I want to take another look a the data supporting Peter Jones claim that federal deficits may be, in some way, fostering the illusion that state borrowing can create surplus value.
To begin with, I want to truncate the timeline and reorient the chart I presented in the last post.
Here is the original chart:
And here is the truncated and reoriented chart I will reference in this post:
Although the differences may be obvious, let me point them out.
First, I truncated the timeline, beginning with 1992, instead of 1970.
Second, I inverted the data, so the values now are showing mostly as negative balances.
Third, I have highlighted three periods (the blue arrows) where federal deficits went into multi-year declines:
- 1992 to 2000,
- 2004 to 2007 and
- 2009 to 2015.
So, what can we see?
Well, consistent with Peter Jones’ argument, when the federal deficit declined from 1992 to 2000, we find the sort of economic event we might expect when the rate of profit falls: namely, economic crises of one sort or another.
During the first fiscal deficit reduction event, from 1992 to 2000, a series of currency crises swept the world market, global stock markets crash and the world market was plunged into a global recession. Further, United States gross domestic product, measured in gold, after expanding unsteadily for two decades, began to contract. A depression erupted in 2001, alongside the recession, that has lasted long after the initial recession ended, despite vigorous intervention by the fascist state.
However, the second fiscal deficit reduction event, from 2004 to 2007, does not unambiguously show up on my chart. The likely reason this event does not show up may be that the US national capital was already in a steep and prolonged contraction when the second fiscal deficit reduction takes place. There is some slight evidence of a modest acceleration in the rate of contraction of the national capital between 2005 and 2006, but I wouldn’t bet my life on the cause. What does occur during this period, however, is the final and long expected breakdown of monetary policy, as the Federal Reserve finally ran head first into the zero lower bound when the financial system came to the point of near collapse.
The third fiscal deficit reduction event, from 2009 to 2015, is less ambiguous than the second and, by far, the largest of the three. After the financial crisis erupted, the US national capital and the world economy was in free fall. Washington initially intervened with a multi-year massive deficit spending program in an effort to prevent the mode of production from rolling over. But the intervention was designed to be tapered off in the following years. Not only did the intervention address the immediate financial crisis, as the chart show, it was large enough to temporarily halt the contraction phase of the depression by 2012, much like FDR’s intervention did in 1933. A modest expansion begins in 2013 that continued through 2015 until more or less flatlining in 2016, as Washington deficit spending fell below some definite level. This situation more or less held until the emergence of the CoViD-19 pandemic in 2020.
So, is Peter Jones right about deficits and the rate of profit?
Well, maybe, sorta.
But who cares, right?
I mean, you didn’t really think I went through all of this to test Peter Jones’ hypothesis, did you?
You’re not that stupid, are you?
Come on, nobody actually cares what Peter Jones wrote about the impact of fascist state deficit spending on the rate of profit, except me and a handful of other geek commies, people who even other commies don’t want to invite to their sparsely attended lectures, because we ask disturbingly awkward questions about obscure points of methodology and assumptions.
What you are really interested in testing is the mainstream hypothesis that the Great Depression of the 1930s began as a mild recession, but turned into a prolonged depression because monetary policy was hampered by the limitations of the gold standard.
Even Marxists believe that crap.
In 2002, for instance, future Chairman of the Federal Reserve, Ben Bernanke, wrote:
“When William Jennings Bryan made his famous “cross of gold” speech in his 1896 presidential campaign, he was speaking on behalf of heavily mortgaged farmers whose debt burdens were growing ever larger in real terms, the result of a sustained deflation that followed America’s post-Civil-War return to the gold standard. The financial distress of debtors can, in turn, increase the fragility of the nation’s financial system–for example, by leading to a rapid increase in the share of bank loans that are delinquent or in default. … Closer to home, massive financial problems, including defaults, bankruptcies, and bank failures, were endemic in America’s worst encounter with deflation, in the years 1930-33–a period in which (as I mentioned) the U.S. price level fell about 10 percent per year.”
The statement is almost hilarious.
That this poor simpleton actually believed the long depression of the late 19th century and the Great Depression of the 1930s could, somehow, be blamed on the gold standard is really quite laughable. That someone put this guy in charge of the entire banking system of the United States is — well — understandable, since they are all simpletons.
Bernanke was so confident the 21st century threat of deflation — depression — could be prevented by aggressive monetary policy because he had this amazing new 21st century super-secret weapon, a computer terminal, that could create trillions of dollars at will:
“the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”
So how did this super-secret weapon work in practice?
Well, between 2004 and 2007, Congress reduced the deficit almost 40% and left it to the Federal Reserve to handle the consequences. Again, as happened with the earlier Clinton-Gingrich deficit reduction deal, the so-called economy rolled over into recession. But this time, instead of simply taking out a bunch of foreign currencies, a hedge fund or two, and some 401(k)s, it took out the entire over-leveraged housing market, a good chunk of the global financial system and finally broke conventional monetary policy forever.
Oh, and it didn’t stop there.
As you can see in the above chart, the US national capital continued to contract sharply, despite Bernanke’s confident assurances that he had the tools for exactly this worst-case scenario.
Yeah, turns out he had nothing.
To ultimately stop the contraction of the US national capital that began in 2001, after a catastrophic financial implosion and the collapse of monetary policy in 2007-2008, it took four more years and the injection of deficit spending equal to the total accumulated federal debt of the previous 40 years.
And even this was only sufficient to bring real output, measured in commodity money, back to where it had been in 2009. In the end, the output, as measured in exchange value, was about 40% of where it had been in 2001.
In November, 2013, almost eleven years to the day after Bernanke’s speech on deflation, Larry Summers, former chief economist under President Obama, gave his own speech openly admitting the world had entered a new era of secular stagnation.