Sovereign Debt Crises- for China's People's Daily.


First Published in China’s People’s Daily on 29 May, 2015

Sovereign debt can be uniquely complex, from both a financial and political perspective. It is covered by private law, yet there is no international law equivalent to insolvency law for sovereign states. Unlike individual and corporate debtors, who can appeal to the law of bankruptcy to draw a line under their debt, the citizens of poor countries remain infinitely liable for debts incurred by their governments. This is the case even if their exchange rate has collapsed and the debt has a far higher value than when incurred.

There are welcome recent efforts by the G77 and China to put in place a fair international process for sovereign debt crisis resolution. By contrast, the IMF is pursuing a far more limited path of improving the technical wording of bonds, to enable collective action clauses that enforce organized write-down or restructuring of debt more easily. While making some improvements, this does not resolve the root problem.

Underlying most recent sovereign debt crises is the fact that, under today’s global financial architecture, there is no adequate management of exchange rates and of cross-border capital flows. These footloose, de-regulated and often short-term speculative flows encourage excessive borrowing, reckless lending and risk-taking. With increased regularity they cause financial crises.

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Why not join the Euro, Mr Osborne?

There is nothing original about George Osborne’s proposal that governments of both the left and the right should in future embrace

“a permanent change in ….our approach to fiscal responsibility – just as they have done in recent years in countries like Sweden and Canada.” (My emphasis)

“Governments of the left as well as the right should run a budget surplus to bear down on debt and prepare for an uncertain future.”

It’s an idea that is older than Lord Palmerston’s  Victorian Commission for the Reduction of the National Debt convened 150 years ago.

And it is an idea that is revived periodically. Indeed the principle of stripping elected, democratic governments of fiscal policy autonomy underpinned the “corset” that was the gold standard – Keynes’s “barbarous relic” – both before and after the First World War. [1]

And we know how that ended.

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Try as he may, the Chancellor cannot “eliminate the deficit”

The Fabian Society invited Nicola Smith of the TUC, Dan Corry – once a Labour government adviser – and me to address their Summer Conference last Saturday. The theme: how can Labour restore its economic credibility with the electorate? The audience was large – about 300 earnest, well-informed and assertive Fabians. The discussion was lively, with a buzz, as the session immediately following was to be a hustings for Labour leadership candidates.

The need for the biggest British opposition party to restore a degree of economic credibility is urgent – both in its own interests, but also in the public interest. But it will be tough, with little help expected from a majority of the economics profession.

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The Growth Delusion

Originally Published on 14 May by IAI News as part of the festival HowTheLightGetsIn.

On 31 May, I will be on a platform with Isabel Hilton, Michael Howard and Robert Shiller discussing the theme ‘The Infinite Boom’. 

Can continuous economic growth ever be sustainable, or is it merely a delusion?

We tend to assume that our wages or salaries should, and will always rise in real terms. That living standards will follow the same trajectory. That house prices will never fall. That the price of Picasso paintings or ruby rings can be trusted always to “smash records”. And that the economy will “grow’ exponentially over time. Indeed “economic growth” is hard-wired in the way we think about, and measure the economy.

This is delusional stuff, if only in linguistic terms. “Growth” derives from nature. Plants are seeded, animals are born, they grow, mature and then die. And although humans mostly live in denial of the reality, our lives follow the same trajectory.

Death is as inevitable as taxes.

We know, in our heart of hearts, that there are limits. That markets and firms, grow, mature and then die – or implode. Think of the market for sub-prime mortgages, CDOs, credit default swaps or even that for chimney sweeps. Think of firms like Woolworths, HMV, PanAm, Arthur Andersen or Enron.

They are no more.

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Has Labour just dodged a bullet?

While Labour and LibDem activists mourn, and political opportunists seize the moment, is the loss of the election such a bad thing? Might this be a good time to lose an election?

I think so. The reasons can be found in both domestic and global financial imbalances, in the advance of de-globalisation trends that are manifest in shrinking capital flows and growing nationalist movements; and in rising geopolitical tensions.

As I write, out in the big wide world there are upheavals in Eurozone and other sovereign bond markets.  Whether this violent volatility will lead to a global bond market crash is an open question, but in just two weeks markets have already marked up almost €1tn of losses.  Shares in booming stock markets have begun to slide, while currency movements are increasingly erratic.

