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. Continue reading… ›

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.

In discussion with Erin Ade on Boom Bust for Russia Today, on the Federal Reserve and the Greek situation.

Screen Shot 2015-03-19 at 14.56.28

Watch the interview on Boom Bust here.

On the FED:

‘I don’t believe the FED has the role of global stabiliser… I believe that role ought to be played by an institution over and above the central banks but there is no such thing, so the FED is rightly focusing on its mandate and audience which is the people of the United States and its economy. We can’t blame them for that, but we can blame the politicians who are very deliberately leaving currencies and interest rates up to something called ‘the market’ instead of taking responsibility for stabilising the global economy.’

And on Greece, in response to Varoufakis’s statement that Greece should have defaulted on its debts in 2010 before European taxpayers became liable…

‘I have thought all along that Greece should never have been in the eurozone. Secondly, banks should not have thrown money at the Greek private sector – recklessly – which is what they did on the assumption that Greece’s debts would always be backed up by the German taxpayers… The European Commission should not have allowed that to happen and should not have turned a blind eye to that kind of crazy lending. Thirdly, Greece should really accept that the Euro is not sustainable.’

Greece did not default because the IMF exists to defend the interests of international creditors!

Murnaghan Budget Debate

Taken from the Murnaghan Budget Debate with me; Luke Johnson, businessman; John Longworth, British Chambers of Commerce 15.03.15 courtesy of MURNAGHAN, SKY NEWS

DERMOT MURNAGHAN: More on next week’s budget now and what it could mean for business in the United Kingdom.  I am joined by the Director General of the British Chambers of Commerce, John Longworth; by the economist and author Ann Pettifor and the businessman Luke Johnson who is Chairman of Risk Capital Partners which owns a number of high street restaurant and café chains.  A very good morning to you all and as I was discussing there with the former Chancellor, Ken Clarke, Luke Johnson it is a pre-election budget, can the Chancellor dare make this a budget for business and will there be any votes in it if he does?

LUKE JOHNSON: Well I think what he needs to demonstrate and remind people is that this government has generally speaking done a damned good job over the last five years.  They inherited an economy in a shambles and we are now a rapidly growing economy with falling unemployment, good investment, rising confidence and I think actually from the point of view of business, which is how we create jobs in the private sector, it’s been a good performance.

DM: Would you pick out a measure or couple of measures, specific measures you would like to see?

LUKE JOHNSON: Well I think the biggest single measure is that he has maintained low interest rates and a stable currency which has meant that mortgages haven’t become unaffordable and business that can borrow has been able to borrow at competitive rates and I think that set a general tone which means that we have been able to deliver growth and create these jobs.

DM: So steady as she goes really.  Ann Pettifor, what Luke Johnson is  saying there is that the general economic climate is a pretty fair wind for business at the moment.

ANN PETTIFOR: Well I just have to say that Luke is wrong on several things.  First of all the Chancellor choked off a recovery that was already in place in 2010 and austerity really has not helped, it hasn’t helped productivity, it hasn’t helped incomes, people’s incomes have been falling in real terms over seven years and this in turn doesn’t help the rest of the economy and as for investment, Luke, it’s been pretty, pretty bad and the reason for that is partly because government investment  has collapsed but also because the banks are not lending.  There is a real problem and I think one of the big things he has to do in this budget is to do more than give the banks the funding.  The Funding for Lending scheme has become the Funding for Not Lending scheme and he has got to do more in terms of making the banks shift lending from property where there is a bubble, into real investment for real businesses for real firms.

DM: Well let’s talk to a man who represents a lot of businesses.  So we’ve got a clear dichotomy here, is it generally steady as she goes or is it a lot of work to do?

JOHN LONGWORTH: Well we have got good growth predictions.  Our forecast that we published last week showed good growth over the next three years, 2.7, 2.6% growth.  It’s based on consumption, that’s not good, we need more business investment, we need to shift the economy more towards exports, it needs to be a long-term sustainable growth but it’s growth nonetheless.  If I were the Chancellor I would probably be looking to give something away immediately that would help voters and I would be looking to promise quite a lot of stuff for after the next election, given he’s got …

DM: That’s the facts but we are asking what for business?

JOHN LONGWORTH: But on business we’ve been very specific in this particular budget proposal, we said that we want the investment allowances to continue at the very high level they are at the moment rather than being cut back because this allows business to plan for investment in the medium to long term and that would be something that is very affordable, something that businesses can focus on.  In the Autumn Statement of course we also asked for the Chancellor to increase the amount of compensation people receive for infrastructure disruption which will enable infrastructure projects to go ahead because people will be less inclined to say no if they are getting 150% of the value of their property for example.

DM: Okay, Ann?

ANN PETTIFOR: The real problem for businesses I think is deflation, prices are falling.  Prices of products they are pushing out the door are falling and that means that profits will fall.  I don’t think that the Chancellor, or indeed most economic commentators, have put enough focus on the threat of deflation because Britain is a highly indebted country.  Our personal and corporate debt is very high and is, the OBR predict it to be even higher in a few years’ time.  The Chancellor I think and the Bank of England have been astonishingly complacent about something that would really affect small businesses, the way in which their prices are falling.   Now input prices are falling, oil prices are falling but that is not the real reason why prices are falling across the board, the real reason prices are falling across the board is because of a lack of demand, because of austerity essentially.

DM: Which has affected consumers?

ANN PETTIFOR: There is both a lack of consumer demand and investment demand and the Chancellor has to address demand.

DM: I have got to bring Luke Johnson back in this because there are several points that Ann Pettifor has refuted and you can re-refute them, if that is a word, on investment.  So deflation, okay, it in particular it is evidenced in the eurozone but is there much a government can do about that?

