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.

Following very recent revisions to US and UK data on GDP for the first half of 2011, the position is as follows, broken down into different quarters:

UK growth:

Q1    +0.4%   (revised down from the previous +0.5)

Q2    +0.1%   (revised down from the previous +0.2)

Total: +0.5%

US growth:

Q1   +0.1%

Q2   +0.325% (revised up from 0.25%)

Total: +0.425%

So by the triumphant margin of 0.075%, taking the period in total isolation, Osborne just scrapes home. But this ignores the fact the UK quarter 1 figure of +0.4% followed the disastrous Q4 figure of -0.5%, compared to US Q4 growth of more than +0.5%.

Without this Q4 quirk, his tenuous case would collapse.

For when we compare the US and UK over the last three quarters (including Q4 2010), we find that the US grew by 1%, whilst the UK grew not at all. A difference of one per cent in favour of the US economy.

And over the 12 months to the end of June, i.e. the lifespan of the coalition government, the US rate of growth is likewise 1.0% greater than in the UK (US 1.6%, UK 0.6%).

Taking the last 18 months, we get the following medium-term picture:

US:

2010                        +3.0%

2011 first half         +0.4%

18 months               +3.4%

UK:

2010                        +1.4%

2011 first half         +0.5%

18 months               +1.9%

In other words, the US economy has grown by 1.0% more than the UK over the last 12 months, and 1.5% more over the last 18 months, to end June 2011.

The US has many problems, but it has applied some meaningful, if now fading, stimulus.

So if George Osborne really does wish to speak truth, to power and wealth, and to the rest of us, let him own up – it is simply not true the UK’s austerity-based economy has grown faster than the USA’s. On the contrary, coalition government policies have led us deeper and deeper into the mire of unemployment, bankruptcies and economic stagnation.

Published in the Guardian Cif alongside responses from Jonathon Freedland and Sheila Lawlor:

Ed Balls said sorry for Labour’s record on ultra-light-touch financial regulation, and that must be acknowledged.

But apologies are just not enough. He and Ed Miliband must stop attacking his electoral base, “hardworking families”, many of whom are trades unionists.

As Balls recognises, unless urgent action is taken, this may be the gravest economic crisis in history – given the global integration of finance and the growth of world population.

So Balls must go further.

First, he must declare loudly and forcefully that Labour will never again be captive to neoliberal central bankers like Alan Greenspan; or private bankers like Sir Fred Goodwin of RSB.

Labour must never again be seen to be in the pockets of the finance sector.

Balls and Miliband must give the Labour party back to its electoral base, to its members.

They must both distance themselves from Labour leaders that profit from links to the global finance sector.

Second, Balls must stop talking about the deficit; about “tough decisions on tax and spending” – the last thing the economy needs. It is private debt – 469% of British GDP and six times the public debt – that is the real crisis facing Britons. It is debt-deflation, and debt-deleveraging, and collapsing private investment that pose the gravest threat to us all.

Given this, there is an urgent need for government spending on environmentally sound projects to generate economic activity – jobs, the income, the savings that will help protect us from Armageddon.

Until he does, his apologies will count for nothing but special pleading.

Read the original article on Cif here >

While I was in Australia I recorded this interview with ABC’s daily show. This went out on 15th September. Watch it above or on ABC’s website here >

I appeared on Al Jazeera’s ‘Empire‘ on Thursday evening – hosted by Marwan Bishara, the panel was made up of myself, Dr. Georges Corm (former Lebanese finance minister and former special consultant), World Bank Professor Alex Callinicos (director of European Studies, King’s College London and author of ‘Bonfire Of Illusions’) and Dr Mario Blejer (former governor, Argentine Central Bank and former advisor, Bank Of England).

Click here to watch the hour long special >

“Marwan Bishara asked: will the International Monetary Fund regain its influence and reshape its role?

“The world is undergoing seismic economic changes, from the international financial crisis to the shifting balance of power between developed and developing countries.

“In this new world order the International Monetary Fund (IMF), the most prestigious and powerful international economic organisation on the planet, is reduced to a mere advisor, even spectator.