The causes of bond market volatility are unclear. But what we do know is that both the United States and China are slowing down, and emerging markets are dogged by too much foreign-denominated debt. Chinese local governments and households too are heavily indebted (Chinese private debt is 6x larger than in 2007 at about 150% of GDP in 2014) and so the central bank of China is forced to ease monetary policy – by lowering bank rates.  This seems to have sparked an uptick in global oil prices, which in turn has led to fears (irrational in my view) of rising inflation.  Inflation, it is argued, will erode the value of highly priced, low yielding government bonds, and hence the big bond sell-off. (I happen to think disinflationary and deflationary trends are still dominant, driven by weakness in demand from both the Eurozone (‘austerity’), China and increasingly the United States. But hey, deflation is bad news too.)

Given that we were all expecting such bond market sell-offs and instability to occur when central bankers inevitably raise base rates; and given that central bankers are clear such rises are a year or so away – this bond market turbulence seems premature. But let us not forget: central bankers long ago gave away their powers to influence market interest rates. Today these are effectively controlled by a global ‘invisible hand’ that moves in mysterious ways.

Because everyday interest rates are influenced by bond market yields, we can expect today’s rise in yields to translate into higher interest rates on UK and US mortgages and other forms of lending.

This is not good news for British debtors. As a famous (February, 2015) McKinsey Reportnoted, the UK experienced the largest increase in total debt  (i.e. private finance sector, corporate, household and government debt) as a share of GDP from 2000 – 2008 with its ratio to GDP reaching 469%.  Even adjusting for London’s role as a global financial sector, the McKinsey team concluded that the UK has the second-highest ratio of debt to GDP in the world – second only to Japan.

This is not an economy that will be amenable to higher rates of interest.

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Deflation: Transferring Wealth To Rentiers

First published on 14 April 2015 by the New Left Project

Deflation, as we have already seen, involves a transference of wealth from the rest of the community to the rentier class and to all holders of titles to money; just as inflation involves the opposite.  In particular it involves a transference from all borrowers, that is to say from traders, manufacturers, and farmers, to lenders, from the active to the inactive.

John Maynard Keynes in A Tract on Monetary Reform (1923)

For more than three decades economic policy-making in western economies has been dominated by financial interests – those of bankers, creditors/moneylenders, investors and financiers.  Their interests have been eagerly supported by most of the mainstream economics profession (including private, academic and official economists) in a variety of helpful ways.  Perhaps the most helpful was the tendency of economists to look away.

Most economists have very little understanding of money and credit and of how the banking system operates.  Hard though this is to believe, classical economic theory neglects the role of money, debt and banks in the economic system.  Instead orthodox economists theorise as if money is neutral, simply a ‘veil’ over activity in the real economy, as if changes in the stock of money have no impact on wider economic activity.

This has led economists (wilfully or blindly) into promoting policies that have accelerated the capital gains of the financial sector, building up mountains of unpayable debts.  These policies include the de-regulation and liberalisation of capital flows (‘globalisation’); the removal of constraints on lending and on interest rates charged to consumers and firms; the abolition of legislation that divided the speculative divisions of banks from their retail divisions, such as the Glass-Steagall Act in the US; and tax breaks for debt-financed investments – to name but a few.

But the most important element of these pro-finance policies is, and was, their anti-inflationary, or the downright direct deflationary, bias.  Deflationary policies were actively promoted by orthodox economists at the IMF, at western central banks and in OECD Treasuries.

Its easy to understand why.  Inflation erodes the value of a financier’s most valuable asset: debt.

‘Inflation’ for these economists and financiers is strictly defined and refers to the inflation of wages or prices – rises in earnings of workers and in the prices charged by firms.  But there is another kind of inflation – asset-price inflation – and for decades economists and central bankers ignored asset-price inflation, when they weren’t actively stoking asset-price bubbles.

Assets are owned on the whole by the rich and the rentier class – and include real estate, race horses, works of art, brands, software, football clubs etc.  – from which an endless stream of rents flow.  (Think of revenues from the sale of ManU tickets and t-shirts flowing straight into the pockets of the Glazer brothers.)

While wages and prices were suppressed, asset prices were allowed to let rip.  Which goes a long way to explaining why the rich got richer and the rest got poorer over those three decades.

Now finally inflation has been slain, and deflation is taking hold across the world.  In the UK, as Geoff Tily of the TUC hasshown, inflation is falling faster than across the Eurozone.  This is largely the consequence of private debt, which first caused the catastrophic collapse in 2007-9, and is now constraining recovery, exacerbated by austerity.  This has meant prolonged weak growth in incomes, while the UK economy, for example, has performed well below its capacity, and the Eurozone is weakening fast.

