Central Bank Economy Labor

The Fed’s Austerity Program to Reduce Wages

Photograph Source: wandererwandering – CC BY 2.0

By Michael Hudson / CounterPunch

The Federal Reserve Board’s ostensible policy aim is to manage the money supply and bank credit in a way that maintains price stability. That usually means fighting inflation, which is blamed entirely on “too much employment,” euphemized as “too much money.”[1] In Congress’s more progressive days, the Fed was charged with a second objective: to promote full employment. The problem is that full employment is supposed to be inflationary – and the way to fight inflation is to reduce employment, which is viewed simplistically as being determined by the supply of credit.

So in practice, one of the Fed’s two directives has to give. And hardly by surprise, the “full employment” aim is thrown overboard – if indeed it ever was taken seriously by the Fed’s managers. In the Carter Administration (1777-80) leading up to the great price inflation of 1980, Fed Chairman Paul Volcker expressed his economic philosophy in a note card that he kept in his pocket, to whip out and demonstrate where his priority lay. The card charted the weekly wage of the average U.S. construction worker.

Chairman Volcker wanted wages to go down, blaming the inflation on too much employment – meaning too full. He pushed the U.S. bank rate to an unprecedented 20 percent – the highest normal rate since Babylonian times back in the first millennium BC. This did indeed crash the economy, and with it employment and prosperity. Volcker called this “harsh monetary medicine,” as if the crash of financial markets and economic growth showed that his “cure” for inflation was working.

Apart from employment and wage levels, another victim of Volcker’s interest-rate hike was the Democratic Party’s fortunes in the 1980 presidential election. They lost the White House for twelve years. The party thus is taking great courage – or simply being ignorant – by entering on this autumn’s midterm election by emulating Mr. Volcker’s attempt to drive down wage levels by financial tightening, which already has crashed the stock market by 20 percent.

President Biden has thoroughly backed up Republican-appointed Federal Reserve Chairman Jerome Powell in endorsing a financial crash in hope that it will roll back U.S. wage levels. That is the policy of the Democratic Party’s donor class and hence political constituency.

To Wall Street and its backers, the solution to any price inflation is to reduce wages and public social spending. The orthodox way to do this is to push the economy into recession in order to reduce hiring. Rising unemployment will oblige labor to compete for jobs that pay less and less as the economy slows.

This class-war doctrine is the prime directive of neoliberal economics. It is a feature of the tunnel vision of corporate managers and the One Percent, the Federal Reserve and IMF are its most prestigious lobbyists. Along with Janet Yellen at the Treasury, public discussion of today’s U.S. inflation is framed in a way that avoids blaming the 8.2 

percent rise in consumer prices on the Biden Administration’s New Cold War sanctions on Russian oil, gas and agriculture, or on oil companies and other sectors using these sanctions as an excuse to charge monopoly prices as if America has not continued to buy Russian diesel oil, as if fracking has not picked up and as if corn is not being turned into biofuel. There has been no disruption in supply. We are simply dealing with monopoly rent by the oil companies using the anti-Russian sanctions as an excuse that an oil shortage will soon develop for the United States and indeed for the entire world economy.

Covid’s shutdown of the U.S. and foreign economies and foreign trade also is not acknowledged as disrupting supply lines and raising shipping costs and hence import prices. The entire blame for inflation is placed on wage earners, and the response is to make them the victims of the coming austerity, as if their wages are responsible for bidding up oil prices, food prices and other prices resulting from the crisis. The reality is that they are too debt-strapped to be spendthrifts.

The Fed’s Junk Economics of What Bank Credit Is Spent On

The pretense behind the Fed’s recent increase in its discount rate by 0.75 percent on June 15 (to a paltry range of 1.50% to 1.75%) is that raising interest rates will cure inflation by deterring borrowing to spend on the basic needs that make up the Consumer Price Index and its related GDP deflator. But banks do not finance much consumption, except for credit card debt, which in the United States is now less than student loans and automobile loans.

