Mentally challenged people can sometimes be useful as a dull stone on which we can hone our economic definitions.
For instance, one reader of Rodger’s blog claimed that there has been no austerity in the USA, Japan, or Europe.
Perhaps this person thinks there is no austerity unless there are federal budget surpluses (such as the U.S. government had for the fiscal years 1998, 1999, 2000, and 2001).
Or perhaps this person does not understand what austerity is. Wikipedia’s definition of austerity is partly correct…
In economics, austerity is a set of policies with the aim of reducing government budget deficits. Policies grouped under the term “austerity measures” may include spending cuts, tax increases, or both.
Yes. If a central government seeks deficit reduction, then there is austerity.
However this definition is flawed. At the bottom of this post I will claim that the correct definition of austerity is any government program or policy that widens the Gap between the rich and the rest. Even a deficit increase can be austerity, if all the government money goes only to the rich. More on this below.
Regarding the motives for austerity, Wikipedia fails to distinguish between the various degrees of Monetary Sovereignty between nations.
Austerity may be undertaken to demonstrate the government’s fiscal discipline to creditors and credit rating agencies by bringing revenues closer to expenditures.
This is only correct in some circumstances.
To clarify this issue of the motive for austerity, let us divide nations into three types…
 NATIONS WITH NO MONETARY SOVEREIGNTY, such as the euro-zone nations, or nations like Ecuador which use a foreign currency (the U.S. dollar) instead of using a native currency. Such nations can get money if they have a trade surplus. However if they have a trade deficit, they must borrow all their money. They quickly become like Greece, caught in a death spiral of ever-increasing debt and austerity.
NOTE: even when such nations have trade deficits, they can still survive if the central monetary authority is benign, and it distributes money at zero or near zero interest. Examples include the six nations of the Organization of Eastern Caribbean States. These six nations use the East Caribbean Dollar, which is pegged to the U.S. dollar, and whose central bank is in Basseterre, St. Kitts.
Antigua and Barbuda
Saint Kitts and Nevis
Saint Vincent and the Grenadines
(The British overseas territories of Anguilla and Montserrat also use the East Caribbean Dollar. Two other “observer” members of the Organization of Eastern Caribbean States are the British Virgin Islands, which use the U.S. dollar, and Martinique, which uses the euro).
Motive for austerity: If these nations have a trade deficit, and if the central bank refuses to write off their debt, then they must live on a credit card. As their debt mounts, their governments are forced to impose austerity on their ordinary people. Their governments must continually try to reduce their debt by starving their citizenry, and selling all its public assets to the rich. This causes the nation’s debt to become even worse. The nation falls into a death spiral. Still, the whole nightmare remains gratuitous, since the central government could choose to reclaim its Monetary Sovereignty. If the government chooses not to do this, it is because the government wants to widen the Gap between the rich and the rest.
 NATIONS WITH PARTIAL MONETARY SOVEREIGNTY. These nations have their own sovereign currencies that are not widely accepted outside their national boundaries. Such nations can easily pay government employees, but they must obtain foreign currencies in order to buy imports, since foreigners want to be paid in US dollars, or in euros, or in some other widely used currency. These nations have full Monetary Sovereignty (MS) over their own currencies, but no MS over the foreign currencies they use.
Motive for austerity: If the austerity occurs in the nation’s own currency, it is gratuitous, unless the nation has an inflation problem, and its government wants to remove some of the money from the nation’s economy. If the austerity occurs in the foreign currency that the nation uses, it is because the nation has a trade deficit and / or it has a foreign debt, and the government simply cannot get enough foreign currency.
 NATIONS WITH FULL MONETARY SOVEREIGNTY. The USA is the only nation with 100% Monetary Sovereignty, since its domestic economy and foreign trade are both transacted entirely in U.S. dollars. China, Australia, Canada, and Japan are almost there, since their currencies are widely accepted, but not as universally accepted as is the U.S. dollar. China, for example, accepts U.S. dollars for the goods it sells to the USA.
Motive for austerity: The closer a government comes to 100% Monetary Sovereignty, the closer its austerity comes to being 100% gratuitous — i.e. strictly designed to widened the Gap between the rich and the rest.
In most macroeconomic models, austerity generally increases unemployment as government spending falls, reducing jobs in the public and/or private sector, while tax increases reduce household disposable income, and thus reducing consumption.
Most macroeconomic models? Try all realistic macroeconomic models. Only liars claim that austerity boosts employment and disposable income.
Speaking of the USA, its people are divided into two classes…
 People whose income and wealth comes from the ownership of capital and property, and from government subsidies and government contracts.
 People whose livelihood depends on wages, or on charity (e.g. soup kitchens) or on fixed incomes such as Social Security.