Financiers, their friends in the media, most notably the Financial Times, and the economic profession, are celebrating ‘good deflation’.  Their argument is that falling prices provide room for consumers to spend more, and that deflation will therefore boost the economy.  This approach requires them to once again turn a blind eye: this time to the vast volume of private debt that continues to act as a drag on economic activity, in particular on investment and on the creation of skilled, well-paid employment.

As prices fall, the relative value of debt, and of interest rates, rises.  (Just as inflation erodes the value of debt, deflation inflatesthe value of debt.) So, for example, if generalised prices fall 2% and interest rates remain at 2%, then in this deflationary environment the real rate of interest is 4%.

The prospect of debt and interest rates rising in value, regardless of the actions of borrowers or central bankers, even while prices fall and incomes remain low, is of grave concern.  It is particularly concerning for all those productive actors in the economy that need to borrow.  This includes businesses who need to make improvements to their firms, and anyone who needs an overdraft, student loan or mortgage.  Deflation is a particularly big threat to households that have had to borrow large mortgages to afford a decent home.

In 1933, Irving Fisher concluded gloomily that:

deflation caused by the debt reacts on the debt.  Each dollar of debt still unpaid becomes a bigger dollar, and if the over-indebtedness with which we started was great enough, the liquidation of debts cannot keep up with the fall of prices which it causes.  ……Then we have the great paradox which, I submit, is the chief secret of most, if not all, great depressions: The more the debtors pay, the more they owe.  The more the economic boat tips, the more it tends to tip.  It is not tending to right itself, but is capsizing.

How often has deflation been mentioned during this General Election campaign – by any of the political parties?  Because this generation has never lived through a period of deflation, and because the finance sector has so successfully captured the imaginations of politicians, there is widespread ignorance of deflation’s impacts.

Far from being lulled into complacency, society and the political parties should be protesting loudly at the failure of the government and the Bank of England to adequately address the threat of deflation to the people of Britain, who are burdened by some of the highest levels of private debt in the world.

Murphy’s ‘there is no money’ - doing to Sturgeon what Osborne has done to Balls

In the Scottish leaders’ TV debate last night, Jim Murphy (the leader of the Labour Party in Scotland) has challenged Scottish nationalists to explain where the money will come from under the ‘full fiscal autonomy’, since the full gains of the Mansion Tax would not be available to Scotland. In effect Murphy is arguing that “there is no money” – or that the proposed Mansion Tax is the only source of income for reversing austerity.

Derek Mackay, the chairman of the SNP, responded on the Today programme this morning(at 70 minutes), where he was confronted also by points from the fiscal hawks at the Institute for Fiscal Studies. In defence of the SNP case he partly resorted to alternative sources of money (including oil revenues) to cover spending. (In fairness to Mackay, he did try to make a growth argument, but the BBC wasn’t interested).

While there is clearly a bigger picture here, the assumption behind Murphy’s assault on the SNP mirrors that of the Chancellor’s attack on Ed Balls. It is typical of flawed austerity economics and austerity politics, and is a battle that nobody can win – least of all the Scottish or British people.

The point of rejecting austerity policies is surely to recognise that cutting public spending in times of economic weakness harms both private and public employment and earnings, and economic activity generally.

If sound public infrastructure spending is expanded, then well-paid, skilled employment will be expanded.

The ‘money comes from’ that same increase in employment and economic activity, as higher labour income leads to higher tax revenues and lower benefit, tax credit and housing benefit expenditures.

It’s not rocket science.

While there may be a brief lag between any spending and these gains to the public finances, the gap is easily made up from short-term borrowing. The latter might be from capital markets, high street banks, even the Bank of England – it does not matter (though of course ‘the cheaper the better’ might be the best guide).  The borrowing can be repaid as appropriate when the gains to the public finances materialise.  Current government borrowing rates are at historic lows. And as economic activity and government revenues pick up, the debt to GDP ratio – the main international indicator – improves.

All this is the point of fiscal autonomy. This is the point of a sovereign government with its own central bank.

That is why the UK should take the lead, and in so doing could help the Eurozone to escape from the depressing, deflationary downward spiral of austerity.

That can only be achieved by a newly-elected British government that has the intellectual capacity and confidence to move beyond the sterile, flawed “there is no money” argument.

Is there no such thing as public money, only taxpayers money, as PM asserts? Was £375bn of QE raised from taxpayers?

“The state has no source of money, other than the money people earn themselves. If the state wishes to spend more it can only do so by borrowing your savings, or by taxing you more. And it’s no good thinking that someone else will pay. That someone else is you.”