Banks lend almost entirely to buy real estate, stocks and bonds, not goods and services. Some 80 percent of bank loans are real estate mortgages, and most of the remainder are loans collateralized by stocks and bonds. So raising interest rates will not lead wage-earners to borrow less to buy consumer goods. The main price effect of less bank credit and higher interest rates is on asset prices – deterring borrowing to buy homes, as well as for arbitragers and corporate raiders to buy stocks and bonds.

Rolling Back Middle-Class Home Ownership

The most immediate effect of the Federal Reserve’s credit tightening will be to reduce America’s home-ownership rate. This rate has been falling since 2008, from nearly 68 percent to just 61 percent today. The decline got underway with President Obama’s eviction of nearly ten million victims of junk mortgages, mainly black and Hispanic debtors. That was the Democratic Party’s alternative to writing down fraudulent mortgage loans to realistic market prices, and reducing their carrying charges to bring them in line with market rental values. The indebted victims of this massive bank fraud were made to suffer, so that Obama’s Wall Street sponsors could keep their predatory gains and indeed, receive massive bailouts. The costs of their fraud fell on bank customers, not on the banks and hence on their stockholders and bondholders.

The effect of discouraging new home buyers by raising interest rates lowers home ownership – the badge of being middle-class. Despite this, the United States is turning into a landlord economy. The Fed’s policy of raising interest rates will greatly increase the interest charges that prospective new home buyers will have to pay, pricing the carrying charge out of reach for many families.

As the United States has become more debt-ridden, more than 50 percent of the value of U.S. real estate already is held by mortgage bankers. Homeowners’ equity – what they own net of their mortgage debt – has fallen even faster than home ownership rates have declined.

Real estate is being transferred from “poor” hands to those of wealthy landlord corporations. Private capital companies – the funds of the One Percent – are going to pick up the pieces from the coming wave of foreclosures to turn homes into rental properties. Higher interest rates will not affect their cost of buying this housing, because they buy for all cash to make profits (actually, real estate rents) as landlords. Within another decade the nation’s home ownership rate may fall toward 50 percent (and homeowners’ equity even lower), turning the United States into a landlord economy instead of the promised middle-class home ownership economy.

The Coming Economic Austerity (Indeed, Debt-Burdened Depression) 

While home ownership rates have plunged for the population at large, the Fed’s “Quantitative Easing” has increased its subsidy of Wall Street’s financial securities from $1 trillion to $8.2 trillion – of which the largest gain has been in packaged home mortgages. This has kept housing prices from falling and becoming more affordable for home buyers. But the Fed’s support of asset prices ha saved many insolvent banks – the very largest ones – from going under. Sheila Bair of the FDIC singled out Citigroup, along with Countrywide, Bank of America and the other usual suspects. The working population is not considered to be too big to fail. Its political weight is small by comparison to that of Wall Street banks and other FIRE-sector donors.

Lowering the discount rate to only about 0.1 percent enabled the banking system to make a bonanza of gains by making mortgage loans at around 3.50 percent. And despite the stock market’s plunge of over 20 percent from nearly 36,000 to under 30,000 on June 17, America’s wealthiest One Percent, and indeed the top 10 Percent, have vastly increased their wealth in stocks, while the bond market has had the largest boom in history. But most Americans have not benefitted from this runup in asset prices, because most stocks and bonds are owned by only the wealthiest layer of the population. The Fed is all in favor of asset-price inflation. But For most American families, corporations and government at all levels, the financial boom since 2008 has entailed a growing debt burden. Many families face insolvency as Federal Reserve policy aims to create unemployment. Now that the Covid moratorium on the evictions of renters behind in their payments is expiring, the ranks of the homeless are rising.

