Money for Nothing...

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The production of money is ultimately the struggle for control over resources, wealth, people and our environment. But there is a surprising level of ignorance around how banks create money out of thin air and the benefits which flow from it. So on this programme we shine a much-needed light on who should get the privilege of creating our money. Host Ross Ashcroft is joined by the economist and author of the recent book The Production of Money, Ann Pettifor and founder of banking platform Seascader, Steven Round.

To watch, visit the programme’s site here:

Osborne: Speaking truth to wealth and power? Really?

George Osborne was presumably aiming at himself and his friends, when he vowed “to speak truth to power and wealth” at the Tory party conference this week, but dare he speak economic truth to the rest of us? – simultaneously published on Left Foot Forward >

On the narrowest of bases, he might still claim he spoke “truth” to the weak and powerless when in the House of Commons debate on the economy on August 11th he made this challenge:

“Those who spent the whole of the past year telling us to follow the American example, with yet more fiscal stimulus, need to answer this simple question: why has the US economy grown more slowly than the UK economy so far this year?”

It was a ‘brave’ claim when he made it, and it’s looking even ‘braver’ – and more disingenuous – now.

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What a financial tailspin may mean for you and me

Wall Street plummeted as concerns over European debt and the US economic downturn spurred a broad sell-off. Photograph: Shen Hong/Xinhua Press/Corbis

Read my article from Guardian Cif, Friday 19th August:

As bank shares and stock markets plummet, and investors flock to the safety of government bonds; as obstinate EU leaders crucify their countries in a futile struggle to defend today’s equivalent of the gold standard; as British and American politicians adopt austerity policies and drive their economies closer to the cliffs of depression; and as most professional economists stand aloof from the escalating crisis – what lies ahead for ordinary punters like you and me?

First, let’s take look at the big political picture. This crisis is already sharpening the divide between left and right in both the EU and the United States. Studying a precedent – the implosion of the 1920s credit bubble in 1929 – we note that four years after that crisis erupted, the political divide sharpened decisively. The United States and Britain moved to the left. Germany chose a different path. After 1930, Germany’s Centre party under Chancellor Brüning adopted austerity policies that resulted in cuts in welfare benefits and wages, while credit was tightened. At the same time the German government engaged in wildly excessive borrowing from the liberalised international capital markets. The ground was laid for the rise of fascism.

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Eight fallacies in the LSE Keynes/Hayek debate

Tonight, Wednesday 3 August 2011 at 08.00pm BST (GMT +1), BBC Radio 4 will broadcast a debate which took place at the London School of Economics (LSE) on 26 July.  This broadcast will be repeated on Saturday, 6 August, at 10.15 p.m BST (GMT +1).

Along with my colleagues Prof. Victoria Chick and Douglas Coe at PRIME  we have written the following response to the debate:

Debaters considered whether Keynes or Hayek had the solution to the present financial crisis. The economist George Selgin and philosopher Jamie Whyte spoke for Hayek; Keynes’s biographer Robert Skidelsky and the economist Duncan Weldon spoke for Keynes.

On the one hand we are pleased that the BBC and the LSE now acknowledge rival positions to the present austerity policies of Western governments. On the other  we are concerned that the debate might have served mainly to reinforce existing prejudices, rather than to clarify the substance of the matters under discussion, matters which – there can be no doubt – are of the most profound importance.

Lord Skidelsky provocatively but justly reminded the audience that in the early 1930s, the same orthodoxy driving western austerity policies directed the actions of Germany’s 1931 Bruning government and paved the way for the rise of Nazism. These actions – vigorously opposed by Keynes – were the final straw for a Germany crushed by defeat and the disastrous boom-bust cycle that followed their return to the gold standard. Reparations were easily circumvented by wildly excessive borrowing from financial interests around the world, in a manner that even Keynes did not anticipate. It was these financial and fiscal policies that brought Hitler to power.

With financial interests still firmly in the ascendency and reactionary right-wing forces increasing their grip in the United States and much of the Western world, we must not forget these lessons from history, which formed the background to the original debate between Keynes and Hayek themselves. The stakes are high indeed.

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GDP figures: the verdict

This morning I joined the Guardian’s panel of  and  to give our verdict on today’s GDP numbers:

Ann Pettifor:

“The Chancellor must eat humble pie”

The statisticians, clutching at straws, blamed the victims – the British people – for the measly 0.2% growth in GDP. It turns out we are too fond of holidaying (the royal wedding effect) and basking in “warm weather”.

But this cannot explain the fall in manufacturing by 0.3% and the 3.2% fall in electricity, gas and water supply. Nor does it explain the rise by 0.7% in “business services and finance”. The fact is the economy remains unbalanced, and the coalition government is doing very little to restore some balance, and with it the potential for recovery.

