Ann Pettifor: 28th February 2009

Most of us alive today have not lived through a period of debt-deflation. On the contrary the global economy has been dominated over these last three decades by creditors and creditor interests. These have made inflation the No. 1 Threat to civilisation, and so we are overly concerned about inflation, and relatively ignorant about deflation.

The reason that creditors or moneylenders or bankers hate inflation is that it erodes the value of their assets – in particular loans. It erodes the value of debt. So that a loan of $100 today is worth only say, $80 when it is finally repaid. Creditors hate that.

On the other hand deflation inflates the value of debt. It increases the value of debt. A loan of $100 today may be worth $120 when it is repaid. Creditors love deflation as it increases the value of their assets, in particular loans.

This is a very important distinction. Particularly important for borrowers.

Irving Fisher clearly identified the phenomenon of ‘debt-deflation’. A famous economist, he published his seminal work in 1933: “The Debt-Deflation Theory of Great Depressions,”

In this he argued that if we assumed a state of excessive indebtedness – such as the state we are in – then we must assume liquidation of that debt, through the alarm of either debtors or creditors or both. This would lead to a chain of consequences. In order to liquidate their debts (think of a homeowner about to plunge into negative equity) the borrower tries to sell his/her asset.  Given their circumstances, they are ‘distressed sellers’ – in other words, they will take any sum likely to cover their debts, and allow them to escape from under their creditors.

As loans are paid off there is a contraction of deposits in banks – which slows down the velocity of the circulation of money.  This contraction of deposits leads to a fall in prices.

A fall in prices leads to a fall in the net worth of a business, and in profits, which in turn leads to bankruptcies. Businesses that are making a loss, reduce their output, their trade and their employment of labour.

Losses, bankruptcies and unemployment lead to pessimism and a loss of confidence.

This in turn leads to hoarding and cutting back, and even more of a ‘credit crunch’

These various changes cause complicated changes to real rates of interest.  Nominal interest rates might fall, but real rates might rise.

This is because interest rates cannot fall below zero (otherwise the bank is paying you take away the money!).  However, the prices of goods (think of tomatoes during a glut and trainers from China) can fall below the cost of producing them. So while prices can fall below zero, because interest rates can’t, the real rate of interest rises, as prices fall.

Scary stuff. Which is why it is so important to get interest rates – all rates, safe and risky, short-term and long-term – down to zero effectively in a deflationary environment – such as the one we are living through now.

And scary too, because once trapped inside a debt-deflationary spiral, it is very hard for an economy to emerge from it….confidence has to be restored; consumers have to be persuaded to spend and not hoard their precious savings; interest rates have to be very low; debts have to be written off.  Getting all this done is really tough in the midst of a Depression – which is why no government should allow their economy to spin into a debt-deflationary spiral…..

Ann Pettifor: 20th February 2009

This is an image of the billionaire Allen Stanford posing with members of the English and West Indian Cricket boards in London in June, 2008. The plastic box is stashed with $20 million and was used – in the most obscene public display of wealth – to lure the gullible and naive cricket establishment into his web of power.

I argued at length in my 2006 book, The coming first world debt crisis,  that the Finance sector – call it the finance oligopoly – corrupted all aspects of society throughout the period celebrated as ‘globalisation’.  Their tentacles embraced and corrupted good men and women in politics, sport, industry, the arts, public broadcasting – and the banking sector itself.  Was religion immune? Some, but not all religions I suspect.

Today the exposure of the political system and the international game of cricket to this corruption is laid bare. Allen Stanford it turns out is accused by the SEC of defrauding investors – ‘a massive fraud’. But he is guilty of worse: corrupting the sport of cricket and, it is asserted politicians too.

Those in the driving seat of the globalisation juggernaut – economists, politicians, central bankers, finance ministers, financiers, hedge fund managers, international investment bankers, gamblers, speculators – believed that they could continue to corrupt society, enrich the rich, and extract additional assets from the earth and from ordinary people – forever.

They lived in a world in which gambling, speculating, making money from money was like baking an enormous, yeasty cake which would rise exponentially and inexorably. Now the cake has flopped.  Witness the collapse of Donald Trump’s casino gambling empire. And the Dow Jones U.S. Gambling Index has fallen some 83 percent since its lifetime high reached in October 2007.

The rich are brought down, if not humbled.  Far worse is the devastating impact on all of our culture and institutions. The sport of cricket is tainted, politics discredited and held in contempt.  Society’s  disillusionment, the cynicism of the young towards these institutions,  will most likely weaken them. That will be disastrous. We need healthy, democratic political institutions with which to restore the values and practice of decency to our society.

In the words of Roosevelt: “The money changers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truths. The measure of the restoration lies in the extent to which we apply social values more noble than mere monetary profit.” (Inaugural speech, 1933.)

Ann Pettifor: 15th February 2009

The G7 group of finance ministers’ statement today is full of the usual hot air, and includes their new finding. That the financial crisis has “highlighted fundamental weaknesses in the international financial system.”  Over the years many have tried to alert political leaders to these fundamental weaknesses. To no avail.

