How to Break Austerity-Induced Stagnation?

Yves here. Possibly due to the fact that this article was originally published as an op-ed for a mainstream wire service, it does not acknowledge MMT-type ideas, most importantly that fiat currency issuers are constrained by resources (as in access to workers and resources), while currency users, like US state governments and countries in the Eurozone, do need to consider the possible negative effects of budget deficits.

Having said that, Sundaram correctly focuses on the fact that the barrier to good economic policies is dogged adherence to failed policies, due in no small measure to political leaders failing to challenge them. Notice that politicians who have been calling orthodox approaches failures, whether for well-thought out reasons (Sanders, Corbyn) or occasional astute observations mixed with cliches from all over the political map and a lot of word salad as binder (Trump) have disrupted overly-comfortable political arrangements. But as we’ve said repeatedly, the response has been to double down on failed strategies. Not a good look.

By Jomo Kwame Sundaram,  former UN Assistant Secretary General for Economic Development and Anis Chowdhury, former Professor of Economics, University of Western Sydney, who held various senior United Nations positions in New York and Bangkok. Originally published at Inter Press Service

What kind of leadership does the world need now? US President Franklin Delano Roosevelt’s leadership was undoubtedly extraordinary. His New Deal flew in the face of the contemporary economic orthodoxy, begun even before Keynes’ General Theory was published in 1936.

Roosevelt’s legacy also includes creating the United Nations in 1945, after acknowledging the failure of the League of Nations to prevent the Second World War. He also insisted on ‘inclusive multilateralism’ – which Churchill opposed, preferring a bilateral US-UK deal instead – by convening the 1944 United Nations Conference on Monetary and Financial Affairs at Bretton Woods with many developing countries and the Soviet Union.

The international financial institutions created at Bretton Woods were set up to ensure, not only international monetary and financial stability, but also the conditions for sustained growth, employment generation, post-war reconstruction and post-colonial development.

Debt Bogey

In resisting painfully obvious measures, the current favourite bogey is public debt. Debt has been the pretext for the ongoing fiscal austerity in Europe, which effectively reversed earlier recovery efforts in 2009. With private sector demand weak, budgetary austerity is slowing, not accelerating recovery.

Much has been made of sovereign debt on both sides of the north Atlantic and in Japan. In fact, US debt interest payments come to only 1.4 percent of annual output, while Japan’s very high debt-GDP ratio is not considered a serious problem as its debt is largely domestically held. And, as is now well known, the major problems of European debt are due to the specific problems of different national economies integrated sub-optimally into the Eurozone.

The international community has, so far, failed to develop effective and equitable debt workout, including restructuring arrangements, despite the clearly dysfunctional and problematic international consequences of past sovereign debt crises. The failure to agree to sovereign debt workout arrangements will continue to prevent timely debt workouts when needed, thus effectively impeding recovery as well.

Meanwhile, earlier international, including US tolerance of the Argentine debt workout of a decade and a half ago had given hope of making progress on this front. However, this has now been undermined by the Macri government’s recent concession, on worse terms and conditions than previously negotiated, to ‘vulture capitalists’.

Golden Cages of the Mind

Most major deficits now are due to the collapse of tax revenues following the growth downturn and costly financial bailouts. Slower growth means less revenue, and a faster downward spiral. While insisting on fiscal deficit reduction, financial markets also recognize the adverse growth implications of such ‘fiscal consolidation’.

Many policymakers are now insisting on immediate actions to rectify various imbalances, pointing not only to fiscal deficits, but also to trade and bank imbalances. While these undoubtedly need to be addressed in the longer term, prioritizing them now effectively blocks stronger, sustained recovery efforts.

Recent recessionary financial crises have been caused by bursting credit and asset bubbles. Recessions have also been deliberately induced by public policy, such as the US Fed raising real interest rates from 1980. Internationally, this contributed not only to sovereign debt and fiscal crises, but also to protracted stagnation outside East Asia, including Latin America’s ‘lost decade’ and Africa’s ‘quarter century retreat’.

