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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(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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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.
Tin produced at a Glencore plant in Vinto, Bolivia
“Experience shows that when policies falter in managing capital flows, there is no limit to the damage that international finance can inflict on an economy.”
Yilmaz Akyüz, “Capital Flows to Developing Countries in a Historical Perspective: Will the current Boom End with a Bust?”
Today, as speculation and leverage in global, financialised commodity markets reach manic levels; as we witness an ‘epic rout’ (FT 5 May, 2011) in commodity prices, and as the boom in capital flows peaks, is another crash inevitable? And is it coming soon?
I know from experience that while it may be possible to analyse fundamentals, it is always difficult to predict precisely what dynamic will trigger the next crisis, and when it will happen. Back in 2003, together with colleagues at the new economics foundation in London, and with very little funding, I assembled and edited a series of essays on the ‘outlook’ for the global economy. We titled it: ‘Real world economic outlook’, and added a subtitle, ‘the legacy of globalization: debt and deflation’. We intended the report to be annual, and to act as a counter to the IMF’s annual World Economic Outlook, which in our view was irrationally optimistic about developments in the global economy.
We were pretty pessimistic about global imbalances, and predicted a crash. Sadly, our timing was way out: the crash was four years away. It does not always help to be right on the fundamentals. Given the inevitability of the then forthcoming crash, we argued that there was once more a need for a ‘great transformation’ of the global economy. The starting point we wrote ‘will be to reverse the most pernicious elements of the ‘globalization’ experiment’ by the ‘taming of financial markets through the re-introduction of capital controls; restraints in the growth of credit; the establishment of an International Clearing Agency; and a Tobin Tax’.
Back then it was hard to talk/write about these matters – and be heard. Our cheerfully-titled report and predictions did not hit the best-seller lists. Funding for the project was withdrawn, and the project wound down. It’s major flaw? We had breached areas of economic debate that at the time were carefully circumscribed. It took the financial crisis of 2007-9 to loosen the intellectual chains to which orthodox economics had so heavily tied economic debate. Today the Tobin Tax, or Robin Hood Tax is a high-profile issue, with some signs that EU governments are considering implementation of such a tax. (See point 8 of Euro leaders’ statement, March 11, 2011). So that taboo has been broken.
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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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Posted on the Huffington Post today:
The disaster in Japan is almost beyond comprehension. Without minimizing the scale of the humanitarian tragedy, it is already possible to discern the emerging economic debate.
Stock markets immediately anticipated the potential benefits to Japan’s construction industries and their suppliers. Policy makers in the U.K. and Europe, who are busy implementing austerity measures to curb budget deficits, should take note.
The valuable argument coming from the ashes of this crisis is simple: Japan can afford to rebuild.
The Bank of Japan is clear about this. In asserting this point, and calming markets with massive liquidity injections, the central bank is basing its Keynesian policy on a wholly different analysis from that of economists and politicians promoting austerity measures in Europe and the U.S.
The economic possibilities of nations don’t depend on financial resources, but rather on human, technological and organizational power. The banking industry relies on these productive resources. The stability of banks hinges on lending for projects that will generate revenue streams for their own repayment.
Power of Banking
Japan is replete with all the human ingenuity and dedication that reconstruction and rebirth demands. The power of modern banking can enable Japanese society to deploy all of these resources, irrespective of the condition of Japanese public finances. The domestic banking system can circumvent the naysayers of international finance in a manner that should be understood by all financial authorities and economists.
Japan can address this natural and man-made disaster without handing a begging bowl around to other nations.
Read the full article on the Huffington Post >
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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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… ›
24 February, 2010
In the international financial system, the Rule of Law seldom applies.
It is in this context that a wake of vultures (for that is the collective noun) hovers over weakened debtor nations as diverse as the Congo, Iceland, Greece and Portugal and operate within weak international law.
They are international creditors, and their presence reminds us once again of the urgent need for governments to co-operate to devise international law to protect effectively insolvent sovereign nations from rapacious creditors. In just the same way that e.g. the US’s Chapter 11 protects insolvent companies from creditors.
Professor Kunibert Raffer of the University of Vienna has long argued for a framework for sovereign nations that simulates Chapter 9 of the US Legal code by protecting American governmental bodies (such as City governments) and their citizens from predatory creditors in the event of insolvency.
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