The austerity brigade is rattled. Young Daniel Knowles over at the Daily Telegraph is so worried, he has had to rise to the defence of the Treasury and Office for Budget Responsibility – and then resorts to proposing Greece’s economic strategy for the UK. Why? Because orthodox economic ideology has been challenged by none other than Daniel’s ‘hero’ that notorious womaniser, President Bill Clinton.
Bill gets it. On the deficit that is. Thanks to Left Foot Forward and Mehdi Hasan we have all read Clinton’s speech:
“(the) UK’s finding this out now. They adopted this big austerity budget. And there’s a good chance that economic activity will go down so much that tax revenues will be reduced even more than spending is cut and their deficit will increase.”
Daniel Knowles challenges his hero, on these grounds:
- “The government cannot spend so much that net revenues actually increase. By Clinton’s logic we should increase spending until our deficit goes away. ”
- “The Office of Budget Responsibility..using a Keynesian model, estimates that the fiscal multiplier is about .35”……that means that…overall the deficit is will be smaller than it would have been without cuts….. (Note: Knowles Update: I actually made a mistake with that statistic – 0.35 is the estimate for the multiplier for VAT. Estimates of the fiscal multiplier overall, including those of the OBR, IMF and others, are closer to 0.)
- Greece: spending cuts have reduced the deficit from 15.4% of GDP in 2009 to 9.5% now.
The first two points are rightly, morphed together in Knowles’s argument. The first is to do with the impact of government spending. In a slump – which we are living through now – it is vital for the government to spend to fill the investment vacuum created by an over-indebted and extremely nervous private sector, desperately trying to de-leverage its debt. Right now the UK private sector is busily hoarding cash, because they are – rightly – worried about their levels of debt; and because they fear – rightly – that if they do invest, customers (both private and corporate) will not walk through the door – because customers too, are heavily indebted and worried about the threat of unemployment and falling house prices.
So given these circumstances of widespread fear and paralysis in the economy – what the ONS calls ‘flat-lining’ – say the government invests £1 billion in libraries. What would happen next?
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Unemployment poster ‘jobless men keep going, we can’t take care of our own’, 1931.
We write to encourage you – to urge you on in your resistance.
In your defiance, you understand Greece is slave to the interests of private wealth.
You must understand too that it is private wealth that needs Greece. Greece does not need private wealth.
As is obvious to you – if not to EU finance ministers – Greek and other EU taxpayers are asked to shore up the immense wealth and reckless lending of private French, German, British and American banks.
Without your taxes, your sacrifices, the privatisation of your government’s assets, these bankers once again face Armageddon – as they did in autumn of 2008.
Just as then, so now they have rushed behind the ‘skirts’ of their defenders at the IMF and the EU. On their behalf, these unelected officials and some elected politicians demand that Greek and EU taxpayers shield private sector risk-takers from the consequences of their risks. The very antipathy of market principles.
In the process, the European Union is torn apart. Politicians, backed by officials, now defy the founding goals of the Community and, in the interests of private wealth, set the peoples of Europe against each other.
On 20 June, 2011 the acting Head of the IMF called for “immediate and far-reaching structural reforms, privatization, and the opening of markets to foreign ownership and competition.”
Which proves our point: private wealth needs Greece. Greece does not need private wealth.
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Irish Finance Minister Noonan and Luxembourg Treasury Minister Frieden attend an EU finance ministers meeting in Brussels. Image source: www.reuters.com
I find it hard to write about the crisis in Greece….because the tragedy unfolding there is so reminiscent of the tragedies that unfolded in Africa, Latin America and South East Asia in the 80s and 90s – and I was very close to those. Seeing the same economic mismanagement replicated in well-armed Europe is scary. Watching as tensions rise between the peoples of Europe…given our bloody history….is frightening. So I have been silenced by rage.
But my outrage boiled over today, because of what the FT wrongly calls a ‘subtle’ change unveiled by EU finance ministers to the terms of the massive Eurozone bailout fund – a fund backed by European taxpayers. This is how the FT explains it:
Any bonds issued in future by the eurozone’s new €500bn rescue fund on behalf of Ireland, Greece or Portugal will not enjoy “preferred creditor status” – an alteration to the fund intended to help those nations return more swiftly to private capital markets.
For those who do not dabble much in sovereign debt, let me explain. Common to the whole of the international financial architecture/system for sovereign lending, there is one principle that overrides all others. That the IMF/World Bank are ‘preferred creditors’. Just as when a company goes bankrupt, the supplier that sold it widgets, is ranked lower than the bank that provided the overdraft – so in international ‘law’ – taxpayer-backed lending from the IMF and World Bank is ‘preferred’ when it comes to repayment – over all private commercial lending. And it is preferred because it is public money.
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(Photo: REUTERS / Yiorgos Karahalis )
A Greek riot policeman stands in front of graffiti written on the wall of a bank during violent demonstrations over austerity measures in Athens, May 5, 2010. Greece faced a day of violent protests and a nationwide strike by civil servants outraged by the announcement of draconian austeristy measures.
Dear readers….Recovering from ‘flu and a trip down to Hay on Wye…Thought you might be interested in this piece I have written for Prime.
“We should note recent developments in political economy, that – while understated – are, we hope, of significance. Last week, the OECD published their latest World Economic Outlook, which features chapters on each developed economy as well as an assessment of the world economy as a whole.
The report is schizophrenic. It clumsily offers an outlook of excessive optimism; makes a selective assessment of ‘risks’; but continues adherence to an economic policy doctrine that is clearly making OECD economists very uncomfortable.