“This bastion of capitalist ideologies and neo-liberal policies is coming under attack from all sides.

“The developing world accuses the IMF of exploitation and favouritism, and the current scandals have only added to their woes. And the developing world refuses to be treated by the IMF as if was merely developing.

“But in the last three years the global economy has shifted and the old divides between east and west, north and south have become blurred. Many nations are looking at what the fund has to offer and are increasingly saying, “Thanks, but no thanks.”

“The IMF talks about reform, but is it empty rhetoric? Will it or can it change to reflect the new reality?

“And more importantly, with bailouts, defaults and rich nations living in a state of permanent crisis, are the IMF’s free-market policies part of the solution, or just perpetuating the problems?

“Empire asks: do we still need the IMF?”

Watch the show here >

Have just been told that my post on the Left Foot Forward on Ed Balls’s speech  crashed the site “under weight of people wanting to read it”…so here it is for those of you that may have missed it….

David Cameron was delighted when the formidable Ed Balls walked straight into his framing of the debate on the deficit – and was promptly trapped.

That framing goes as follows. We (the government) have spent beyond our means. And the way to pay for it, is by cutting (public sector) jobs, and raising taxation - like VAT.

Ed Balls’s speech concedes (as Labour has done since Alastair Darling’s time at the Treasury) the deficit-reduction-emphasis agenda set by his opponents. And by so doing – implicitly concedes the need to cut public sector jobs.

But I am being unfair.  Balls began his speech by mentioning Labour’s “emphasis on jobs and growth” But the speech immediately morphed into Labour’s concession to the Coalition: that what is needed is “a steady and balanced approach to halve the deficit in four years”. The implication being that cuts must be matched by ‘jobs and growth’.

But the highlight of the speech – the sound-byte that his spin doctors no doubt intended the media to emphasize-  is a call for a cut in VAT “to boost consumer confidence and jump-start the economy.”

Cameron flashed back his retort: ”slashing taxes” he argued, would only make the UK’s fiscal deficit worse.

And so Balls is trapped.

The debate now centres on whether the deficit can be financed by increasing or cutting taxes, in particular VAT. For most people, Cameron has the upper hand.  ’Of course the deficit can only be financed by increased taxes’ is the consensus. Because we have ‘spent beyond our means’ – we have to raise taxes, like VAT.   “Slashing” VAT – when it’s higher VAT returns that are paying down the deficit – is unacceptable to the Coalition, to the Treasury, to orthodox economists and to the bulk of the British public.

But that’s only because most have been drilled in the propaganda: “the deficit is like a credit card”. We need to pay it down. To do so, we have to mobilise/hoard ‘savings’ – i.e. higher taxes – to pay down the ‘credit card’.

But the government’s deficit is not like a credit card. And nor do we need ‘savings’ to pay it down.

The only surefire way of paying down the deficit is not by government cutting the deficit – which I and others have argued it cannot do -  but by employment.

Put 2.43 million people back to work, and hey presto! the deficit will vanish.

Get 2.43 million people – including thousands of skilled and unskilled workers, clever and talented student graduates –  to address Britain’s very real insecurities in energy, food and health – and hey presto, the deficit will be financed.

How? By the tax revenues that will pour into the Treasury’s coffers, either directly or indirectly – and by the savings that will be made on welfare benefits.

However, keep 2.43 million people unemployed, keep them feeling insecure, with their purses firmly shut, and you can guarantee an ever-rising government deficit (April’s deficit numbers were the highest on record for that month).

And 2.43 million unemployed is sure to make British ‘confidence’ fall and the recession deepen.

Ed Balls has to face this fact: cutting VAT on falling retail sales will do little to ‘restore confidence’. Confidence is evaporating, and retail sales are falling, not just because of VAT – but because of the fear of unemployment.

The only thing that will restore confidence will be: employment. And while it is encouraging that the private sector created 88,000 jobs between February and April, that still leaves 2.43 million people economically inactive, unemployed and lacking in confidence. Many millions more are worried about their job security, rising fuel and food prices.