Yet another distraction is exaggerating the threat of inflation. Much recent inflation in many countries has been due to higher international commodity (especially fuel and food) prices. Domestic deflationary policies in response only slowed growth while failing to stem imported inflation. In any case, the collapse of most commodity prices since 2014 has rendered this bogey irrelevant.

Market vs Recovery

Strident recent calls for structural reforms mainly target labour markets, rather than product markets. Labour market liberalization in such circumstances not only undermines worker protections, but is also likely to diminish real incomes, aggregate demand and, hence, recovery prospects. Nevertheless, these have become today’s priorities, detracting from the urgent need to coordinate and implement strong and sustained efforts to raise and sustain growth and job creation.

Meanwhile, cuts in social and welfare spending are only making things worse – as employment and consumer demand fall further. In recent decades, profits and rents have risen at the expense of wages, but also with much more accruing to finance, insurance, and real estate (FIRE) compared to other sectors.

The outrageous increases in financial executive remuneration in recent years, which cannot be attributed to increased productivity by any stretch of the imagination, have exacerbated problems of financial sector short-termism. Regulations are urgently needed to limit short-termism, including the ability of corporations to reap greater profits in the short-term while worsening risk exposure in the longer term, thus exacerbating systemic macro-financial vulnerability.

Growing income inequality in most countries before the Great Recession has only made things worse, by reducing consumer demand and household savings, and increasing credit for consumption and asset purchases – instead of augmenting investments in new economic capacities and capabilities.

Reform Bias

Current policy is justified in terms of ‘pro-market’ – effectively pro-cyclical – choices when counter-cyclical efforts, institutions and instruments are sorely needed instead. Unfortunately, global leadership today seems held to ransom by financial interests, and associated media, ideology and ‘oligarchs’ whose political influence enables them to secure more rents and pay less taxes in what must truly be the most vicious of circles.

John Hobson – the English liberal economist in the tradition of John Stuart Mill – noted that ‘economic imperialism’ emerged from the inherent tendency for economic power to concentrate and the related influence of oligopolistic rentiers on public policy. Selective state interventions to bail out and protect such interests nationally and internationally, while not subjecting them to regulation in the national interest, must surely remind us of the dangers of powerful, but unaccountable oligarchies in a systemically unstable market economy and politically volatile societies.

Print Friendly, PDF & Email


  1. Ranger Rick

    We can complain about oligarchs all we want, but what we’re really talking about is gigantic piles of money in the control of a few people, and that money can dictate financial policy by acting on its own behalf. Take asset prices (or even stock prices, for that matter, in the case of Facebook’s awful IPO). Any downward market pressure on prices is going to be met with a tsunami of capital intended to keep that price from falling. We’ll have to see if the money can evaporate in market-fixing activities faster than it can accumulate.

  2. George Fagan

    Possibly due to the fact that this article was originally published as an op-ed for a mainstream wire service, it does not acknowledge MMT-type ideas, most importantly that fiat currency issuers are constrained by resources (as in access to workers and resources), while currency users, like US state governments and countries in the Eurozone, do need to consider the possible negative effects of budget deficits.

    Unfortunately, global leadership today seems held to ransom by financial interests, and associated media, ideology and ‘oligarchs’ whose political influence enables them to secure more rents and pay less taxes in what must truly be the most vicious of circles.

    Yves, thank you for posting this article.

    It seems that what prevents reform is the oligarchs’ regulatory capture, as Sundharam/Chowdhury mention later in their article.

    I bolded your mention of MMT theory because it represents a solution to the political problem. I wonder, however, is MMT-type theory doesn’t get to the heart of the matter enough to actually convince ordinary people to break through the cant and vote for genuine political change

    Perhaps what’s needed to break this domination are simpler ideas and conceptualizations of the role of government. Example: The role of government is to decrease the everyday cost of living of its citizens, so as to facilitate commerce, among other things. In turn, it should concentrate absolutely on reducing the cost of healthcare, student loans, and housing.

    1. Darius

      The author makes a nod to MMT by stating that Japan’s sovereign debt isn’t considered a problem because it’s owed internally.