The Biden Administration is trying to blame today’s inflation and related distortions on Putin, even using the term “Putin inflation.” The mainstream media follow suit in not explaining to their audience that Western sanctions blocking Russian energy and food exports will cause a food and energy crisis for many countries this summer and autumn. And indeed, beyond: Biden’s military and State Department officers warn that the fight against Russia is just the first step in their war against China’s non-neoliberal economy, and may last twenty years.

That portends a long depression. But as Madeline Albright would say, they think that the price is “worth it.” Biden’s cabinet depicts this New Cold War as a fight of the “democratic” United States – “democracy” being a euphemism for privatizing economic planning in the hands of the largest banks “too big to fail” and other members of the neo-rentier class – in opposition to “autocratic” China and even Russia – being “autocratic” for treating banking and money creation as a public utility to finance tangible economic growth, not financialization, and otherwise resisting Western neoliberal takeover.

There is no evidence that America’s neoliberal-neoconservative New Cold War can restore the nation’s former industrial and related economic power. The economy cannot recover as long as today’s debt overhead is left in place. Debt service, housing costs, privatized medical care, student debt and a decaying infrastructure have made the U.S. economy uncompetitive. There is no way to restore its economic viability without reversing these neoliberal policies. But there is little “reality economics” at hand to provide an alternative to the class war inherent in neoliberalism’s belief that the economy and living standards can prosper by purely financial means, by debt leveraging and corporate monopoly rent extraction while the United States has made its manufacturing uncompetitive – seemingly irreversibly.

The Rentier Class Has Sought to Make America’s Neoliberal Privatization and Financialization Irreversible

It has succeeded to such a degree that there is no party or economic constituency promoting the policies needed for an industrial recovery. Yet the Democratic Party leadership, subjecting the economy to an IMF-style austerity plan, will make this November’s midterm elections unique. For the past half century, the Fed’s role has been to provide easy money for the economy, to give the ruling party at least the illusion of trickle-down prosperity to deter voters from electing the opposition party. But this time the Biden Administration is running on a program of financial austerity.

The Party’s identity politics address almost every identity except that of wage-earners and debtors. That does not look like a platform that can succeed. But as the ghost of Margaret Thatcher no doubt is telling them: “There Is No Alternative.”

Michael Hudson’s new book, The Destiny of Civilization, will be published by CounterPunch Books next month.

Michael Hudson
Michael Hudson

Michael Hudson is the author of Killing the Host (published in e-format by CounterPunch Books and in print by Islet). His new book is J is For Junk Economics.  He can be reached at mh@michael-hudson.com


  1. And Michael is spot on. He was interviewed by Pepe Escobar, too, a deent journalist:

    Pepe, said,

    he future world order, already in progress, will be formed by strong sovereign states. The ship has sailed. There’s no turning back.

    Let’s cut to the chase and roll in the Putin Top Ten of the New Era, announced by the Russian President live at the St. Petersburg forum for both the Global North and South.

    The era of the unipolar world is over.

    The rupture with the West is irreversible and definitive. No pressure from the West will change it.

    Russia has renewed its sovereignty. Reinforcement of political and economic sovereignty is an absolute priority.

    The EU has completely lost its political sovereignty. The current crisis shows the EU is not ready to play the role of an independent, sovereign actor. It’s just en ensemble of American vassals deprived of any politico-military sovereignty.

    Sovereignty cannot be partial. Either you’re a sovereign or a colony.

    Hunger in the poorest nations will be on the conscience of the West and euro-democracy.

    Russia will supply grains to the poorer nations in Africa and the Middle East.

    Russia will invest in internal economic development and reorientation of trade towards nations independent of the U.S.

    The future world order, already in progress, will be formed by strong sovereign states.

    The ship has sailed. There’s no turning back.

  2. Conspiratorial nonsense where the facts speak differently.

    The free market can legally and lawfully support real economic growth with the addition of debt-free transactions that are consumer driven. There is no law that binds people to the forced use of legal tender (debt) to make market based trades in the economy.