LUKE JOHNSON: I don’t think so.  If you look at job creation, if you look at new business creation which is at record levels, if you look at the fact that 85% of the population work in the private sector and are not that affected by government investment, I think it is frankly political the idea that we have really suffered austerity.  You can’t have it both ways, if we are very highly indebted then to run prudent budgets is surely correct isn’t it?

ANN PETTIFOR: Well it isn’t Luke because what’s happened is we had a big financial crisis and the private sector contracted massively as a result of that through no fault of their own, investment collapsed and this is because of the banking crisis and in that circumstance the government has to intervene.  We have seen the fall in GDP and growth is a function of the fall in government spending and government investment.  Normally the government shouldn’t do this but …

LUKE JOHNSON: I don’t agree, I don’t agree.

ANN PETTIFOR: … the point is that the government’s investment stimulates the private sector, think about …

LUKE JOHNSON: So what happened in France?  Unemployment is almost twice ours, they’ve had no growth in recent years and that is because they have continued to spend more than they can afford, they have an unsustainable public sector and what this government is actually done is say we need a bigger and more healthy private sector, we need to attract investment and we need to …

DM: All right, hold on, let me bring in John Longworth because there is a philosophical divide here about how much, what the government can do about providing not just a stable business environment but by encouraging growth and Ann Pettifor was very clear that the government could spend and invest a lot more and that would stimulate the economy.

JOHN LONGWORTH: Well the speed at which the government invests or spends money of course is a matter of debate, the fact of the matter is that we do need to get the deficit down because we have to have a cushion against potential world shocks that come forward, you never know what’s going to happen next and at the moment we are in a very fragile situation with the deficit being as high as it is.  There is no question in my mind that in the last four or five years the Chancellor has actually played a blinder.  What he’s done is persuade the world markets that he has applied austerity which has given confidence in the UK …

DM: And then not actually applied it.

JOHN LONGWORTH: Exactly, which is a good thing in these circumstances.

DM: So in effect pulling the wool over the eyes of the …

JOHN LONGWORTH: Then of course is what happens next which is the really important thing because in the next parliament whoever comes into government is going to have to cut the deficit much more strongly.

DM: Okay, I want to ask you, don’t sit on the fence for me now, we are looking beyond the budget, beyond the election, you fear a Miliband led government don’t you, especially if they are in coalition with the SNP.

JOHN LONGWORTH: We never comment on parties or people, we only comment on policies and actions so we’ll be looking at all the party’s policies over the next few weeks and commenting on whether we think they are good for business.  There is no question that whoever comes into office is going to have to cut the deficit, it is all a question of at what speed and how they do it, whether it’s by tax or cuts.

DM: So do you accept that, whoever gets into power does have to continue dealing with both the deficit and the overall debt?

ANN PETTIFOR: You know, I think this obsession with the deficit is bizarre actually because it’s really not the issue but the other really interesting thing is that the deficit is at about 5% which is higher than it is allowed to be across the eurozone which is why we’re doing better slightly.  The Chancellor cut very substantially until 2012 when he realised the error of his ways and he started to increase spending and then the recovery began.  He did that and then he boosted – the Bank of England has lent £55 billion to the banks in order to stimulate basically investment and lending for small businesses, that’s all gone into property and we’ve got a massive property boom.  Call that a blinder?  I would call that a blinder when people see property …

DM: That analysis is persuasive isn’t it, Luke Johnson, in terms of what we’re doing again, are we beginning to repeat the mistakes of past, consumer led, money going into housing, inflated prices certainly in the metropolitan area?

LUKE JOHNSON: I don’t think we need to be too London centric, I think it’s an exaggeration to say it’s all gone into property.  There is no doubt that there is…

ANN PETTIFOR: Excuse me, banks have stopped lending to businesses, they are only lending to property.

LUKE JOHNSON: If you let me speak then at least I can respond to your remarks.  I do believe that there is investment going into business, these things don’t happen quickly.  As we’ve heard I think actually to maintain low interest rates and to produce the growth we’ve had or to help produce the growth we’ve had or to help produce the growth, which other countries have achieved that?  To cut unemployment and thereby save money, that’s a great achievement and I think that to think that what we need to do is far more government spending is naïve at best.

DM: When you talk, you’ve said it twice now about low interest rates, hasn’t the Chancellor just got lucky with the overall prevailing global environment and now we’re seeing falling commodity prices, in particular oil and the inflationary outlook, as Ann Pettifor was saying, it’s not inflationary it’s deflationary so interest rates can stay low.

LUKE JOHNSON:  Yes, well sure he’s been lucky and I think it’s useful to have people in charge who are lucky.

ANN PETTIFOR: But talk to the people whose incomes have been falling in real terms over this period, they don’t feel this has been a blinder of a Chancellor basically, they are feeling really hard done by and as I think John said, think of the young people, oh no it was Ken Clarke who was saying that, think of all the young people who have really lost out and are going to be pretty bitter about it.  Pensioners have done rather well.

DM: Just one last word from you John Longworth, we’re nearly out of time, your feelings on what Ann’s just said?

JOHN LONGWORTH: Well there are big challenges, we have still got over half a million young people out of work under 24 and it is very important that we actually  give them skills to make them employable so the education system needs to be reformed for example.  There is an issue about businesses getting access to finance, we still have a substantial number of businesses in our network saying they can’t grow to be the mid-sized businesses of the future, the home grown businesses of the future, because they can’t get access to finance so we have still got a big issue to solve there but we’re making progress.

DM: Okay, well listen, thank you all for your thoughts, all will be revealed of course on Wednesday and I’m sure a lot more of you will be tramping in and out of the studios during the course of Wednesday.  Luke Johnson, thank you very much indeed, John Longworth and Ann Pettifor, very good to see you.