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Deflating democracy

By Henry Johnston 

Earlier this week my neighbour asked, “Is America a democracy?”

I replied, “America is a republic which aspires to democracy via its Constitution and Bill of Rights.”

We continued our discussion from the perspective of white and non-white U.S. citizens, but our conversation eventually ended in stalemate. We agreed Shakespeare’s line, now is the winter of our discontent, best sums up the mood of Republican United States which, if you believe the commentators on MSNBC and CNN, is as far from a democracy as it has ever been in that nation’s history.

But this drift from democratic exceptionalism is not confined to the United States.

On Thursday 6 December 2018 Australia demonstrated the extent of its slide from idealism to the ignobility of brute force. The occasion was Prime Minister Scott Morrison threatening to go nuclear if Labor did not support yet another measure to battle the ongoing war on home-grown terrorists.

I leave the detail of that debacle which ended the Australian Parliamentary year to others. Suffice to say as a democracy our nation seems on the verge of a summer of discontent.

But what triggered this negativity? The answer I believe is the fallout from the Great Recession of 2008, and its most stubborn legacy; deflation.

The fact Australia survived this debacle is thanks to the text book application of Keynesian economic theory, universally derided by Liberal economic rationalists. In my opinion their continued scorn of the finest management of an economic crisis in contemporary Australian history, constitutes perilous wilfulness.

The Liberal Government let the 10th anniversary of the Great Recession of 2008 pass without so much as a mention.

Earlier this week a slew of financial pundits predicted the Reserve Bank of Australia might cut interest rates next year. If this eventuates, Australia is on the precipice of deflation.

In psychological terms deflation deprives individuals of a sense of well-being. No matter how hard people work their goals remain out of reach. Think low pay, the gig economy, casualisation, the marginalisation of women in the work force etc.

One way or another deflation is entrenched in other parts of the world, especially England. But despite a chronically sluggish economy, Brexit looms large for the Old Dart.

The Bank of England recently warned of a catastrophe if an unprepared Britain turns its back on Europe. But gleeful Brexiteers, led by the Conservative Party, insist the winter of our discontent will be made glorious summer by this son of York. This quote by the way is from the play Richard the Third by William Shakespeare.

The deformed body of Richard the Third was recently found buried beneath a car park somewhere up north.

But Europe too is wracked by turmoil, caused by deflation and stoked by the knuckle-duster fists of far-right thugs. And in Eastern Europe there is a real prospect of a full-scale hot war between Ukraine and Russia, over access to the Sea of Azov. Both Ukraine and Russia are also experiencing deflation. Even China with its command economy is sliding backward.

There are thousands of definitions of deflation, but this simplified version sums it up in a way that can be traced back to our disgraceful Liberal government, which continues to embrace a discredited economic rationalist model without question.

Deflation occurs when supply is high and demand low. In other words when people stop buying. Think the current housing market in Australia.

Deflation can also come about when the supply of money decreases, often in response to a financial contraction created by bad investment or a credit crunch. Think the recent Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, with its sensational revelations of predatory lending practices.

Too much competition can also trigger deflation as can and too little market concentration.

Japan is trapped by its quicksand, and no matter what economic tricks it conjures, Japan cannot free itself from its grip.

The last time the world endured a lengthy period of deflation was between 1918 and 1939, when democracy waned to the point where its beacon was almost extinguished.

This must never happen again.

As the season of good will looms, I find it hard to believe there will be a change for the better next year unless Australia rids itself of a truly awful conservative government, and prepares once more to deploy the economic levers devised by John Maynard Keynes.

But this will not happen if the Liberal Party of Australia remains in power in 2019.

Economic rationalists around the world, Scott Morrison and Treasurer Josh Frydenburg among them, hate Keynes for many things, none the least of which is this pithy bon mot: “capitalism is the astounding belief that the wickedest of men will do the wickedest of things for the greatest good of everyone”.

Henry Johnston is a Sydney-based author. His latest book The Last Voyage of Aratus is on sale at Brays Bookshop in Balmain an at Forty South Publishing.


9 comments

  1. Andreas

    l take that quote:
    Wicked they surely are (see Royal Banking Commission). Any queries?
    Down the salt mines they go. Salt coming up? Then food is going down.

  2. Andreas Bimba

    John Maynard Keynes was a genius and his economic theories would certainly outperform the current economic beliefs of our neoliberal/neoclassical conservative governments and banking establishment who are really just a throwback to the Dickensian capitalist era. This crowd gained the ascendency over the postwar Keynesian economics when Milton Friedman’s Monetarism which was based on a con was implemented by Reagan, Thatcher, Lange and by both our Labor and Conservative governments to serve the interests of the wealthy.

    Keynes however was around over 100 years ago and has been superseded by the Post Keynesian Modern Monetary Theory economists who have combined all the genuine advances macroeconomic theory has made since Keynes along with the best from that earlier era such as from Keynes himself, Marx, Kalecki and a few more.

    Keynes would have argued for balanced national government budgets over the economic cycle which is ultimately unnecessarily contractionary. The ALP still follow this line of thought for fiscal policy.

