Princeton economist and Nobel laureate Paul Krugman is once again excoriating the budget vultures. He is absolutely correct that austerity now will not improve the deficit, but instead slow the economy even further, thus reducing tax revenues and raising the deficit. I sense that Krugman’s tone is becoming more desperate. Like the rest of us, he is caught in a stampede towards the cliff and is trying to reason with a herd that is dead-set on staying the course.

I haven’t read anyone who makes a reasonable case for immediate austerity, but I haven’t read every article on the subject, either. If anyone knows of an intelligent article justifying budget-balancing at the present time, please leave a comment.

Such a push to balance the budget clearly is not made with the intent of putting people back to work or restoring the economic health of the United States and therefore the economic health of the global economy upon which it depends. One must conclude that the budget vultures (or in the case of Congressional budget vultures, their sponsors) have a monetary interest in a tightening of the currency supply and will not experience the resultant suffering it will cause amongst the population.

Who are these vultures? In a deflationary economy, the only good that rises in value is money. Gold declines as money becomes scarce. People with money hang on to their money in the expectation that it will purchase more tomorrow than today, the very opposite of inflation. Debts suddenly become more and more burdensome to debtors as the dollar value of their collateral declines and their employment prospects become progressively worse. Merchants must reduce prices to sell their goods because demand is down. Holders of debt, like banks, see the purchasing power of their assets increase, but they also must suffer the increasing number of defaults that accompany a deflationary spiral.

So who stands to gain from economic austerity measures?

Since there are few Uncle Scrooges with vast underground vaults of money, we can eliminate hoarders of cash as a significant factor. What remains are holders of very high quality, very safe debts, and the very highest quality, safest, blue-chip debts are the obligations of the United States. If your money is sunk into government paper, you are very well set for a depression, because the purchasing power of your bonds will increase as prices fall.

There are also the Wall Street banks. A strong currency makes the dollar the favored choice for many international financial deals. It draws investments from abroad into the stock and bond markets, filling the coffers of the bankers. The aborted coup against Franklin D. Roosevelt in 1932—exposed by General Smedley Butler (ret)—was most likely instigated by some of the biggest banks in the world, including the House of Morgan, motivated by Roosevelt’s decision to cut the dollar loose from the gold standard, which caused it to sink in value against other national currencies. This was good for the economy, since American goods sold more cheaply in overseas markets and foreign products became more expensive here. But it clearly hurt the holders of dollar-denominated debt, and as a result the banks did everything in their power to defeat Roosevelt.

The budget-balancing tide, unfortunately, seems to be rising. If Congress attempts to balance the budget in the middle of a recession—and we most assuredly are in the middle of a nasty recession—it will bring about severe and undeserved hardship for a large number of Americans, as well as people overseas. It will also fail to balance the budget, as tax revenues will decline with a deepening recession exacerbated by the very austerity measures undertaken to balance the budget.

But a few people and a few institutions will do very well, including bankruptcy attorneys, who always thrive in hard times.

Tags: Krugman, Smedley Butler, Roosevelt, Austerity