contracts for the sake of rightwing ideology. It had several options to resolve this phoney crisis, the 14th amendment, progressive taxation and coin seigniorage among them. These were not options they were prepared to play since they would preclude the current ugly outcome.

  6. I have just finished reading “Web of Debt” by Ellen Brown.
    I am 75 years old and for the first time ever,yes an AHA ! moment,The Wizard of Oz !!!!I never knew.
    This book “Web of Debt” should be read in every classroom,every home.As Robert Shiller said “WE NEED DISCLOSURE”
    If millions of Americans were to read your book;there would be a “march to the wizards castle” demanding that the people whose money it is ,be able to as stated in the US Constitution use it…
    for the general welfare. Create jobs and what ever is needed to promote the general welfare.

    Please check the writing of Joseph Firestone and maybe even,the stuff on Pragmatic Capitalism.
    Could it be possible that together you could start “The Grassroots Party” or call it “The Humaniterian Party”?

    Is your book available via internet printing at a low cost?
    or better yet could you blog a page everyonce in a while.

  7. This is how far we have strayed from the concept of money, where now mystical operations of so-called exchanges between the Treasury and the FED involving fiat declarations of worth are going to save us from the catastrophe of the debt-based monetary system itself. I don’t trust government officials, elected or otherwise, to control the quantity of money; I don’t trust the FED bankers to control the quantity of money; but more importantly I don’t agree with their very definitions of money.

    The intent of the framers of the Constitution, coming off a period of paper money hyperinflation, was not to give the Federal Government the power to mint coinage at some arbitrarily determined denomination, but to mint coins and confirm the actual value as WEIGHT of the coins so minted.

    In our hubris we believe we can change the nature of things without paying the consequences of falsifying their nature! I stand on three principles: firstly, that gold and silver are money (and for convenience can be represented by paper money only if that paper money is redeemable 100% in gold or silver); secondly, that fractional-reserve lending by banks is inherently fraudulent; and thirdly, that the purpose of government in the monetary arena is to prosecute for counterfeiting and fraudulent contracts between banks and their customers.

    These very old-fashioned principles are currently out of style, and the resulting disarray in the economy proceeds from abandonment of these principles. Even our cultural degradation can be laid at the foot of this abandonment of archetypes.

    • The hyperinflation after the revolution was because the British had
      flooded the economy with counterfeit bills. It was not the
      result of colonial action. So, don’t blame it on the government that
      issued the real paper money.

      Metalic money will not work when the economy grows to a point
      that there is no more gold and silver and platinum left to
      match in value of goods that need to be produced. It will cause

      Money is the promise that everyone agrees to repay in goods
      and services to whomever has a comparable amount of money.

  8. Justaluckyfool:P.S.
    Have you read “Sen. B Sanders…A Jaw Dropper at the Federal Reserve”…TARP and TALP were for $1.3 Trillion???
    wrong as disclosed to congress thru Sanders effort over $8 Trillion.
    This in fact may prove some of the theories.Yes,you can print,and even if close to $10 Trillion,hey,no inflation!!!!!
    Also Dr Bernanke could be the AMERICAN HEROE.
    Call upon him to lead the march with a demand for “QE3″
    (newest version by justaluckyfool 8/09/2011)
    Congress to mint one coin for legal tender of $20.11 TRILLION
    for deposit only in the US Teas.
    The coin can be on display as it would only have to be electronically deposited.Maybe next to the US CONSTITUTION.
    You know what to do with the money ?
    1. Buy the insolvent banks thru FDIC (I believe Sheila Blair would probable love to be a presidential candidate for the “Grassroots Party”
    or “The Humanitarian Party”) also 1a, solve the problem of Freddie and Fannie…buy them 100%.
    2.The banks will then make ALL residential loans for all taxpayers
    for 95% of fair value @4% for a term of 36 years.
    ALL new sales foreclosures and short sale.(and there sure will be enought of them,but they will not be left on the market very long because they will be affordable.Plus the added benefit of at least 4 Million jobs created in the construction industry which will have immediate orders placed for purchase.
    Freddie and Frannie will be paid 1% for servicing the loans,and returning the prin. and interest to the US Treas.If $10 needed,that would mean more than $10 Trillion profit to the BANK (read taxpayers)
    3.Either Freddie or Frannie could handle the residential loans,whichever one is left would handle the commercial loans.
    of the people’s , MONEY,paying for the people’s GENERAL WELFARE.

