23 October 2012

Is the US About to Default?

There was just too much going on in the IMF report I blogged about yesterday to cover it all. However, one of the most interesting paragraphs is the following:
'The third advantage of the Chicago Plan is a dramatic reduction of (net) government debt. The overall outstanding liabilities of today’s U.S. financial system, including the shadow banking system, are far larger than currently outstanding U.S. Treasury liabilities. Because under the Chicago Plan banks have to borrow reserves from the treasury to fully back these large liabilities, the government acquires a very large asset vis-à-vis banks, and government debt net of this asset becomes highly negative. Governments could leave the separate gross positions outstanding, or they could buy back government bonds from banks against the cancellation of treasury credit. Fisher had the second option in mind, based on the situation of the 1930s, when banks held the major portion of outstanding government debt. But today most U.S. government debt is held outside U.S. banks, so that the first option is the more relevant one. The effect on net debt is of course the same, it drops dramatically.'

The report also suggested a buy-back of private debt, the other side of the debt coin that is holding back the global economy.

What is the explanation for this extraordinary change of heart, if not yet of policy? Could it be that the US acknowledges that its debt, both public and private, is simply unpayable? However great the temptation to return to the lure of further borrowing, eventually states as well as individuals must adjut that they are bankrupt. But the US has grown rich on producing debt that has been bought by other countries, and those at the top of the pile have grown the richest, fastest. There must surely be a price to be paid rather than letting the financiers and those who have gambled with them slope off to their mansions in the Hamptons.

In an earlier paper I suggested that a default of the largest sovereign debtors was inevitable. I proposed that the price the world might extract would be to implement a new global currency regime that uses carbon as backing for the global trading currency. This would allow a fresh start but would limit the consumption of all countries to a level that is environmentally sustainable and will allow us to avoid frying the planet.

22 October 2012

IMF Study Supports Public Money Creation

My post earlier this month reporting that Adair Turner, one of the front runners for the post of Governer of the Bank of England, has suggested that the financial assets the Bank bought in return for its quantitatively eased money should be simply cancelled felt fairly shocking at the time. Around the same time my attention was brought to a paper emanating from the IMF that has the even more surprising proposal that we should return to an effective 100% reserve on the creation of credit. In layman's terms this removes from banks the power to create money and reduces their role to re-lending money that has been deposited with them.

The paper is couched in terms of a re-examination of the proposal from Henry Simmons of Chicago University and later summarised by Irving Fisher in 1936 and is thus called The Chicago Plan Revisited. The report has two authors, a Czech economist named Jaromir Benes who works for the Reserve Bank of New Zealand and Michael Kumhof who is a staffer at the IMF. While the report states clearly that its findings do not represent the policy of the Fund it has been approved for publication.

The authors summarise the Chicago Plan as follows:

'The key feature of this plan was that it called for the separation of the monetary and credit functions of the banking system, first by requiring 100% backing of deposits by government-issued money, and second by ensuring that the financing of new bank credit can only take place through earnings that have been retained in the form of government-issued money, or through the borrowing of existing government-issued money from non-banks, but not through the creation of new deposits, ex nihilo, by banks.'

Fisher argued that such a policy would remove the ability of banks to introduce instability into the monetary system. More crucially in view of the highly damaging consequences of the massive public debts being carried by a number of developed economies, the Plan would allow for the elimination of these debts, since money would be created by public authorities rather than borrowed from banks with interest, which creates a corresponding debt, given that irredeemable government-issued money represents equity in the commonwealth rather than debt'. Fisher forecast a similar reduction in private debt.

The authors of this report test Fisher's theories using an econometric model. Their conclusions are striking: 'We find strong support for all four of Fisher’s claims, with the potential for much smoother business cycles, no possibility of bank runs, a large reduction of debt levels across the economy, and a replacement of that debt by debt-free government-issued money.' They suggest that banks would continue to exercise their role of allocating money between lenders and borrowers and providing high-street banking functions, but they would lose the role of creating money.

