From the March 2016 Preface to The Economic Consequences of Mr Osborne
By Ann Pettifor, Professor Victoria Chick and Geoff Tily
… when sustained, fiscal consolidation increases rather than reduces the public debt ratio and is in general associated with adverse macroeconomic conditions. ‘Economic Consequences of Mr Osborne’, June 2010
Having missed the genuine threat of the private debt bubble, the economics profession misread disastrously the increase in public debt. In their 2009 This Time is Different, Kenneth Rogoff and Carmen Reinhart discreetly warned:
However, the surge in government debt following a crisis is an important factor to weigh when considering how far governments should be willing to go to offset the adverse consequences of the crisis on economic activity. (290)
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The following is a letter by Professor John Weeks and Ann Pettifor, published today, 15th March 2016 in The Guardian.
Andrew Harrop’s article on John McDonnell’s public borrowing for investment points out its improvement on the chancellor’s deficit obsession (John McDonnell’s new fiscal rule is strong, but it’s no election winner, theguardian.com, 11 March). Of particular concern is George Osborne’s determination to “balance the books” by cutting current spending on the disabled. To McDonnell’s widely accepted principle of borrowing to invest so as to expand the nation’s income at a time of private sector weakness, we add a complementary guideline for macroeconomic stability: adjust current expenditure for demand management. If as is now the case, interest rates are low, exports contract and demand remains weak, responsibility falls on the public budget to prevent recession by expanding income. Once started, investment expenditures are relatively inflexible to adjust, making current (day-to-day) expenditure the rational choice for demand expansion. Come that happy day when the economy starts to overheat, current spend should be reduced.
As Keynes argued: the boom, not the slump, is the time for austerity. It is that simple.
Ann Pettifor Prime Economics
John Weeks SOAS, University of London
“For the proposition that supply creates its own demand, I shall
substitute the proposition that expenditure creates its own income”
JM Keynes Collected Writings, Volume XXIX, p. 81
G20 Finance Ministers met in Huangzhou, China recently and refused appeals from both the IMF and the OECD for “urgent collective policy action” that focussed “fiscal policies on investment-led spending”. Instead the world’s finance ministers concluded that “it’s every country for themselves”.
Keynes’s simple proposition is compelling: that expenditure will expand national (and international) income (including tax income) and thereby reduce the deficit. But it is a proposition that is anathema to OECD politicians, their friends in the finance sector and their advisers. Instead they adhere stubbornly to the antiquated classical economics embodied in Say’s Law.
Rather than relying on expenditure or investment, the British 2010-2015 Coalition government and then the 2015 Conservative government placed excessive reliance on monetary policy to revive aggregate demand for goods and services. The consequences were predictable. Loose monetary policy enriched those that owned assets – stocks and shares, bonds or property. The evidence of this grotesque enrichment is clearest in London. According to the FT (20 Feb 2016) the owners of South Kensington residential properties have seen “substantial capital appreciation – 45 % over the past five years and a remarkable 155% since 2006.” And as the Bank of England concluded back in 2012 in its paper on the Distributional Effects of Asset Purchases” (i.e. QE)
“the benefits from these wealth effects will accrue to those households holding most financial assets.”
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Christian Bale as perspicacious hedge-fund manager Michael Barry in The Big Short (2015)
First published (as a slightly edited version of the original, below) in the BFI Sight and Sound Magazine, 28 February 2016.
As this goes to press, global capital markets appear to be stabilizing after another period of intense, and scary stock market volatility. This set the context for the arrival in Britain of Adam McKay’s The Big Short – a film about the American sub-prime mortgage meltdown, based on the book by Michael Lewis.
It could be argued that the movie is late, and even outdated. But it is not in fact. It ends with the systemic failure of the system in 2007-9 – a crisis that has not gone away. On the contrary, it has rolled around from the US sub-prime housing market and Wall St. and on to the Eurozone, where Greece, Cyprus and Portugal were at the eye of the storm. Today financial volatility is centered on ‘emerging’ markets and in particular, China, and has unnerved financial markets around the globe.
That the crisis is ongoing should come as no surprise. That a movie about fraudulent traders and a far-seeing hedge fund manager should still seem relevant is as it should be, because the economic model that encouraged reckless and fraudulent practices in the market of dodgy mortgages is still with us. Indeed the model remains wholly intact. Very little has been done to ‘reform’ or transform the flawed design of an economic architecture that caused destruction of value on a global scale, bankrupted thousands of companies, led to millions of job losses and lowered incomes everywhere. Indeed the model, while still fragile, is more prevalent than it was before. China for example, is the latest adopter of the western model. In January 2016 Chinese banks lent a record 2.51 trillion yuan ($385.40 billion) of new loans, surpassing expectations. Unsurprisingly, the country faces rising levels of unpayable private debts. And worldwide politicians are paying a price as popular discontent plays havoc with established parties.