So Ed Balls’ speech should have gone like this.

Jobs will cut the deficit.

Look after unemployment – and the budget will take care of itself.

And if the private sector can only create 88,000 jobs in 3 months - while 2.43 million people remain economically inactive, depriving the Treasury of tax revenues, costing the Treasury dear in welfare benefits – and causing the deficit to rise even higher – then government must step in and spend on public works, to create jobs.

Jobs will cut the deficit – and simultaneously create the ‘confidence’ the private sector needs to invest – to create more jobs.

That framing would have put David Cameron on the defensive – would have pleased Labour’s base, and would have encouraged insecure voters. It would have put Ed Balls and Ed Miliband in a ‘winning state of mind’.

Instead we are back on sterile, old territory: the centrality of the deficit to all of political debate, and economic policy-making, and the eclipse of the subject of unemployment.  Paying down the deficit as Labour’s leadership and its right-wing constantly concedes, is REALLY IMPORTANT. For the Coalition it is is far more important than creating jobs, and getting 2.43 million people back into meaningful work.

So let’s go on emphasizing the deficit, and ignoring the unemployed. But please, spare us the tears and anguish of politicians and economists when the deficit keeps rising!

(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.

In parallel, President Obama was reported as disappointing the expectations of UK policymakers by failing to endorse the Government’s approach to economic policy. While Obama has not proved the champion of the better world that we had all hoped, – he is no FDR -  his stance is important and perhaps even brave.

In the second half of 2010 the world economy began to weaken, but this is greatly underplayed by OECD economists.  Instead they point to a perceived optimistic outlook ahead. But this outlook is thinly based. We are told that financial conditions are improving: but in the UK the latest assessments of project Merlin flatly contradict such a notion.

Source: www.telegraph.co.uk. Data: BBa / BIS / Bank of England

In the real economy, world trade has retreated substantially from the relatively rapid outturns at the start of 2010. The report recognises that this is a consequence of monetary policy tightening in emerging markets and the wearing off of stimulus packages in major economies. The retraction of earlier stimulus programmes by the US and EU is rather an understatement. Stimulus has not only been withdrawn, it has been replaced by austerity.

So what are the grounds for OECD optimism?   Especially given that their economists remain obsessed by inflation as the causa causans of all possible outcomes. Their overriding fear is that inflation will cause consumers to retrench. This threat is then used to justify tighter monetary policies – which would hurt over-indebted consumers, corporates and SMEs. But unemployment is a much more important driver of consumer behaviour. Wage earners snap their purses shut in the wake of what for many millions is the reality of, and for others the threat of, unemployment. Inflation is no doubt painful to the less well-off, but from a macroeconomic perspective ‘core inflation’ today is at low levels, no matter how much the OECD tries to play it up. Watch out as inflation falls rapidly over the next few months, in line with weakening economies.

The austerity and fierce monetary strategies embarked on by governments – already burdened by losses transmitted by the private banking crisis – have been directed by the civil servants of supra-national organisations: such as the OECD and IMF as well as the global central banking fraternity. These public employees enjoy immense influence, and as the the president of the European Central Bank, Jean-Claude Trichet indicated in a speech on 2 June, 2011 they wish to capture:

“a much deeper and authoritative say in the formation of the country’s economic policies….. A direct influence, well over and above the reinforced surveillance that is presently envisaged”

Given the ECB’s role in exacerbating the crisis in Greece (described by Nouriel Roubini as ‘throwing good money after bad – to bail out, rather than bailing in, reckless creditors….a giant Ponzi scheme”)  such “authoritative” advice  by supra-national organisations has crucified economies “in a struggle which is certain to prove futile” –  to quote Keynes.

But the OECD’s latest report hints that minds might be changing. It contains the beginnings of the admission that the world is being forced down a desperate path that has no justification in economic reason and the evidence of history. The experience of the great depression stands before us. It was only enlightened monetary policies and expansionary fiscal policy that restored the US and UK not only to health but to a position to resist reactionary forces and fascism.  The current strategy is likely to make us more vulnerable to reactionary political forces – in the EU and the US.