Perhaps even more naive is their protest against protectionism.  My viewpoint on protectionism is taken straight from Karl Polanyi’s great work: The Great Transformation.

Namely that protectionism is the natural reaction of the people to the imposition by the finance sector of a ’self-regulating market society’.  In other words a society that hollows out democratic decision-making and relies entirely on the market to determine whether we have food, jobs, wages, care for the elderly and the sick or security from threats like global warming.   When the ‘market society’ fails to protect the interests of the people – then the people naturally resort to protectionism or worse.

For those guardians of the nation’s finances to blame the people for trying to protect their jobs and their security – when the guardians have most blatantly failed in their duty to do so – shows just how out of touch they are.

Ann Pettifor: 15th February 2009

A couple of weeks ago, I warned on this blog of the impending crisis in Ireland.  (See below). Now the international capital markets are turning the screw on that little sceptred isle. The insurance on Ireland’s debt has rocketed in recent days, implying that the markets expect Ireland to default on her sovereign debt.  There would be no sharper, or more rapid fall from grace for a country that until very recently was the toast of the international capital markets and the European Union.

For an excellent commentary on this, please can I refer you to Simon Johnson’s blog. He is an ex-chief economist at the IMF – and therefore not someone I would naturally warm to. But he turns out to be a soul-mate.  Here is his blog. Look out for the interview with Bill Moyers.

Ann Pettifor: 14th February 2009

John Maynard Keynes must be a mysterious figure to today’s students of economics. They must hear much talk of him, and wonder who on earth he could be?

I drifted into such thoughts on a visit to Cambridge this week to hear a friend, Geoff Tily give a seminar on Keynes – to a very small group -  at Robinson College. There I met a University of Cambridge Economics lecturer who told me that the University does not teach Keynesian economics. The reason for this is that students are not examined on Keynesian economics.

And so students remain mystified.  As do I.

Ann Pettifor: 4th February 2009

Everyone should just calm down and get a grip. The problem is not the fiscal stimulus. It is not pork barrel politics. It is not the banks. Nor is it those parasites, the bankers. It’s not even the debt.

It’s the cost of debt. And it’s just like Japan, 1990-2009.

Read more on the Huffington Post

Ann Pettifor: 2nd February, 2009

I am grateful to Dr. Krassimir Petrov of the Center for Research on Globalisation for this daunting chart.  It shows how much debt sludge has to be cleared out of the US financial system. Much, much more than in the 1930s. Contrary to orthodox economic forecasting, this portends a Greater and Longer Depression – deeper and more prolonged than that of the 1930s.

Purging or detoxing debt from an economy is a strained, long-winded and ugly process.  Private creditors exacerbate the crisis by imposing a tough diet on the heavily borrowed: they restrict credit; compound interest on defaulted debt; and impose higher real market interest rates.  Today, while Fed rates are low, private market rates for non-investment-grade corporates are in the region of 16%.

This is as life-threatening a cure as the medieval concoction of gall from a castrated boar, briony, opium, henbane and hemlock juice

Yet regulators and politicians turn a blind eye to this financial sector quackery, cause of high mortality and unemployment rates amongst otherwise healthy companies – preferring instead to  bail out the quacks.

So the US faces a larger challenge.  How will it cleanse itself of the money-changers that since the 1970s have acted as parasites on the healthy US economy?  Those that burdened thriving companies with debt, and then siphoned off a large share of the profits in the form of interest payments?  Or used direct debits to drain excessive interest payments from the bank accounts of hard-working Americans?  Will they be purged from the system?  Or will American politicians and regulators continue to treat them as delicate “intestinal flora”  – vital to the health of the economy?

In the run-up to the stock market bust of 1929, as in the run-up to the ‘debtonation’ of 2007 – the unregulated private finance sector created and sold credit as if there was no tomorrow. Regulators – official and political -  turned a blind eye.  It was a lucrative business as credit-creation – unlike software, digital or clean technology development – was, and is, largely effortless.  For long periods money-lenders basked in the delusion that it was risk-less too.

Their ‘easy but dear money’ financed and fuelled the stock market boom of the 1920s.  At its peak, credit (or debt) rose to 250% of GDP.  In other words, Americans borrowed two and half times their annual income – and used a great deal of it to gamble on the stock exchange.

“Using the same metric today” writes Professor Petrov,  “the debt level in the U.S. financial system surpassed 350% in 2008. ”

The implications are clear. It took years – from 1929 until the 1940s – and a World War, before the US cleansed itself of the 1930s debt sludge.   Japan is still trying to purge itself of debts built up in the 1980s.  18 years after the Japanese ‘debtonation’ of 1990,  the economy is still  the weakest of all the OECD countries. Eighteen years after the property bubble burst, Japanese house prices are still falling!

Will it take 12-18 years for the US economy to recover, after purging debts equivalent to 350% of GDP?  On this reckoning: more than likely.