      A good summary of the problem. I have become skeptical of infrastructure spending because it mostly goes to expand unsustainable automobile-oriented infrastructure. I think spending needs to increase on housing and social welfare.

      Also, the leading currencies are overvalued. Trump in his blundering way is addressing that in terms of the dollar, which is devaluing as we sit here and breathe.

      1. Anon

        …and spending on health care. There are a full range of health care professionals, support staff, and therapists that would benefit society more than spending on freeway expansion.

  3. Jim Haygood

    US debt interest payments come to only 1.4 percent of annual output, while Japan’s very high debt-GDP ratio is not considered a serious problem as its debt is largely domestically held.

    Not feeling complacent, are we? With interest rates near their lowest level in history in many countries — currently 0.38% in Germany and 0.05% in Japan for 10-year debt — of course debt service is low.

    But when policy makers finally get the hang of inflating away their unfunded, unpayable pension obligations in the 2020s, Japan is going to find itself shaken senseless in the scaly hands of an angry Godzilla.

    The authors criticizing current policy as both “austerity” and “pro-cyclical” at the same time — when anti-cyclical policy would mean running budget surpluses in the ninth year of an economic expansion — makes my pointy head explode. Word salad from the wimps, as it were.

    Here is a rather more nuanced (and coherent) view from a promising young autodidact:

    1. Goyo Marquez

      What would interest rates look like if we were in a monetary deflation coupled with economic growth? (What’s the opposite of stagflation? Deflowth?)

      .38% sounds like low interest but if you’re experiencing a monetary deflation not so much. IIRC same thing happened in the 30s. Interest rates seemed low but because of monetary deflation they were actually high.

      The question economists never bother to answer: who profits from a monetary deflation and how do they go about getting one?

    2. paul

      Where on earth is this economic expansion you speak of?

      Asset prices and footballers have done OK, but the machine stopped 10 years ago for most.

      1. Goyo Marquez

        The maldistribution of the expansion doesn’t disprove the existence of the expansion, on the contrary it proves it.

        1. animalogic

          Actually, it proves nothing: saying growth/expansion is of a certain variety (ie maldistribution) still leaves you to prove the original issue — where is this expansion ?

    3. craazyman

      Rising interest rates are the best thing that could happen to Japan.

      If they had to print money to buy back all their debt now, it would cost them a lot more than it would if rates there were 5%. Get the rates up, get the bond prices down, swoop in for the buy, put it all in a rocket and send it off into the sun. That would solve the whole problem, probably in less than a month.

      It’s like losing 100 pounds while you sleep. Wake up slim and refreshed!

      The only problem is — and I’ve noted this before — what if the rocket misses the sun? Six months later, when the earth is on the other side of the sun, that rocket may be a man-made Asteroid. Fortunately, if they plan ahead, they can use their new financial flexibility to set up some high energy lasers just in case. It takes forethought, but it would work.

      1. Anon

        Umm, the Sun is 93 million miles away. It would take more than six months to travel past the Sun on a misdirect.

  4. Jim A

    Current policy is justified in terms of ‘pro-market’ – effectively pro-cyclical – choices when counter-cyclical efforts, institutions and instruments are sorely needed instead.

    I think that doesen’t receive nearly enough emphasis. Those who worship at the alter of the free markets rarely seem to show any appreciation for their cyclical nature. While it’s true that the most stable market is a clusterf’d one where nobody is ever willing to lend, extreme boom and bust cycles are also destructive, and not just in a “creative destruction” way.

  5. Synoia

    MMT may not fully apply if a sovereign’s country’s service debt payments are paid in other than their sovereign currency (for example US $).

    The country must manage its exposure to it non sovereign debt payments.

  6. Jan Krikke

    A novice in economics like myself may ask some naive questions:

    Why is it OK to spend billions of dollars in interest payments while spending billions on health care is an issue?

    Why is growth seen as a panacea to all economic ills rather than a more equitable allocation of available wealth and resources?