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On Thursday 21st January, Ann Pettifor appeared on Al Jazeera, along with Vicky Pryce, chief economic adviser at The Centre for Economic and Business Research, and Anastasia Nesvetailova, director of the City Political Economy Research Centre at City University in London.
Presenter Nick Clark asked them to discuss why the global economic system lurches from one financial crisis to another, and whether another crisis is imminent. Watch the full discussion here.
Figure 1 source: @SoberLook
@SoberLook yesterday shared this chart of collapsing UK inflation expectations from Barclays Research UK, heightening fears of a deflationary spiral. As noted in an earlier blog, the year 2015 began with the Chancellor, George Osborne ‘welcoming’ the news that inflation had fallen in December to 0.5% – more than 1% below the official target. The FT declared that “this is almost certainly “good deflation”. Jittery stock markets are now skeptical of the Chancellor’s earlier complacency as UK prices continued to fall at the end of 2015, as the ONS chart below shows. This is worrying for firms, SMEs and households, as both debt and debt servicing costs rise in real terms as general falls in the prices of goods and services occur, and as average real wages remain almost 8% below pre-crisis level. (This is calculated from ONS data comparing Q1 2008 with Q3 2015).
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Chinese workers in Guangzhou clearing the sludge. Photo by Jeremy Smith (PRIME)
The year 2015 began with the Chancellor, George Osborne ‘welcoming’ the news that inflation had fallen in December 2014 to 0.5% – more than 1% below the official target. The FT declared that “this is almost certainly ‘good deflation’“.
In his subsequent letter to the Chancellor the governor of the Bank of England attributed the fall to “unusually low contributions from movements in energy, food and other goods prices.” In other words he described the symptoms – falling prices – and neglected to analyse or explain the cause of such falls. Understanding the cause of falling energy, food and goods prices is fundamental to effective policy-making and to decision-making by investors. So by simply offering descriptions of events, the Bank of England – guardian of the nation’s finances – does society no favours.
In our view the cause of deflationary pressures lies with the ongoing Global Financial Crisis (GFC), which has not as yet been resolved. On the contrary the economic model that fostered the crisis remains intact, with only some tinkering at the margins of the banking system. As a result the GFC continues, rolling around from the core (the Anglo-American economies) to first the Eurozone, and now hitting emerging markets, including China. The GFC, as we now know, was caused by the bursting of excessive and unpayable private debt bubbles: bubbles that were punctured from 2006 onwards by high real rates of interest. (Think of high rates as daggers pointed at, for example, a bubble of sub-prime debt).
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The Financial Times reminds us today that 2015 has been a vintage year for the finance sector and lists twelve of the “choicest gifts” bestowed on the sector, including “the unexpected Conservative party election win… a win for the numerous hedge funds and financiers who donated to the campaign in the hope of pro-business policies”. Chancellor Osborne gifted the sector by calling “time on the era of heavy fines following financial scandals that had blighted the City’s reputation, such as the Libor and foreign-exchange rigging scandals”. Another “choice gift” was George Osborne’s decision to cut the bank levy.
Before euphoria engulfs the City, it might do to remind the sector that while Conservative governments may periodically enrich the already-rich by inflating the value of their assets, and bestow upon them the choicest gift of tax breaks – they have also regularly adopted policies “with terminal consequences” for British banks.
I’m reading Duncan Needham’s excellent book: UK Monetary Policy from Devaluation to Thatcher, 1967 – 1982 (Palgrave Studies in the History of Finance). Its difficult not to be struck by the parallels between the 1970 Conservative government of Edward Heath and his Chancellor, Anthony Barber and today’s Cameron government.
The book is about how flawed monetarist and ‘free’ market economic dogma – as dictated by both the IMF, Tim Congdon and others – influenced changes made to Credit rationing by the Bank of England, and led to the introduction of Competition and Credit Control (CCC). The result was that in 1971 rationing credit creation by Bank of England control was replaced by rationing by cost – in other words by higher expected market rates of interest.
Unfortunately for the Bank of England’s monetary theorists, neither the then Chancellor Anthony Barber nor his Prime Minister, Ted Heath, fully understood the implications of targeting the money supply and rationing credit by cost. Unfortunately too, the Conservative manifesto for the 1970 election had called for an ‘end to the tax nonsense…[that] disallowed the interest on many loans as a deduction from income for tax purposes’. John Nott (remember him?) insisted that tax relief for interest was a manifesto pledge and was therefore ‘inescapable’. So it was included in the 1972 Budget.