The authors write that 'We take it as self-evident that if these claims can be verified, the Chicago Plan would indeed represent a highly desirable policy'. Since their modelling suggests that the claims can be verified in terms of the current economic crisis we must await further policy moves from the IMF with interest, and the kind that doesn't bring debt crises in its wake.
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21 October 2012

Dispatch from Austerlitz

The award of the Nobel Peace Prize to the European Union is a timely reminder of the central role that this much-maligned organisation has played in all our lives. If we have spent our lives in comfort, alienating decadence even, and without having to fight for our birth-right, then much of the credit for that must go to the founding fathers who found a way to ensure that we had more to gain from standing together than by falling apart.

But the economic crisis that was caused by finance and has shown the current generation up for the political pygmies they are has frightening echoes of the crisis of the 1930s that led us into the last great European, and then global, war. During the 1930s, as brilliantly described by Karl Polanyi, the gold standard was the strait-jacket that strangled domestic economies while allowing the financiers to grow rich. This time around that role is being taken by the Euro and the Eurocrisis is allowing them to grow rich while the people of Europe are impoverished.

The Czech economy is doing pretty well by the standards of some of those with whom it joined the EU. The Czechs had the good sense to hold onto control of their currency the Koruna. It trades at around 35 to the pound and this allows the Czechs to maintain a fairly significant manufacturing sector. This small Central European country has more reason than most to fear the spectre of European war. In the Jakubske church in Brno, the city I visit most regularly, there is a series of dates painted onto the ceiling to commemorate dates when the people of the city needed to seek refuge. My Czech friends laugh when I say that my country has not be invaded since 1066; they can recall 60 invasions the last of which was the cost of 'peace in our time' for Chamberlain.

A few miles away is the battlefield of Austerlitz, site of Napoleon's most famous victory. My visit to the battle site was appropriately undertaken under thick fog, similar no doubt to the fog that enabled Napoleon to disguise his attack on the Pratzen heights and overwhelm a superior force. The greatest danger I faced was from a rally race that was most inappropriately staged by the battle memorial. The battle lies at the heart of Tolstoy's War and Peace, where it is a staging-post to the glorious victory of the Russians in 1812. The following century it was the Somme, which reminds us again of the exceptionality of what really has been peace in our time for the past 70 years.

If you travel to the south of France by train you will leave Paris from the station named for this battle; it matches our own Waterloo station, named to commemorate the place in Belgium where the English army halted Napoleon's continental rampage. These stations remind us of the century or so of conflict that ended in 1945. Between the cultural exchanges, the creations of pan-European institutions, and the mutual guarantee of economic security, the EU can and should be rewarded for underpinning peace in most of Europe for most of the past century.

This is why the Peace Prize comes at a timely moment. Because the current European obsession with the single market is putting the unity of nations in jeopardy. When David Cameron calls for a negotiation so that we can improve our relative situation he ignores the fact that our gain will be another's loss. His question 'What does Britain get back from Europe?' Is the wrong one. The project of peace in Europe is one we all gain from jointly, that cannot be counted in terms of a million here or there on farm subsidies. I have two sons and a daughter of fighting age and what I most want from Europe is to be assured that they will not be called to fight on her soil.
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18 October 2012

Putney Debates Round II

Readers of this blog will recall an earlier post when I called for a revival of the Putney Debates, the heated discussions that took place in St. Mary's Church Putney at the end of the English Revolution, usually referred to as the English Civil War. My energy was diverted in different directions but Occupy have taken up this idea and organised an excellent series of events under the banner of the New Putney Debates.

The series begins on 26 October and runs through into November. It touches on all the key themes of the original Putney debates: the need to question patterns of land ownership and the right to own land, questions of power and how it should be shared in what is now a purportedly democratic system, and the issue of equality. On Sunday 28th October there will be a reading of Caryl Churchill's 1976 play A Light Shining in Buckinghamshire in St. Mary's Church. According to the programme, 'The second half of the play focuses on the conflict within the New Model Army between the senior officers (the Grandees) and the Agitators, who stood for the interests of the ordinary men and women.¨This part will have a special poignancy for many of us with a long history of political involvement.