  9. This downgrade and ensuing nosedive may be the QE addicts asking for another fix… only to squirrel the spoils again.

  10. [...] L’austerità – una spesa del governo ridotta – è male, secondo lei. Il Mercato Ha Parlato: l’Austerità E’ Male per l’Economia [...]

  11. “The federal debt has not been paid off since the days of Andrew Jackson, and it does not need to be paid off. It is just rolled over from year to year. The only real danger posed by a growing federal debt is the interest burden, but that has not been a problem yet.”

    Of course it will NEVER be a problem. As interest like debt can just be added to debt and rolled over as well

  12. “Another alternative was suggested in my book Web of Debt in 2007: the government could simply mint some trillion dollar coins. Congress has the Constitutional power to “coin money,” and no limit is put on the value of the coins it creates, as was pointed out by a chairman of the House Coinage Subcommittee in the 1980s.”

    I’m a big fan of Ellen and MMT. But not of creative (fraudulent) accounting tricks like this. Money reform should be based on sound logic but also ethical behaviour. And this is not even close.

    It would likely have accountants up in arms. And would likely fool no one.

    This is how I understand the situation. Please correct of not right

    In the past Govts financed deficits in significant part by new notes and coins (rather than Govt bonds or central bank credit)

    New notes and coins is now coded to Govt debt
    Dr Treasury expenses
    Cr Liability (Govt debt?)

    In the past the credit accounting entry was coded to CR Treasury revenue (or not Liability / Govt debt)

    Some money reformers see this as our salvation. It is not. This accounting treatment (cr revenue) was dubious at best. It is not the way forward

    If accounting is to be changed treat Govt debt as say
    Cr base money or better still
    Cr Non Govt Retirement provision (which is what it really is)

    But as you can see in the past new notes and coins (Govt debt) was hidden as revenue (or as a liability account but not included as Govt debt). Why in part I believe Govt and non Govt debt is so much higher now.

  13. “The Problem Is Not Debt But a Shrinking Money Supply”

    Credit = Debt. They are one and the same

    When ever anyone raises a bank loan (to obtain new credit)

    The banks initial accounting entry is

    Debit (bank asset but customer or Govt debt)
    Customer Bank loan (BANK LOAN) =customer liability bank asset

    Customer Cheque acc (DEPOSIT) =customer asset bank liability

  14. I see this sort of economic assessment all the time in the mainstream media. Economists like Krugman and Brad De Long also promote this form of stimulation for recovery. What is also the driver for this belief seems to be that no other economic policy will work other than stimulus.

    Where this thinking completely fails is in its appreciation of the problem. What is the problem? Too much easy credit and debt which has given rise to too many dependencies for America. So by adopting more short-term massive debt via more QE one must ask whether this is healthy for America — especially if her total long-term debt, both national and fiscal, are left completely unattended. Therefore, just addressing the problem with just short term stimulus alone must be inadequate as a total long-term solution.

    Another point of view that this author completely excludes or ignores are its economic effects, the very destructive effects, of a deliberately inflated and devaluing dollar policy. These manipulations have been completely ignored by the likes of Geithner, who still laughingly maintains the propaganda that he believes in a strong dollar — and then in the next breath insists that China tying its Yuan to the dollar is Protectionism !! Bernanke has also commented that dollar inflation is “…very, very low”. Well it would be if you don’t include food and energy
    in the CPI stats. Nevertheless Real Inflation(includes food and energy) is now at between 12% — 13% for America. I guess American economists must think this more real figure is trivial. Right. What I see are American government agencies simply lying outright to protect the precious American markets — who helped to cause the financial crisis in the first place.