Needham: “This could hardly have come at a worse time for monetary policy. Just six months after predicating monetary control on the interest rate weapon, that weapon was blunted by making interest payments deductible against tax. For a basic rate taxpayer, the cost of servicing a loan was immediately reduced by 30%. For the highest rate taxpayers it was reduced by 90%. (My emphasis). This measure alone meant it would take much higher interest rates to control bank lending to the private-sector and therefore, M3. It also meant that, far from generating the investment boom the PM was looking for, the dash for growth would produce an asset and property boom that would crash in 1973 with terminal consequences for a number of British banks.”
British bankers cannot say they have not been warned.
From: South African history online. http://www.sahistory.org.za/archive/rock-which-future-will-be-built
I am South African born. My father was an Afrikaner Theodorus Potgieter, and my mother, Olive Grace Smart, of English descent. As a child I was often witness to arguments between my more progressive father and my grandfather, Edward Nelson Smart (b.Hunt – an ‘illegitimate’ child) as the latter was an English nationalist and royalist. My father, unemployed after playing a heroic role in the Second World War as a captain in the RAF, moved his family to a small town, Odendaalsrus, in the ‘outback’ of South Africa – the Orange Free State, where gold had recently been discovered.
All through my childhood in these backwoods we referred to African male adults encountered at for example petrol stations, as “boys”. Africans were widely known as “kaffirs”. So I have extensive experience of the application of what the Financial Times bewails as “incorrect speech”. While I have no doubt that such language is still in use in South Africa, it is now no longer acceptable to use such speech in polite company. Indeed it has been “banned” – thanks to the struggle and sacrifices made by progressive, black-led liberation movements in Southern Africa. I have no doubt that such terms are even “banned” in right-wing publications such as the Daily Telegraph and the Financial Times.
The idea that a British so-called Liberal, Nick Clegg should argue in the Financial Times “this trend of banning people whose views you don’t like is getting seriously out of hand” in relation to Cecil John Rhodes is but a reflection of how reactionary British politics has become.
Rhodes was not only a racist, but a white supremacist. As a British imperialist he can correctly be compared to members of the Ku Klux Klan. Like the Ku Klux Klan he advocated white supremacy, white nationalism and racism, as the following well-known excerpt from his writings testifies:
“I contend that we are the finest race in the world and that the more of the world we inhabit the better it is for the human race. Just fancy those parts that are at present inhabited by the most despicable specimens of human beings what an alteration there would be if they were brought under Anglo-Saxon influence, look again at the extra employment a new country added to our dominions gives.”
Cecil John Rhodes regarded black people as “despicable specimens of human beings.” His role in setting black workers “apart” in “compounds” from white diamond diggers in Kimberley marks him out as one of the first architects of “apartheid”. He upheld the abhorrent idea that black people were natural thieves that had to be imprisoned to prevent them obtaining diamonds. By contrast, white imperialists, guilty of thieving these valuable African assets by the use of force, were of the “finest race in the world”. Afrikaner nationalists were to learn a great deal from their imperialist overlords, as they built on the racist foundations laid at Rhodes’s Kimberley diamond mine.
The profits made from apartheid enabled Rhodes to dictate the legacy made concrete at Oriel College. By raising a statue to him the Oxford college was not just celebrating the donation of his wealth, but also his role in entrenching apartheid. If Harvard’s establishment had erected a statue in the grounds of the University to a wealthy donor member of the Ku Klux Klan one can only imagine the furore – the stink – that would have caused.
So the Oxford students are right. They must be supported. Rhodes must fall from the elevated status he tried vainly to guarantee for himself, and wrongly accorded today by the British political and media establishment.
A version of this letter was published in the Financial Times today.
Larry Summers is right to point out how few tools central bankers have to “delay and ultimately contain the next recession”. (FT, 6 December, 2015). We share his pessimism. However his analysis of the so-called “neutral rate of interest” being lower in the future than in the past” is based on the flawed notion of a “growing relative abundance of savings relative to investment”.
As Keynes explained and understood, in an economy based on credit, investment is not constrained by savings (and vice versa). Many of those who lay claim to his theories still do not accept this basic principle of a credit-based economy – applied in the UK since the founding of the Bank of England in 1694.
This flawed analysis leads Summers to misunderstand the direction of interest rates for those active in the real economy – rates often distinctly higher than prevailing central bank policy rates.
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