Some might like to celebrate the previous timid stimulus for e.g. car scrappage schemes etc, under both Alastair Darling and the Larry Summers White House.  But in the light of present events, it is clear that their approach was designed not to save society but to preserve a financial system that has palpably failed the vast majority of the citizens of the world.

We at PRIME economics have repeatedly called for something greater and more just. Perhaps the foot-shuffling of the OECD indicates recognition that imposing austerity policies at a time of global economic weakness is indeed a futile struggle – soon to be abandoned?”

There has been much sturm and drang generated by the Guardian and others on the threat posed to government finances by the flawed and often irrational rating agencies, and by the supposedly despotic, vengeful and greedy bond markets.

Methinks they protest too much.

We at the Green New Deal group have long argued that there is no reason why governments should rely for their financing on the capricious private bond markets. Instead, we write in ‘The Cuts Won’t Work’ -  finance ministers should oblige the banks in which taxpayers have a substantial stake to lend to the Treasury at very low rates of interest.

That’s how World War II was largely financed in Britain – and no one was the worse for it. The loans were given a title: Treasury Deposit Receipts.  These TDRs – bless them – financed a war that saved Britain from the threat Nazism posed to its very existence. Today they could be used to finance the public investment needed to substitute for the collapse in private investment – and to stave off the threat posed by climate change.

Analysts on the Financial Times Lex column (FT 1st January, 2010) have obviously read our latest report, and describe our proposal as “an intriguing alternative” . Governments they write “may lean on the commercial banks in which they hold large stakes to take up the strain instead. Forcing them to purchase government bonds would help replace the market heft of central banks.”

Quite so. You read it first in the Green New Deal.

This is the press release from the new economics foundation:

“Two days ahead of the pre-budget report, and as the UN climate change talks open in Copenhagen – the second report from the authors of the original Green New Deal argues that the British Chancellor is likely to miss a historic opportunity to tackle public debt, create thousands of new green jobs and kick-start the transformation to a low-carbon economy.

The cuts won’t work, the Green New Deal Group’s second report shows how, contrary to the policy of all the major political parties, cutting public spending now will tip the nation into a deeper recession by increasing unemployment, reducing the tax received and limiting government funding available to kick-start the Green New Deal.

Instead a bold new programme of ‘green quantitative easing,’ rather than simply propping up failing banks, could help reduce the public debt and kick-start the transformation of the UK’s energy supply while creating thousands of new green-collar jobs.

Drawing on evidence from the great depression in the UK and the USA, the Group show how cuts in public spending then, before the economy had recovered, tipped both nations deeper into depression.
Now, the Group say, the Chancellor must announce a plan that updates the lessons from history for the challenges of the modern world, and spend to reduce the public debt by investing in the long-term restructuring of the UK’s energy infrastructure needed to meet the challenges of climate change and the inevitable peak and decline of oil.

To illustrate the potential of ‘green quantitative easing’, new calculations produced by nef (the new economics foundation) for the Group reveal that:

A sample of £10 billion in green quantitative easing invested in the energy efficiency sector could:

• Create 60,000 jobs (or 350,000 person-years of employment) while also reducing emissions by a further 3.96MtCO2e each year;
• This could also create public savings of £4.5 billion over five years in reduced benefits and increased tax intake alone;

A sample of £10 billion in ‘green quantitative easing’ invested in onshore wind could:

• Increase wind’s contribution to the UK’s total electricity supply from its current 1.9 per cent[i] to 10 per cent (39 TWhe) and;
• Create over 36,000 jobs in installation and direct and indirect manufacturing.
• This is a total of 180,000 job-years of employment – here we have described each ‘job’ as providing stable employment for an average of five job-years.
• Create a further 4,800 jobs in the operations and maintenance of the installed capacity and other related employment[ii] over the entire 20 year lifetime of the installation (equivalent to 96,000 job-years)
• And, if this directly replaced energy from conventional sources, it could decarbonise the UK economy by 2.4 per cent.[i] – reducing emissions from the power sector by up to 16 Mt[iii]CO2e[iv] each year  This corresponds to a £19 billion reduction in environmental damage

Or, a sample investment of £10 billion could:

• re-skill 1.5 million people for the low-carbon skills of the future, bringing 120,000 people back into the workforce, and increasing the earnings of those with a low income by a total of £15.4 billion.