    Why is it OK to have debt massive debt (i.e. Japan) because it is “owed internally” – while it is in fact “owned” by today’s children and their children?

    Future generations will probably try to figure out what their (grand)parent meant by “sustainable debt”.

    1. Hiho

      Japan will be ok with its debt, do not worry. Sustainable debt means debt issued in your own currency combined with low inflation rates.

      That’s to say, Japan will print its way out of the debt and since it has been also trying to raise inflation in vain for ages, inflation will not be a problem.

      Sovereign countries with sovereign currencies are limited by internal resources. Do not focus on the numbers, focus on the bigger picture. Get it now?

      1. Jan Krikke

        I understand your reasoning but not the logic behind it (seriously).

        If debt of three times GDP is not a problem, when will it become a problem? When economists and money markets say so? Why would this debt not impact future generations who had no part of this profligacy?

        Every child born today owns a share of this debt. Why would a child be comforted by the notion that the debt is “sustainable”? Why would it be comforted by the fact that the debt is internal if it has to pay the interest and/or the principal?

        I realize the value of debt can be inflated away, but does that not also carry a price tag? Should we not approach this issue both from an economic and a moral vantage point?

        1. Nell

          To answer the question you would need to read up on Modern Monetary Theory. It is hard to get your head around at first as it goes against what we learn about money and debt from newspapers and so on. Bear in mind that a big chunk of MMT is describing what fiat currency is – ie it is not theoretical but factual. The theory element relates to how money works in the economy.
          To get you started.

          1. Jan Krikke

            Thank you Nell. I should read up on MMT, but one comment. According to Wikipedia:

            The key insight of MMT is that “monetarily sovereign government is the monopoly supplier of its currency and can issue currency of any denomination in physical or non-physical forms. As such the government has an unlimited capacity to pay for the things it wishes to purchase and to fulfill promised future payments, and has an unlimited ability to provide funds to the other sectors. Thus, insolvency and bankruptcy of this government is not possible. It can always pay.”

            Should we not qualify this notion of “unlimited ability to provide funds” by saying “limited only by what global financial markets are willing to accept? I realize a new monetary theory was needed after Nixon took the dollar off the gold standard (and forced the world to pay for oil in dollars, with all the dire results), but isn’t it true that this “fiat” only extends as far as what the global markets will accept? Given the integrated nature of global finance and economics (not to mention China’s ascendancy), this seems to me the crux of the issue.

            1. John Zelnicker

              @Jan Krikke – No, the amount of debt is not limited by what the global markets are willing to accept. The US debt is in the form of Treasury securities which are purchased with existing dollars held by the non-government sector (foreign and domestic). Think of it this way: If you have cash in your checking account that you don’t currently need, you could put that cash in a CD to earn some interest. Or, you could buy Treasury securities with that pre-existing cash. It’s just an asset swap from a non-interesting bearing account to an interest bearing one. The Fed could redeem all Treasury securities tomorrow just by transferring the dollars out of Treasuries and into the holders’ checking accounts, no new dollars needed. There is no theoretical limit as to how many dollars can be deposited in Treasury securities.

              In fact, the US government doesn’t need to issue Treasury securities at all. New dollars are created by keystrokes whenever the government pays its bills, e.g., paying for a plane, making Social Security payments, paying government workers’ salaries, etc. Dollars collected in taxes are removed from the money supply and effectively destroyed. Issuing Treasuries to match the amount of the budget deficit is a relic of the days of the gold standard and is no longer necessary.

  7. Steven

    I agree about approaching the issue of monetary and fiscal policy from a moral as well as an economic vantage point. To do that you first have to understand the intrinsic nature of money: it is DEBT, a claim on the wealth of the community in which that money is accepted; it is NOT ‘wealth’. For most of us in the real Main Street economy, money’s principle function is serving as a medium of exchange, i.e. the means to buy things. For people like Trump and his buddies, money’s principle use is to “keep score”. But if money can not also be used as a store of value (i.e. a claim on the community’s wealth) it’s continued pursuit becomes nothing but a meaningless game for them. Hence the need for occasional bouts of ‘austerity’.