Austerity targets the second class, and has no effect on the first class. For example, even when there is “sequestration,” dollars keep flowing to military contractors, and to Wall Street for bailouts. For the USA the sole purpose of austerity is to widen the Gap between the two classes.
Austerity measures are typically pursued if there is a threat that a government cannot honor its debt obligations.
The USA has no problem honoring any debt obligations. Occasionally a right-wing blog will admit this. Here’s an example from Forbes titled, “It Is Impossible For the U.S. to Default.” It was written by one John T. Harvey, who is a proponent of MMT, although he cannot use the acronym “MMT” with the Forbes crowd.
With so many economic, political, and social problems facing us today, there is little point in focusing attention on something that is not a problem The false fear of which I speak is the chance of US debt default. There is no need to speculate on what that likelihood is. I can give you the exact number: there is 0% chance that the US will be forced to default on the debt.
We could choose to default, just as a person trapped in a warehouse full of food could choose to starve, but we could never be forced to, since every single bit of the debt is owed in the currency that we and only we can issue: dollars. Unlike Greece, we don’t have to try to earn foreign exchange via exports or beg for better terms. There is simply no level of debt we could not repay with a keystroke.
John T. Harvey goes on to give a number of quotes to prove this fact. Examples…
“The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default.” ~ Alan Greenspan
“As the sole manufacturer of dollars, whose debt is denominated in dollars, the U.S. government can never become insolvent, i.e., unable to pay its bills. In this sense, the government is not dependent on credit markets to remain operational.” ~ Federal Reserve Bank of St. Louis
John T. Harvey (in Forbes) ends with this…
We have plenty of problems in the world. No point in making one up.
Unless you want to use lies to starve the masses, and therefore widen the Gap between the rich and the rest.
Despite these occasional flashes of sanity in right-wing blogs, the austerity beat goes on as though such flashes never occurred.
And clowns like the one noted at the top continue to claim that despite massive and ongoing austerity, there has been no austerity at all.
A BETTER DEFINITION OF AUSTERITY
Beyond all this, I define “austerity” as any government program or policy that widens the Gap between the rich and the rest. This would include “quantitative easing.”
This past week it was officially announced that Japan slipped into recession yet again—its 5th since the global crisis of 2008-09. (“Recession” meaning a fall in GDP.)
Meanwhile the Bank of Japan has been billions of dollars’ worth (in yen equivalents) of corporate bonds and stocks (“quantitative easing”). There was $650 billion in QE for fiscal year 2013, followed by a recession. In 2014 it was $1.7 trillion, which again was followed by a recession. When the Japanese government’s fiscal year 2015 ends on 31 March 2016, there will be over $2 trillion in QE for 2015.
QE is called “stimulative,” but it only stimulates the speculative markets, where rich people play. QE does little or nothing for the real economy. QE widens the Gap between the rich and the rest. Thus, by my definition, austerity includes QE. Since spring 2013, Japan’s stock markets have risen by 70 percent. Corporate profits have doubled. Japanese corporations now sit on a cash hoard of more than $3 trillion, which they refuse to invest in Japan, in decent paying jobs, or in wage increases. And the government refuses to ease up on its austerity for the masses.
As a result, median real wages have been falling at a rate of 2 percent or more each year since 2009. Most of the jobs created in Japan in the past few years (as in the US and Europe) have been low paid part time and temporary jobs. Japan’s “contingent” labor force (i.e. its temporary and part time workers) is about 38 percent of all employed. Many of Japan’s better paid manufacturing jobs have been offshored to China.
Further exacerbating all the above is the sharp rise in inflation from imports for Japan households and consumers.
Here is commentator Jack Rasmus…
A secondary effect of Japan’s QE and monetary policies has been to dramatically reduce the value of Japan’s currency. The Yen in recent years has fallen almost 30 percent against the US dollar; and up to 50 percent against other Asian and emerging market currencies, including China’s. That means Japan prices for imports have risen sharply, further reducing real wages and incomes for workers, retirees, and average consumer households.
Japan has a trade surplus (i.e. Japan is a net exporter) but only in durable goods. Meanwhile Japan must import most of its consumer goods. This is where price inflation hurts average Japanese people.
Prime minister, Shinzu Abe’s, answer in 2013 was QE and free money for banks and investors and then austerity and taxes on consumers in 2014. And when the 4th recession hit in spring 2014, Shinzu Abe’s answer was not only to expand QE, but to introduce tax cuts for corporations within months after he just raised taxes on consumers. To offset wage and income decline Abe’s answer was to plead with Japanese corporations to raise wages voluntarily—a plea which they dismissed publicly as ‘unrealistic’.
Austerity folks, it’s here and now, and waiting to nail you if it hasn’t already.