    American economists and opinion also makes the gross mistake of not considering the wider global effects of America’s monetary policy. What has become very apparent is that China, the BRICs, the ASEAN Nations etc — all the mercantilist export countries — are now all fighting back by deliberately de-emphasizing the world reserve dollar in trade. This month China has struck a huge deal with 10 ASEAN nations to use currency swaps with the Yuan in their trade throughout Asia instead of the dollar. Are the effects of these Asian currency swap arrangements so trivial to the dollar and to America’s monetary policy? This is one of the main reasons why I think America’s current belief in stimulus is so damaging — not only to America but also to the rest of the world.

    Already from the last damaging bout of QE2 we’ve had countries like Thailand, Malaysia and Brazil complaining loudly about the manipulations of the Fed causing their own currencies to rise — making their exports less competitive. Be assured that all these mercantilists — with China as their leader — are now shoring up their defenses against massive dollar invasion into their countries from the American markets. Meanwhile America yells and bleats about China’s currency manipulations — completely forgetting that America herself has been grossly manipulating her own dollar for only America’s advantage for at least the last thirty years — China, after all, is only following America’s lead and precedent. Or should it be “…Do as we say, not as we do” and backwards we go to a Banana Republic global dictatorship by America ?

    And we’ve recently had the Schumer Bill because America wants to teach China a damn good lesson. But the mercantilists are prepared which is easily understandable since America only ever seems to possess a one trick economic policy — QE.. A tariff war, caused by America will kick-off. The mercantilists will also slap on full currency controls against the dollar as well so that the dollar will have nowhere to hide. So where does that leave America — with no means of generating free credit through trade or inflation. Stimulus is therefore good or bad ? How’s it looking now?

    That’s why the author’s solution is way too simplistic. You simply cannot add stimulus without also addressing the main problem as well — which is excess, unmanaged debt. And, as I have illustrated, you cannot institute massive QE, without considering how these policies will so unfairly hurt other foreign countries. If the above author’s reaction is “Well who cares about the mercantilists economies?”, then I would perhaps remind her again to expect the very same regard and treatment from the mercantilists towards America — and she can hardly complain if all these mercantilists respond to America’s damaging economic vampire policies with policies that are similarly hurtful to both the dollar and to the American economy. The author’s solution is very typical of American economists and American media. Their assessment is usually a tunnel vision view of just what’s good for America only. They completely forget and don’t even address how America’s monetary policies hurt so many other other global economies.

    Like I said, tunnel vision. Keep that thought and learn from it.

  15. I can login using my fb account, great…..but were is the share button or do you not want us to share this great info with others?

  16. The popular belief is that we can solve our economic problem by spending money. Only energy creates money, money does not create energy; unfortunately economists have convinced themselves that the system works in reverse: that if you spend money, you create energy.
    The death spiral of the world economy is because it is based on energy input (primarily oil) not money circulation. I work, expend energy, get paid. I then use that money token to buy the results of someone else’s energy output. If my work output isn’t enough to keep me alive, then I starve. The global economic system works in exactly the same way but to function sustainably, there has to be a continual input of energy.
    Without energy in surplus, we do not have an economy, and as energy availability declines, so will our economic infrastructure.
    In simple human terms, our energy output now isn’t enough to keep all of us alive.
    A century ago, when we kicked off our current age of plenty, oil was cheap and abundant, industrial output grew as we pumped more and more oil, and built bigger machines to burn it. Burning oil coal and gas was ‘Gross Domestic product’, burning it faster was called ‘growth’.
    It also gave us a unique way of dealing with debt. We mortgaged our future against anticipated (oil) prosperity. Unfortunately the cost of energy has risen so much, we can’t afford it and without energy we are staring into the abyss of a very different future.

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