The question of the power of religious institutions, so central to the debates in 1647, has been left out of this series, which seems to me a pity. While the issue of institutional religion may be a marginal one for many political activists the question of the exclusion of spiritual values from public debate seems to me overdue for revival. At the Green House conference on the future of green politics last weekend a workshop on this theme was led by Satish Kumar, who spoke to the theme 'Soil, soul and spirituality'. There was general support for the idea of spiritual motivation as central to human community, and the need to harness this as part of the project of saving the planet.
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13 October 2012

Osborne Offers Dodgey Deal on Employment Rights

A surprising article from the Financial Times identifies 'cash upfront on the road to serfdom'. It describes how plans announced by George Osborne offer employees the chance to sell their birthright for a mess of pottage, or in this case to voluntarily relinquish their employment rights in exchange for shares in the company they work for. This is taking the idea of self-exploitation to new depths.

This is surely unlikely to be legal, and a letter from an employment lawyer in the same edition of the paper suggests that this is more ineptitude on the part of Osborne, or what he calls a 'car crash of a policy'. His argument relies on the precedence on European law, however, and the defence we have from European human rights and employment law is clearly the target of the 'renegotiation' with the EU that Cameron is calling for.

12 October 2012

Adair Turner Makes Play for Job as Governor


At last a crack appears in the establishment position over the national debt. Following the statement from the Office for Budget Responsibility that the country is bankrupt, last night Adair Turner, former head of the employers' organisation and now boss of the financial regulator the FSA, came out arguing the case for the Bank to take the necessary steps to eliminate the national debt. He has effectively conceded one of the key planks of the arguments of those who seek monetary reform: if you have maintained the control of your currency, as we did by resisting the push to join the Euro, then you can print as much money as you need to eliminate your unpayable debts. The limit on this is faith in your currency and your national economy.

This is, of course, a deeply political point. It continues the theme of earlier posts that the decision to accept our level of indebtedness is political rather than economic. Turner's proposal is relatively limited. He appears to be arguing about the government debt that was bought from companies through the quantitative easing programme, and that the Bank is cautiously holding onto rather than cancelling. In my article 'Who owes whom?' I quantify this as around 25% of our national debt. It is important to note that Turner is suggesting this as a means of reviving the economy and stimulating growth. He is not conceding the monetary reformers central demand: that the creation of money should be exercised by the state in the public interest rather than by the banks for private profit.

This is clearly a move by Turner to establish himself as the radical and creative candidate to succeed Mervyn King as Governor of the Bank of England. Perhaps King would like to follow this policy but lacks Turner's political nous. The contest within capitalism is now clearly between those who are using the debt crisis to bear down on the power of working people and shift the balance of ownership towards the wealthy, and those who would seek a more workable form of social contract. To those of us who consider that capitalism is inherently an unjust and unsustainable form of organisation this is still something of a sideshow.  We also need to keep our focus on how the massive financial readjustments themselves transfer value between rich and poor - whose assets will be protected? Those of the banks or those of the pensioners?
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11 October 2012

Sisterhood is Powerful

The most successful challenge to the global domination of neoliberalism has been slowly maturing in Latin America. The latest development is an interesting coalition between two women in powerful positions where you might least expect. In Argentina, where stereotypes suggest the men rides horses and the women are pushed around the dance-floor like shopping trollies, the female President and female head of the Central Bank are cooking up a distinctly different monetary policy.

The banker, Mercedes Marco del Pont, has recently achieved the rare accolade of being voted 'worst central banker in the world' by the lackeys of the financiers. Her sin appears to be balancing the needs of the Argentinian people with those of the finance sector. She is refusing to have the sole focus on inflation that the IMF demands and has annouced that financial stability, employment creation and economic development with social equity will also be objectives of monetary policy.