    The Nobel Prize-winning chemist Frederick Soddy wrote

    … a logical definition of wealth is absolutely needed for the basis of economics if it is to be a science.”

    Frederick Soddy, WEALTH, VIRTUAL WEALTH AND DEBT, 2nd edition, p. 102
    Western Civilization’s material and political preeminence was due to – more than any other factor – not letting a little thing like what Soddy called ‘the nothing of money’ get in the way of new wealth creation. It’s bankers and financiers simply created it ‘out of nothing’ to fund the creation of new wealth.

    But they did it without ‘a logical definition of wealth’ as a guide. Their sole test was – and remains to this day – whether the money they created could earn enough more money to pay back the purchasing power they were embezzling from society’s existing stocks of money. In the words of Oscar Wilde, they know “the price of everything and the value of nothing.”

    P.S. Environmental degradation is just a variation on the same fraudulent scheme of converting the world’s real wealth into debts that must be paid by present and future generations.

    1. Steven

      Is there a bug in the ‘Reply’ function? I’m all but sure I clicked ‘Reply’ to Jan Krikke’s rely to Hiho, not Krikke’s original post.

    2. Jan Krikke

      Thank you, Steven. Frederick Soddy makes a valuable point.

      It is one thing to go into debt to invest in, say, education, but another thing to go into debt for speculation, or an unwillingness the bring spending in line with revenues.

      The latter requires hard choices politicians in Japan and the US are unwilling to make. One of the few things both parties in the US Congress agree on is to raise the debt ceiling.

      Environmental duration is indeed another debt burden bequeathed to our children, as is the massive cost to future generations of dealing with mass incarceration. Where are the economic models taking these factors into account?

    3. skippy

      PM has learned that banks have control over the money supply. Because they were educated under the standard economic model which says that the government has control over the quantity of money, they see this is a bad thing, a mistake which must be corrected. Some subversion has happened, and PM wants to restore the more ‘natural’ way they see money systems working, where the currency issuer controls the quantity, and banks merely pass savings from savers to borrowers, and so forth. MMT comes at it from a different angle.

      MMT says, no, the textbooks have always been wrong. Money has never worked that way, except under a few very special circumstances which we probably don’t want to repeat anyway. The role of banks has always been to expand credit, not to pass savings from saver to borrower. The role of the currency issuer has always been to set a price, and let the market figure out the quantity, and that quantity has never been especially relevant because the markets can shift around savings to ensure that quantity is never constraining. – H/T D. Owl

      Disheveled…. Soddy’s blind spot was his Newtonian optics….

      1. Steven

        1- what / who is (are) PM?
        2- “The role of the currency issuer has always been to set a price, and let the market figure out the quantity…”-

        ‘price’ / ‘quantity’ of what, money?

        3- “Soddy’s blind spot was his Newtonian optics…” – by ‘Newtonian optics’ do you mean preserving the relationship between the quantity of money and the amount of wealth for it to purchase?

  8. Lord Koos

    “…the response has been to double down on failed strategies.”

    Gee, that sounds exactly like the Democratic party.

  9. Sound of the Suburbs

    Nothing seems right, but we don’t know how to fix it.

    Several books can help to understand how we got here:

    “Democracy in Chains” Nancy Maclean
    How a right wing ideology was developed in the US to roll back the “New Deal” and give economic freedom back to the wealthy to do pretty much as they pleased.

    “Shock Doctrine” Naomi Klein
    How shocks were applied to (used in) the developing world to implement the neoliberal ideology.

    “Princes of the Yen” Richard Werner
    How shocks were applied to the developed world to implement the neoliberal ideology.

    It’s an expensive book but free on YouTube

    This was a grand plan for the world, but completely flawed in its intellectual framework.

    The economics, neoclassical economics, was used for a purpose, as it is a very right wing, market based economics that was last used in the 1920s when it failed so spectacularly in the US.

    Exactly the same things are wrong with it now.