  3. Banks have been pulling this scam since they were first invented.

    1. Wages can be reduced while real purchasing power rises on the back of real economic growth that is helped and subsidized by debt-free market gold currency that is spent from the hand of the consumer.

      Everyone wins.

      Real economic growth empowers the economy, the value of the debt-free medium and the value of legal tender.

      Three amigos.

      It’s the consumer who has now been given the monetary stage.

  4. Your analysis of the situation is so true (although I wish it weren’t ). I don’t know if Biden just doesn’t have the balls to do what is right, or he is part of the Corparation/wealthy/oligarchy! The people of the US had better wake up!!!

  5. It’s planned austerity, long in the making. Use the 2008 crash as one significant starting point, where topics observed here by Hudson became more thematically developed. 2008 was a crisis for capital rule over the debt economy and national sovereignty insofar as it reawakened consciousness of and commitment to the class war waged under neoliberalism. The Occupy slogan of the 1% v. 99% asserted as much, and its actual embodiment in hundreds of cities and towns, and international solidarity with worldwide uprisings, became targets of security state tactics from infiltration by agents provocateur to nationally coordinated raids and razing of encampments.

    About a year after that, the rise of BLM, now a leading leftwing astroturf movement overseen by philanthrocapitalist fronts of oligarchy, deflected the continuing rage across the general population suffering austerity, or worse, while the banksters got bailouts and get-out-of-jail-free cards, into the trump card of race, emblematic of the surge of identity politics across all sorts of manufactured brands, particularly in play at present according to the strategy of tension since 2020.

    Ruling elites escaped more revolutionary upheaval following the 2008 collapse, while making out like bandits. With the writing on the wall that a repeat performance of system collapse on a far more serious scale was inevitable from their grand theft atop increasing immiseration, and mass murder, the 2009 swine flu fraud served as a dress rehearsal for the biowar now waged against us upon signs of imminent collapse in 2019.

    The class war now is a capitalist coup initiated with covid, suspending national sovereignties with a global state-of-emergency state of siege that has become a constant way of life, the new abnormal, doubled down with geopolitical chess in Ukraine also serving as cover like covid for the plandemic, the planned demolition of the old abnormal with a 4th industrial revolution to lay to rest class war, and many if not most livestock of labor. There is no alternative for elites but to go for broke and inflict disaster capitalism with a vengeance, including final solutions to march humanity into a Great Reset, replacing crumbling governance by debt with digital dictatorship (e.g., CBDCs and social credit), biological colonialism (e.g., ‘vaccines’), and technocratic administration of human resources as synthetic slaves to “masters of mankind” (Adam Smith).

    We need to meet this moment when humanity hangs in the balance.

    The Controlled Demolition of the Economy

    1. The Fed is not designed to stop inflation when the Fed can only issue debt into circulation.

      If we look back through history with a special emphasis on Bretton Woods, we see a progression that the design and structure of the vital price model morphed from a model that was once fixed & pegged and an afront to free market principles to a price model that is now fully scalable by market agreements.
      To achieve an economy that has fully scalable debt-free liquidity that comes from the free market, prices have to be congruent with that end-in-mind. Unless prices can be fully scalable, there is no way to transfer wealth, debt-free, on a lasting basis if the form of money the society uses is limited and finite like gold.
      Now that the whole global pricing model to measure value is scalable by market means and has gained traction over the last 50+ years since the end of Bretton Woods, the free market is able to monetize gold with scalable trading values that are measurable with real-time prices. Debt-free gold backed liquidity is now fully scalable to support real economic growth thanks to this re-engineering of how prices convey transaction values.
      It’s now the responsibility of the free market to use real-time pricing in market transactions to trade debt-free without limitations to available liquidity. This is not something central banks can do for us. It’s the free market that has to initiate the spending of debt-free medium into the real economy for real growth, less reliance on debt, lower costs and a higher standard of living standard.
      When this is embraced, the true mission of the USD and USD hegemony clearly comes into focus.