Somewhat predictably Christine Lagarde, Managing Director of the IMF threatened Argentina with a 'red card', to which President Cristina Fernandez de Kirchner responded 'My country is not a soccer team. It is a sovereign country and, as such, is not going to accept a threat.' Last time we caught up with Argentina on this blog, they were celebrating their liberation from debt-based financing, and  reclaiming their right to the value of the country's resources. Wray updates us: the recent poor weather has threatened both of Argentina's main exports: soya and beef. This helps to explain the inflation problem that the central bank is facing, but so far the political and monetary sisterhood in Argentina is holding firm.

This story is based on the account of Modern Monetary Theorist Randall Wray; he tells the story in greater detail on his Economonitor blog.
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8 October 2012

Spies, Cash and Conspiracy Theories

The similarities between the current global economic crisis and that of the 1930s has led many more thoughtful commentators to re-evaluate the importance of history to the development of policy. A striking recent example, which has been poorly trailed but is well worth watching, is Stephanie Flanders recent series Masters of Money. The link with the Open University shows, but isn't it time we all knew a little more about the variety of economic theories? Flanders makes a sterling effort to explain the thinking of three 20th-century giants - Keynes, Hayek, and Marx - none of whom, interestingly are being paid much heed by contemporary politicians.

I revealed my own interest in economic history in a recent article that was posted on the New Statesman economic blog Current Account. What perked my interest was the revelation that Harry Dexter White, Keynes's sparring partner at the Bretton Woods negotiations and effectively the architect of the post-war global financial settlement, was in fact a Soviet spy. As I point out in the article, in 1944 the US and Soviet Union were still allies, so this is not such a bizarre situation as it might have been by 1948, but none the less it does raise questions about exactly what the negotiators at Bretton Woods were seeking to achieve.

Perhaps the most touching lesson from history is that 100 or so years ago key figures in public life made it their life's work to understand the complexities of the economy. Their objective was not self-aggrandisement or self-enrichment but the impulse to make life better for their fellow citizens. While I find Hayek's idea that politicians should never intervene in markets to be utterly misguided, I can understand how he learned this lesson during the hyper-inflated Vienna where he was a young man, and that his scholarship was dedicated to preventing the same sort of suffering from occurring again. How distant and quaint such motivations seem today, when the highest aim of most authors is to be granted the accolade of a TV series.

As I conclude in my article about Bretton Woods, both the authors of the compact appear to have died of broken hearts: Keynes was dead within two years of the ending of the conference, worn out by his attempts to ensure peace in his time and ours. White outlasted him by two years but could not survive the pressure of the McCarthy era. He suffered a heart attack shortly after giving evidence to McCarthy’s House Unamerican Activities Committee in August 1948.
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6 October 2012

Ineffective Government Breeds Ineffective Demand



The launch of the Bristol Pound on 19 September was the subject of international media attention, and rightly so.  The decision by a whole city to reject the pound sterling and take charge of its monetary affairs is an exciting and unique one.  However, the most important aspect of the Bristol Pound went widely unreported: the local council is prepared to accept it for payment of local taxes.  Once a political authority underwrites a local currency in this way it can become a viable alternative, and the Bristol Pound is the first currency that has been accepted in this way in the UK.

This week I published a report with the Green House thinktank called Local Liquidity where I discuss the implications of this change.  I frame the post-2008 financial crisis in terms of the failure of effective demand. Quantitative Easing has not only increased inequality, as indicated recently by the Bank of England, but has also created only ineffective demand.  If local authorities were to back their local currencies this could enable them to generate effective demand to replace the financial energy they have removed through successive years of spending cuts. A more immediate and effective alternative, of course, would be for the government to spend the QE money on building green infrastructure, but that is beyond the control of local communities.

The report includes an authoritative account of the different types of local money that are in circulation across the world from Germany's hugely successful Chiemgauer to the currency issued by Banco Palmas in Brazil and Rotterdam's Nu-Spaarpas.  It explains how the design and democratic control of local money can help to reverse the tendency of central bank money to favour elites and starve small businesses.