“There is no such thing as public money. There is only taxpayers’ money.”

Mrs Thatcher, speech to Conservative Party Conference, October, 1983.

We know that there is no such thing as public money – there is only taxpayers’ money

David Cameron, on the campaign trail, 6 April, 2015.

Quantitative Easing: ‘new money that the Bank creates electronically’.

Bank of England website in ‘Quantitative Easing: how it works.’[ii]

“When a bank makes a loan to one of its customers it simply credits the customer’s account with a higher deposit balance. At that instant, new money is created.”

Bank of England Money in the Modern Economy: Quarterly Bulletin, Q1, January, 2014.


At the heart of the politically inept responses to the 2007-9 Great Recession is an ideologically-driven and mendacious conviction: that while society can afford to bail out a systemically broken banking system, Trident and the HS2 railway extension, it cannot afford to finance the NHS, higher education, skilled apprenticeships, an expansion of broadband and the arts.

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Eurozone QE: Better ways to boost the economy and employment

Letter co-authored by yours truly and other economists and sent by Positive Money to The Financial Times on March 26 2015. This can be viewed on the FT website here

Sir, The European Central Bank forecasts unemployment in the eurozone to remain at 10 per cent even after €1.1tn of quantitative easing.  This is hardly surprising: the evidence suggests that conventional QE is an unreliable tool for boosting GDP or employment.

Bank of England research shows that it benefits the well-off, who gain from increasing asset prices, much more than the poorest. In the eurozone, where interest rates are at rock bottom and bond yields have already turned negative, injecting even more liquidity into the markets will do little to help the real economy.

There is an alternative. Rather than being injected into the financial markets, the new money created by eurozone central banks could be used to finance government spending (such as investing in much needed infrastructure projects); alternatively each eurozone citizen could be given €175 per month, for 19 months, which they could use to pay down existing debts or spend as they please. By directly boosting spending and employment, either approach would be far more effective than the ECB’s plans for conventional QE.

The ECB will argue that this approach breaks the taboo of mixing monetary and fiscal policy. But traditional monetary policy no longer works. Failure to consider new approaches will unnecessarily prolong stagnation and high unemployment. It is time for the ECB and eurozone central banks to bypass the financial system and work with governments to inject newly created money directly into the real economy.

Victoria ChickUniversity College London

Frances CoppolaAssociate Editor, Piera

Nigel Dodd, London School of Economics

Jean Gadrey, University of Lille

David GraeberLondon School of Economics

Constantin GurdgievTrinity College Dublin

Joseph HuberMartin Luther University of Halle-Wittenberg

Steve KeenKingston University

Christian MarazziUniversity of Applied Sciences and Arts of Southern Switzerland

Bill MitchellUniversity of Newcastle

Ann PettiforPrime Economics

Helge Peukert, University of Erfurt

Lord Skidelsky, Emeritus Professor, Warwick University

Guy StandingSchool of Oriental and African Studies, University of London

Kees Van Der PijlUniversity of Sussex

Johann WalterWestfälische Hochschule, Gelsenkirchen Bocholt Recklinghausen, University of Applied Sciences

John WeeksSchool of Oriental and African Studies, University of London

Richard WernerUniversity of Southampton

Simon Wren-Lewis,University of Oxford

New Publication on Islamic Finance

Islamic Finance is a system of banking operating within a liberalized, deregulated economic framework that is entirely hostile to the values and principles of, for example stakeholder engagement and responsibility, upon which Islamic banks have been established. As a result, Islamic financial institutions find themselves unable to compete with western financial institutions that do not operate under similar ethical principles, or the prohibition against usury. Indeed usury is positively encouraged under today’s liberalized and globalized economic framework. 2 Incorporating the Rentier Sectors into a Financial Model, by Michael Hudson, University of Missouri at Kansas City & Levy Institute, USA and Dirk Bezemer, University of Groningen, Netherlands. World Economic Review Vol 1: 1-12, 2012. file:///Users/annpettifor/Dropbox/Hudson-and-Bezemer%20Rentierism2012.pdf 3 In the YouGov Cambridge University Public Trust in Banking Report, published 17 April, 2013 and found here: 8 If Islamic finance or banking is to be made to work, then its practitioners will have to help in the creation or re-creation of an alternative economic framework, within which Islamic finance could operate safely and even profitably – One which honours and safeguards stakeholder finance (with both lender and borrower sharing risk); and low or zero rates of interest as the price of borrowing funds.