And without economic recovery, there can be little hope for the public finances. The fact is, the chancellor cannot cut the deficit if the economy does not recover. Today’s numbers offer little succour. GDP is still lower than it was in 2006 – four years after the crisis “debtonated” in August 2007.

The chancellor’s budgetary outcome depends on the plans of the entire economic system and its reactions to the Treasury’s policies. Right now the British economy is responding to the government’s determination not to provide a stimulus to the very weak private sector – by faltering.

The argument is that Britain “cannot afford” a fiscal stimulus. That we “cannot afford” to boost the private and public sectors, create jobs, generate income and restore hope to 2.5 million unemployed people.

But we could, apparently, afford to bail out the banking system.

The coalition government’s determination not to stimulate the creation of employment, and with it the income that will generate recovery – will be viewed negatively not just by the powerful rating agencies, but by the British people too.

The fact is that just as work makes things affordable for individuals, so employment makes recovery affordable for the economy as a whole. And until the chancellor eats humble pie, and absorbs this economic lesson, neither the economy, nor the public finances will recover.

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Financing the Green Economy Transition

Below is a short paper I wrote as part of work with Sir David King and the Smith School of Enterprise and the Environment:

“We are capable of shutting off the sun and the stars because they do not pay a dividend. London is one of the richest cities in the history of civilization, but it cannot “afford” the highest standards of achievement of which its own living citizens are capable, because they do not “pay.”

If I had the power to-day, I should most deliberately set out to endow our capital cities with all the appurtenances of art and civilization on the highest standards of which the citizens of each were individually capable, convinced that what I could create, I could afford….

John Maynard Keynes. “National Self-Sufficiency,” The Yale Review, Vol. 22, no. 4 (June 1933), pp. 755-769.

UNEP’s latest publication, Towards a Green Economy tackles the vexed question of financing the Green Transition and estimates that


“to halve CO2  emissions by 2050, requires investments of approximately US$ 750 billion per year from 2010 to 2030 and US$1.6 trillion per year from 2030 to 2050. The World Economic Forum and Bloomberg New Energy Finance, on the other hand, calculate that clean energy investment needs to rise to US$ 500 billion per year by 2020 to restrict global warming to less than 2ºC, while HSBC estimates that transition to a low-carbon energy market will require US$ 10 trillion between 2010 and 2020.” (Towards a Green Economy, page 33.)

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York Minster EBOR lecture

12th December 2009

At the end of last month I delivered the prestigious EBOR lecture at York. My address was entitled:

“Credit, usury and political power: chasing the moneylenders from the temple that is our democracy”

Click on the link below to read a PDF version of the full lecture:

EBOR Lecture November 25th (PDF)

The Treasury Privatised

29 October, 2009

Dan Roberts has a great column in the Guardian today. He asks the right questions. First, why is the Treasury spending £8 billion of taxpayers money reinflating the housing market? Second, why is the Treasury encouraging this now nationalised bank to increase mortgage lending, when the productive sector of the economy – companies, small businesses et al – are being starved of loans from taxpayer-bailed-out-banks, or else having to borrow at usurious rates?

A superb report from the Centre for Research on Socio Cultural Change at Manchester  (“An alternative report on UK banking reform”) suggests the answer: The nationalisation of Northern Rock is being treated as an “equity style turn around”, with the overarching objective of protecting and creating value for the taxpayer as shareholder.

It is not clear whether the banks have been nationalised or the Treasury has been privatised as a new kind of investment fund.

It makes perfect sense doesn’t it, given that the Treasury is advised on these matters (some would say it has been captured) almost exclusively by bankers? Get reading the CRESC report -its excellent –  the first piece of independent, academic thinking on reform of the banking sector to have crossed my path.

Times: Worst of slump yet to come, says economist

Article Published in the Times, September 1st 2009. Photo by Jon Enoch.

Ann Pettifor predicted a painful end to the good times. Now she says that only radical action can prevent further gloom

Phil Thornton

Ann Pettifor is a member of a select club — the seers who saw it all coming. Now the economist, who predicted the credit crunch as far back as 2003, believes that the worst is yet to come unless there is radical reform of the financial system.

Six years ago she parodied the International Monetary Fund’s annual economic forecast with her own — The Real World Economic Outlook. Then, in 2006, her book The Coming First World Debt Crisis, warned that rich countries were heading for a debt crisis that would overshadow anything seen in the developing world. Both were ridiculed.