From a green perspective, the building of s sustainable society requires a transition towards a system of self-reliant local economies, where the majority of our needs are met from genuinely local production. Green economists see the lengthy supply chains of the global economy as wasteful of energy, as well as leaving us vulnerable in the face of rising fuel prices and more unpredictable weather resulting from climate change. Rather than increasing growth for the sake of it, local currencies can shift economic activity out of the globalised economy and into the local economies on which we will all come to rely.

The rapidly growing body of evidence about local currencies indicates that their popularity is counter-cyclical, that is to say that they flourish in times of liquidity crisis, when there is not enough conventional money to support necessary economic activity, and shrink again when the capitalist crisis passes and the economy revives. This is true of the non-circulating currencies such as LETS and time-banks but particularly notable in the case of the scrip currencies that supported local economies in the US Midwest during the Great Depression and more recently during Japan’s lost decade. In a globalised economy local authorities often feel powerless to act to support the economies which support their citizenry, but they are not. Local authorities across the world have the power to support local currencies and enable them to underpin struggling local economies of both production and distribution.
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4 October 2012

More Links to Germany

As the parallels with the 1930s grow stronger, another commentator has written an article drawing attention to the way Germany was treated in the 1950s and the way the Eurozone, at Germany's behest, is treating the debtor nations of Europe's periphery. As Eric Toussaint notes, the 1953 London Agreement acknowledged that Germany was simply unable to pay its debts, and that failure to recognise this could cause social and political tensions within and between countries. With the second great European war still a vivid and personal memory for many this argument was heeded. Amongst our generation of politicians, sadly, the focus on punitive measures and judgemental attitudes is outweighing the good sense that says when countries can't bear, forcing them to do so will only break them and their populations.
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3 October 2012

Market is Slow Motion Train Wreck

At his valedictory address to the Trades Union Congress Brendan Barber used the Olympics as a proof of the way that community is stronger than markets. The fiasco of the G4S contract was spectacular evidence of the fact that in key strategic areas we cannot rely on the market: ‘Congress, it’s right to celebrate the Olympics, but it’s even more important to learn from them. For the central lessons of this summer – that private isn’t always best and the market doesn’t always deliver – surely need to shape future policy.’ Even the blogger at the Spectator had to admit that he had a point.

We now have similar evidence of market failure in the area of our key strategic transport network: the railways. It was a whole series of fatal crashes, caused by poor safety standards and inadequate oversight by managers with no railway expertise, that led the Labour government to take the track back into public control. Now the fiasco of the West Coast mainline franchise indicates that the train services themselves cannot be effectively run in the private sector. The three franchise contests currently underway, which will now be suspended with further costs to the taxpayer, and the 15 due before the next general election threaten an omnishambles on the railway.

The costs of the market obsession to the taxpayer are huge. Privatising the role of money creation has cost us the biggest bank bailout in history, caused the longest and deepest recession in the history of capitalism, and bankrupted the country. In comparison the mere £60 million we will shell out to refund the huge companies whose competitive bids could not be effectively compared seems small beer. The lesson is clear: the railway should come back under political control, as should other key strategic sectors. Who would bet against the energy sector being the next to expose the flaws in the market ideology.

But other wider lessons should also be drawn. In areas of key strategic importance, or which involve high levels of risk and uncertainty, the market simply cannot function well. This current problem will be blamed on mathemetical errors by civil servants but that is simply unfair. How are we to measure the risk that the Virgin brand will become tarnished, or that the cost of fuel will increase more than anticipated. How can a contract that includes a numerical measurement of uncertain variables over a period of 15 years possibly be concocted?  It is because vast and complex systems that we all rely on, whether financial or infrastructural, are so risky that accountabity for them should be political rather than financial. In such areas the market will always fail, and until this lesson is learned we will continue to pay the human and financial cost.
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