    It led to the roaring 20s and the Great Depression. The roaring 20s, roared because of debt based consumption and debt based speculation. All the debt built up in the boom led to the debt deflation of the Great Depression.

    Neoclassical economics was revamped but it still has its old problems.

    1929 and 2008 stick out like sore thumbs when you look in the right place.

    The build up in the ratio of debt to GDP signals the build up of unproductive lending into the economy leading to a Minsky Moment (1929 and 2008).

    Productive lending goes into business and industry.

    Unproductive lending goes into real estate and financial speculation and it shows up in the graph above.

    You have to know where we are, the 1930s before Keyes’s analysis of the problems of neoclassical economics.

    The intellectual framework of neo-liberalism is logically consistent and many leaders and nearly all mainstream economists now live within this framework; they cannot see the answer because they live within this intellectual framework.

    Einstein “We cannot solve our problems with the same thinking we used when we created them.”

    We need to move on and finding the people that did see 2008 coming is a good start, as they have a better understanding of the problem than the mainstream who are constrained in their thinking by an intellectual framework that caused the problem in the first place.

    These experts outside the mainstream provide a great starting point for new thinking.

    Steve Keen – Minsky moments and affects of debt on the economy

    Richard Werner – Money and debt, bank credit and how it must be allocated for economic success,
    studying Japan around 1989

    Michael Hudson – The history of economics, what has been forgotten but is still true

    Richard Koo – After the Minsky Moment, studied 1929, Japan 1989 and 2008.

    The West turned Japanese in 2008 and we need to think in Japanese timescales to recovery.

    27 years and counting.

    Richard Koo saw the Western experts come to Japan and tell them to cut Government spending.

    They did and everything nose dived until they eventually restored Government spending.

    Another delay in the recovery process.

    He tells you why it is wrong.

    1. Sound of the Suburbs

      The big things missing from today’s neoclassical economics.

      1) The effect of debt on the economy. Leading to Japan 1989, US 2008, Irish and Spanish real estate collapses, Greece’s collapse with austerity and the new normal of secular stagnation.

      Today’s neo-classical economics was around in the 1920s and it had exactly the same problem. Debt based consumption and speculation led to the roaring 20s and the debt deflation of the Great Depression.

      The build up to 1929 and 2008.

      2) The difference between “earned” and “unearned” income. Leading to parasitical rentier economies, now spotted by one of today’s Nobel Prize winning economists

      “Income inequality is not killing capitalism in the United States, but rent-seekers like the banking and the health-care sectors just might” Angus Deaton.

      A flawed model of global, free trade that doesn’t consider the minimum wage is set by the cost of living. Western labour is priced out of global labour markets by the high cost of living in the West exacerbated by rentier activity.

      3) Bank credit should be directed into productive investment in business and industry, not blowing asset bubbles (e.g. real estate) and other financial speculation.

      1. Sound of the Suburbs

        Producing a logically consistent but flawed, intellectual frame work.

        “Classical and neo-classical economics, as dominant today, has used the deductive methodology: Untested axioms and unrealistic assumptions are the basis for the formulation of theoretical dream worlds that are used to present particular ‘results’. As discussed in Werner (2005), this methodology is particularly suited to deriving and justifying preconceived ideas and conclusions, through a process of working backwards from the desired ‘conclusions’, to establish the kind of model that can deliver them, and then formulating the kind of framework that could justify this model by choosing suitable assumptions and ‘axioms’. In other words, the deductive methodology is uniquely suited for manipulation by being based on axioms and assumptions that can be picked at will in order to obtain pre-determined desired outcomes and justify favoured policy recommendations. It can be said that the deductive methodology is useful for producing arguments that may give a scientific appearance, but are merely presenting a pre-determined opinion.”

        “A lost century in economics: Three theories of banking and the conclusive evidence” Richard A. Werner

        As the intellectual framework is contrived, nothing readily bolts into it when problems are found.

        You couldn’t bolt in the missing things above in, as this would destroy the whole thing.

        Real science is evolutionary and new discoveries just tend to bolt into the existing frame work with little modification (not quantum physics, but they are working on it).

Comments are closed.