The Debt Ceiling and America’s Stockholm Syndrome

[girl gone mad]

The Debt Ceiling and America’s Stockholm Syndrome
By Pavlina R. Tcherneva
http://neweconomicperspectives.blogspot.com/2011/07/debt-ceiling-and-americas-stockholm.html">New Economic Perspectives

Keynes once said that “Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist” (Keynes 1964, 383). Two among those modern economists must surely be Reinhart and Rogoff, as no other book in recent history has contributed so much to the mass phobia and delusion about the debt and the deficit as theirs. This is a book that reinforces some of the worst ideas in the economics profession, a profession that refuses to acknowledge that we are no longer on a gold standard and that a government which has a monopoly over its own currency can both supply it without facing default and regulate its value.

Now, you may be a gold bug who fantasizes about the gold standard of the middle ages and the Dickensian industrial world, or you may be Hayekian who dreams of a maker with competing private media of exchange without any state ‘usurping’ power over the issue of money, or you may simply wish to barter with your fellow citizens and not bother with this debt business at all. This is all fine and good, but the latter two types of systems have rarely (if ever) existed in history and the gold standard episodes have always ended in deflations, crises, and disaster. So this is what we’ve got in the US—a state money system. A system in which the state determines the unit of account (an abstract measure called “the dollar”) and issues the very thing that serves as that unit of account and medium of exchange (a paper thingy that also happens to be called a ‘dollar’ or an electronic reserve with the same name). Yes! Monopoly money, or more accurately, state monopoly money. This is the system that we’ve got and the system that we have to work with. And as a monopolist that issues its own currency, the US government need not default. Ever. But Reinhard and Rogoff failed to distinguish between countries which control their own currencies from those that don’t when they warned of the ‘dangerous’ levels the US debt was approaching.

Politicians are the most notorious slaves of defunct economists. How a democratic president ended up offering $650 billion in cuts in the most important social programs in the United States (Social Security and Medicare) is something we need to ponder for many years to come. Fortunately (though there really isn’t anything fortunate in this whole situation), Republicans ‘saved’ President Obama from his folly when Speaker Boehner walked out of the debt talks. Now at least we could remove Social Security from the slaughterhouse. But there is little solace in this small ‘victory’ (if we can even call it that), when the slaves of the defunct idea of ‘austerity’ from the extreme right have been driving the policy agenda for the last 2 years culminating in the madness around the debt talks today.

And while policy makers are slaves to defunct economists, the American public has been caught in the middle between bad economics and bad politics. Sadly, just like a hostage held captive for too long, much of the general public has bought into the fundamentally flawed idea, propagated by their Democratic or Republican kidnappers, that the U.S. government is like a household which sooner or later has to pay off its debts and balance its books.

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