While the OECD report contains the expected justifications and support for the ‘austerity’ approach, nevertheless the organisation’s ‘cold feet’ are becoming apparent, even before the full extent of austerity programmes has begun to impact. There is no better example of this unease than their approach to the UK.
The report commends UK policymakers for their “current fiscal consolidation (which) strikes the right balance and should continue.” At the same time, OECD economists hedge their bets by urging the UK government to embark on “higher infrastructure spending (that) would lower the short-term negative growth effects of consolidation without affecting its pace.” At a press conference last week, the OECD chief economist warned that the UK should be prepared to cool austerity in the wake of weaker growth.
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Apropos the last post: we dissidents are not alone. Have belatedly come across David Malone’s excellent post (written earlier but somehow missed by me) on the same theme – the airbrushing of the financial crisis from all political discourse. David goes further and highlights the implications for democracy and the rule of law. I hope he does not mind if I reproduce a few paragraphs for the benefit of those that have not already read it.
It really is very good.
“The official narrative today is that the plan of recovery is working. The narrative focuses on the rise of the stock markets to almost pre-crash heights. The failure of housing or commercial property markets to recover and the fact that unemployment is hideously high is simply no longer part of the recovery narrative. These things have been dropped. What has been added has been the ‘shocking’ level of public, national debt. In the new narrative the cause of the ballooning of public debt has been steered away from facts about the cost of the bail outs or how the disintegration of the speculative bubble caused a subsequent collapse of real economic activity. The new story is that the debts we have now are nothing to do with the banks and their temporary difficulties. They are due to a deeper incontinence in public spending.
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Much of the news of the last few weeks -
… can be explained by the need for banks to urgently raise money to fix their balance sheets. Unfortunately their activities are akin to the little Dutch boy with his finger in the dyke. Just as they raise funds from e.g. commodity speculation to shore up balance sheets, those funds may be drained from some other part of the bank by e.g. a rise in mortgage defaults or company bankruptcies as economic activity stalls, house prices fall, foreclosures are held up by legal arguments, and the over-borrowed fail to repay.
This explains why the banking system may be broke, as well as broken.
Welcome readers, to my newly refreshed blog, and thanks to Georgia Lee and Maz Kessler for making it look so good, and work so well. I had thought that the title needed refreshing too. After all, I am fond of defining 9th August, 2007 as ‘debtonation day’, and that is now long past.
To refresh your memory: it was on that day that the world’s banks woke up to the scale of their debts, and to the simple truth that they may not all be repaid. On that day, the French investment bank BNP Paribas suspended three investment funds due to a “complete evaporation of liquidity” in the market. BNP’s announcement compelled the intervention of the US’s Federal Reserve and the European Central Bank, which both pumped $90billion into the global banking system. As Larry Elliott notes, 9 August, 2007 ” has all the resonance of August 4 1914. It marks the cut-off point between “an Edwardian summer” of prosperity and tranquillity and the trench warfare of the credit crunch – the failed banks, the petrified markets, the property markets blown to pieces by a shortage of credit. ”
So ‘debtonation’ stands as a reminder of that day. However, we also know that the private debts of the individuals, households but also more importantly the corporate sector have not ‘debtonated’. They are still on the books, and in the case of the private sector in the UK, but also wider Europe, look set to rise further. As Douglas Coe and I have pointed out in a paper we have written for PRIME, “Private debt has risen relentlessly since the early 1980s. Most commentators focus on the extent of household debt, which rose from around 40 per cent of GDP before the 1980s to a peak of 110 per cent in 2009. But corporate debt is even more elevated, rising from 50-60 per cent to a peak of 130 per cent in 2009. The latest National Accounts show that both measures fell back in 2010, but only by a very small margin: households to 105 per cent of GDP and corporates to 125 per cent.”
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4th March 2010
With Saturday’s Iceland referendum due in just a couple of days (6th March), Advocacy International’s directors have an op-ed article critical of the UK and Netherlands governments in today’s Morgunbladid, Iceland’s main daily newspaper.
English version> Icelandic version> Press release>
Full text of the article:
So the negotiations have broken down, British and Dutch “bullying” (FT 27 February, 2010) continues and the referendum goes ahead. What next?
We emphasize that this is not a sovereign debt crisis, even if the British and Dutch want us to think it is.
It is a crisis of EU regulatory failure, and of the Anglo-American economic model.
The people of Iceland have a deep democratic tradition, and through the referendum have the opportunity to assert their sovereignty and autonomy.
Their leadership and example will encourage people in other democracies to reject harsh cuts in public services and living standards made at the behest of the very people and institutions responsible for the crisis. For through the wholesale nationalisation of private losses, we are all – not only in Iceland – asked to pay the price of private, reckless risk-taking. Continue reading… ›
5th February 2010
My conversation earlier this week with Elena Sisti – of Italy’s Altreconomia on macro-economics, reform of the finance sector, money, and yes, how we women have left the all-important matter of finance to the boys. Big mistake. It’s time to get in there, and exercise influence. Too much is at stake. Continue reading… ›
15th January, 2009.
Patient readers this blog is triggered by Jeff Randall’s column in the Daily Telegraph today.
In it he inadvertently discloses the identity of the puppet-masters dictating the Tory political agenda around public spending cuts.
In a somewhat histrionic column in which he describes the public deficit as a ‘disaster’ ( he should mind his language: Haiti’s earthquake is a disaster) Randall quotes a piece of ‘research’ by the French bank, Société Générale. The paper is titled “Popular Delusions” and its authors explain some simple facts about government spending cuts to Telegraph readers:
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