      1. The “free market” does not exist, never has, and never will. In any market, some are better negotiators than others. They do better in transactions. Even if this is only a fraction of a percent, like the house vig in Vegas, it adds up over time.

        And as some actors accrue disproportionate wealth, they also accrue disproportionate power. Who is going to stop them in a truly “free” market? And, naturally, those who have more power use it to tilt the balance in their own favor. Very quickly, the “free” in “free market” becomes a sick joke.

        There has never been a time when resources, hence power, were equally distributed. Thus, there has never been a truly free market. And because any truly free market would lead very rapidly lead to the same maldistribution of resources and power that we see today, there never will be. As quickly as they can, the “winners” stack the deck in their own favor.

        So the question is this: are these free market proselytizers really ignorant of how the so-called “free market” actually operates? Or are they the wolves who always win against individual sheep, and whose insistence that the market must be left alone to work its “magic” is really just a thin cover for their desire to prevent even the smallest resistance to their parasitic urge to devour everything themselves?

        All nonsense about free markets is libertarian dog whistling for anti-social goals: to wit, pit everyone against each other, so that the strong may eat the weak at their leisure. Prevent the weak from creating societies to protect themselves from predators.

        But they can never speak truthfully about this goal (except amongst themselves) because when the weak work together collaboratively they can overcome the strong. After all, there are far more of us.

        Finally, how is your soapbox comment a response to mine? If you want to have it out with Hudson over your religious views, why not just address him directly? Maybe you mistook me for someone who buys in to your ugly villainy.

      2. —>>> They do better in transactions. Even if this is only a fraction of a percent, like the house vig in Vegas, it adds up over time.

        That’s a free market. You’re attributing the disparity to the players within the negotiations/agreements rather than seeing the disparity as a function of the current debt system that creates polarity and disparity that you fail to recognize. Its the paradigm that you think and reason within. Step outside.

        Overcoming the massive reliance on debt with the introduction of debt-free market medium shifts the results into a win-win as it raise the tide for all boats. Real economic growth, which we no longer have, is the focal point and the end-in-mind.

        You have a socialist mindset or are in danger of developing one based on the very thing you stare at when you look in your wallet. It has bewitched you !

      3. A professor of mine once told me, “In theory, there is no difference between theory and practice, but in practice there is.”

        And yet here we have another example of a common delusion: all we need to do is X to tweak the system of rape/pillage/murder and all will be well.

        In short, it’s the system. Easy fix.

        Of course, this fails to account for why in six millennia we haven’t fixed it. Or how after five centuries of capitalism, the majority of humanity is still miserably impoverished. Capitalism has had the last three decades to work its magic unfettered and yet we’re worse off than ever.

        And any fool with eyes can see the writing on the wall.

        It’s not, of course, that the free market zealots don’t want a redistribution of wealth. Of course they do! They will happily give up their houses, their estates, their yachts, their toys if it means that others can get proper nutrition, a decent education, security, and health care. They are not hoarders and wasters. Oh, wait, am I missing something here?

        Thanks, Mike, for trying to convince me that we can eat our cake and have it, too. We don’t need to soak the rich to save the poor! No need to fight over scarce and getting scarcer resources. Infinite growth on a finite planet will solve everything. And if not, then maybe a couple hundred of us can make a go of it on Mars, right?

        Sorry, Mike. You’ve had thousands of years to prove to us that free markets can save us and you blew it. Theory doesn’t fill bellies or minds or cure cancer. Practice does.

        I’m not a socialist, but socialism would definitely be a step in the right direction. Sadly, no one will ever convince you of that because your belief is not based on practice, but on a desperate fear that you’ll have to give something up, even if only your dreams of fabulous wealth and power.

        How sad.

      4. Free market capitalism is incomplete and still a work in progress.

        Real-time market pricing for its use in real-time market transactions that are debt-free is indispensable to its emergence. We’re on the threshold of success here.

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