    The stupid Conservatives argue for balanced budgets or even surpluses both during growth periods and during recessions and so are always unnecessarily contractionary. The stupid Conservatives also aim to implement the whole neoliberal agenda which is designed to redistribute wealth upwards. The ALP remain neoliberal -lite.

    The Modern Monetary Theory economists aim to precisely adjust fiscal policy so as to maintain full employment and they also realise that such spending utilises currency issuance and therefore does not incur debt nor require higher taxes nor does it result in ongoing inflation. Generally national government deficits would be higher and more sustained if the MMT economists recommendations were followed but if the economy became overheated then surpluses would be appropriate. A Job Guarantee program is the simplest and most effective way of regulating national government deficits to ensure full employment with price stability (no ongoing inflation).

  3. Phil Gorman

    Thank you gentlefolk for you insightful commentary. Modern Monetary Theory shines a light at the end of the tunnel. Unhappily the corpocracy is busy building more tunnel.

  4. ChristopherJ

    Thank you Henry. No, the US is not a democracy and has been sliding toward fascism for my entire adult life.

    Phil and Andrea. MMT is a description of a utopia we can never achieve with our current political structures. So you are right in a sense, Phil. Yet, the very system of government established at Federation was one designed to divvy up the money confiscated by way of taxation. It may be an illusion as taxes cannot be respent, but it was no accident that the Commonwealth had the taxing powers and the States were underfunded by an inadequate tax base.

    Since it was first agreed with the banks that they could purchase interest bearing bonds to fund the Federal Government, and effectively be the issuer or printer of new money, the banks have held their sway over us ever since and any attempt to do MMT and fund spending by bypassing the banks, well those countries find they cannot access credit and their currency quickly becomes worthless. The global banking cartel can make it very difficult for countries, so we do what we do and talk about MMT while our earth dies before our very eyes.

    People understand Paygo, so we are always going to struggle to get traction on the issue

  5. totaram

    “Phil and Andrea. MMT is a description of a utopia…”
    Wrong. It is a description of how our fiat currency actually works, as opposed to the myths we are told about it.

    All the other stuff you write about currencies becoming worthless etc. is the myths we are told. The Japanese government debt is currently north of 200% of GDP, and it so happens that the Bank of Japan (owned by the government) now “owns” most of this debt.
    Despite repeated warnings from the neoliberal economists, there is no sign that the Japanese Yen is becoming worthless.

    But the fact that you like most others believe these myths, shows how hard it is to get traction. The myths are repeated on a daily basis by the “free” press and if you are not inoculated against the propaganda, you will succumb.

  6. ChristopherJ

    Not many people correct me on MMT, totaram. Agree it is not a theory it is a description of how money works. Japan? Buying your own debt is not the same as spending without debt. They buy it because there are not enough investors who want to lend to them at the going rates.

    And two examples of world leaders who wanted to use MMT and bypass the banks’ role in funding governments, Gough Whitlam and JFK.

  7. totaram

    “Buying your own debt is not the same as spending without debt. They buy it because there are not enough investors who want to lend to them at the going rates.”

    Sorry, I won’t go into it, but you are wrong again. Check out the details here from the guru:

    http://bilbo.economicoutlook.net/blog/?p=40937

  8. ChristopherJ

    I think you misunderstand me and don’t know who I am.

    I am not wrong. Japan could spend into the economy without the debt. Here, from your own ref to Bill Mitchell’s blog:

    If the Bid-to-Cover ratios at bond auctions fell to zero – that is, private bond dealers offered no bids for an auction – then the government could simply instruct the Bank of Japan to buy the issue. A simpler accounting device would be to stop issuing JGBs altogether and just instruct the Bank to credit relevant bank accounts to facilitate the spending desires of the Ministry of Finance.

    and further, Bill says in the same article:

    Then the treasury should net spend as required to ensure that the economy achieves and sustains full employment and price stability. This may under some circumstances (very strong external surpluses) require a fiscal surplus, but normally for most countries it will require continuous fiscal deficits of varying proportions of GDP as the overall saving desires of the private domestic sector varied over time.

    The treasury should issue no debt at all. Even those who argue that the government should issue short-term paper to allow the central bank to reach its target interest rate via liquidity management operations now realise that interest payments on excess reserves accomplishes the same end.

    All those commentators who claim that accelerating inflation would result if governments abandoned debt-issuance but continued to run deficits have been repeatedly shown to be wrong.

    No increased inflation risk would be introduced by the government refraining from issuing debt to match any fiscal deficits it might be recording.

    The monetary operations that accompany fiscal policy changes have very little impact on increasing or decreasing the inflation risk of continuously running an economy close to full capacity.

    The risk is real but can be managed.

    totaram, the Japanese Govt buys that part of the JGB issuance that the market doesn’t want. That’s pretty much what I said.

    Have a good day

  9. Karen Kyle

    Great article Henry, I enjoyed it. Thanks very much. You make economics sound simple and they are not.

    The question of American democracy has been something of a puzzle. Right wing Americans who are determined to bring democracy down insist that America is a Republic and not a democracy. This is an astounding claim often made in all seriousness such is their duplicity. The situation is fraught in America and elsewhere.

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