With the British and world economies languishing in the worst recession since the Great Depression and with once-mighty banks reliant on government life support, she could be forgiven for being a little smug. Not a bit of it: “No, being Cassandra is not something I wish for. I hate this role of being a gloomer and doomer, as I’m an optimist by nature. But I am very pessimistic now.”

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Quantitative easing (QE) made easy

by Ann Pettifor, 8 March, 2009. There is much confusion about the meaning and impact of QE. This is an attempt to summarise what it means, what it does not mean, and how it can be effective in preventing insolvencies by lowering interest rates.

I am indebted to Graham Turner of GFC Economics for sharing his knowledge and experience of Japan’s use of QE with me. Graham spent time in Japan during the years of that country’s Credit Crunch which began in 1990, and is also knowledgeable about the 1930s when QE was adopted by policy-makers.  Japan adopted QE eleven years too late – in 2001, but has since then kept interest rates below 2%.

Graham notes that Ben Bernanke’s book “Essays on the Great Depression” ‘contains no reference to Quantitative Easing…there is astonishingly little analysis of the monetary policy response that secured recovery (in the 1930s) in any of Mr. Bernanke’s essays.’

First lets remind ourselves that a bond is like a loan. The issuer is the borrower, the bond holder is the lender.  So when I buy a bond from the Federal Reserve or BoE, the governors of these banks are issuing a bond (‘I promise to repay on this date…at this rate…’) and I am trusting their word with my money. Bonds, like loans, usually have a fixed term, or maturity. The interest rate on the bond is known as the ‘coupon’, and is what the issuer pays to the bond holders.

Rates on company or corporate bonds are important because they determine whether companies can afford to borrow to invest, to pay wages or to manage cash flow. They determine whether entrepreneurs can take risks – and invest, e.g. in green technology.  If they can’t do any of these things they declare bankruptcy, and lay off their employees.

Above all interest rates determine whether companies can afford to repay the huge debts dumped on them by lenders, so-called ‘private equity’ companies and other financial institutions during the inflation of the credit bubble.

Interest rates on government and corporate bonds can be lowered by QE – purchases of government bonds by central banks and the shifting of these bonds out of the market, and on to the balance sheets of central banks.

The first myth to dispel is that interest rates are currently low. Base rates may be low, but the rates that companies pay, as Warren Buffett has argued is at ‘record levels’.  He tells shareholders that “highly-rated companies, such as Berkshire, are experiencing borrowing costs that, in relation to Treasury rates, are at record levels.  Though Berkshire’s credit is pristine – one of only seven AAA corporations in the country – (its) cost of borrowing is now far higher than competitors with shaky balance sheets but government backing.”

Graham Turner shows that ‘average yields on loans for non-investment grade companies in the UK rose to 31.66% on the 4th March, 2009.’ These are bankrupting rates.

The second myth to dispel is that QE is about ‘printing money’. QE is not about directly using liquidity  injections to boost the supply of money. As we have learned to our cost, plenty of liquidity has been injected into banks, but this has not slowed the pace of bankruptcies. As Turner notes: ‘money supply (M) is entirely endogenous, and depends on the structure of borrowing costs being secured through bond purchases. ‘  It will be vital for the Bank of England to set a long term interest rate target, and to use the purchase of government gilts to reach that long-term, and low target.

QE is about preventing debtors from defaulting. This is done by the Central Banks targeting lower rates of interest e.g. for 30-year bonds (or loans), and achieving this by purchasing government bonds and taking them on to their balance sheets, (It can be used to purchase corporate bonds, but is more effective in bringing down all rates, if used to purchase government bonds.)

These purchases are known as ‘open market purchases’.  By purchasing government bonds,  central banks increase the price of the bonds, but damp down the yields, or rates of interest, on these bonds. It is particularly important that rates on e.g. 20-year bonds should be driven down low.

Within a month of the Federal Reserve starting large scale open market purchases of government bonds in April, 1932,  corporate bond yields had started to fall decisively.

By buying up government bonds, the Federal Reserve or the Bank of England will increase the price of government bonds, and lower the yield – effectively the interest rate on these bonds. By lowering the rate on government bonds, central banks will help suppress rates across the board.

By lowering rates, they will begin to help companies, and stop the spread of insolvencies – the economic ‘virus’ at the heart of the crisis.

Two additional points: QE has to be applied early on in the crisis. If insolvencies are allowed to spread and engulf the whole economy, there comes a point when QE just cannot help. Second, in a highly synchronised, global economy, it is vital that central banks co-ordinate and co-operate to apply QE across the board. If applied in just one or two economies, the measure will not work. If it is not applied in the United States soon, then US insolvencies will cause unemployment to spiral higher, and will exacerbate global economic failure.

So the stakes are high, and the timing of QE measures vital.