The Group recommends:

• A £50 billion programme in ‘green quantitative easing’ in the short term to rebuild the economy. This is the amount of annual spending recommended by some of the most comprehensive analyses to date of the amounts needed to re-engineer the UK economy to meet the challenges of a low carbon future;

• Next, planning must begin for all of the new forms of bond finance detailed in the Group’s report to ensure the long-term stable funding needed for the long-term transformation of UK infrastructure.

Once spending on the green economy of the future has breathed life back into the deflated economy, the Green New Deal will require a whole new savings and investment infrastructure to meet the long-term investment needed to underpin the Green New Deal and to meet the needs of a new generation of investors who are fed up with all that has gone before.

This means secure new forms of saving which promise stable returns over the longer-term. The Group put forward a range of new measures to help public borrowing and encourage public investment by individuals, local authorities and companies in greening and reviving the economy. The foundations for these must be laid now. These include:

Measures on tax that are explicitly designed to re-gear the UK economy and transform energy infrastructure:

• Tax incentives on green savings and investment, so that future ISA tax relief – costing more than £2 billion a year – is only available for funds invested in green savings (tax relief for ISAs was more than the whole green stimulus package announced in the 2009 Budget, estimated to be worth just £1.4 billion).
• A general tax-avoidance provision to end the abuse of tax allowances. If just half of the tax avoidance in the UK was stopped by this provision, it would raise more than £10 billion a year.
• A Financial Transaction Tax, commonly known as a “Tobin Tax”. Such a tax, applied internationally at a rate of about 0.05 per cent has the potential to raise more than £400 billion a year. This could be the basis for a Green New Deal in the Global South, playing a significant role in enabling the majority world to adapt to climate change as well as breaking the carbon chains of fossil fuel dependence.
• New savings mechanisms that support the greening of the economy now, create thousands of new jobs and guarantee stable returns into the future:
• Green bonds, which will be issued by the government with the explicit guarantee that the funds raised will be invested in new green infrastructure for the UK. The bonds will carry conventional rates of return for bonds.
• Local authority bonds, to invest in energy efficiency and provide renewable energy for each of the country’s three million council tenants, as well as for all other local-authority-owned or -controlled buildings, such as town halls, schools, hospitals and transport infrastructure.
• Carbon linked bonds, to align investment returns with carbon saving and create a significant body of investors who will take the risk on there being carbon savings that can be secured.

A new publicly owned ‘Green New Deal Investment Bank’ to allocate the capital provided by green quantitative easing, and new bank lending to government:

• Green New Deal Investment Bank, a publicly owned bank to hold and disburse capital provided by ‘green quantitative easing’. It will be used exclusively to fund companies and projects designed to accelerate the transition towards a low carbon economy.
• Treasury Deposit Receipts, like those issued during the Second World War, a mechanism whereby banks were forced to use their ability to create credit to lend to government.

The Green New Deal group believe that despite the appearance of calm, the need for the implementation of the Green New Deal is greater than ever. When the Group launched their first report, new analysis suggested that from 1 August 2008 there were only 100 months, or less, to stabilise concentrations of greenhouse gases in the atmosphere before we hit a potential point of no return. The climate clock is still ticking and nothing like the scale of reform needed to rapidly re-engineer the economy has been implemented, anywhere.

This could be a real opportunity for the UK to show global leadership by implementing an interlinked package that recognises the need for targeted public spending in a downturn.  Not to further fuel an economy hard-wired into ever increasing use of fossil fuels, but to revitalise the productive economy and lay the foundations of the low-carbon infrastructure of the future.

The opportunity for action is even more pressing than it was when President Franklin Roosevelt instigated his bold New Deal programme that touched almost every aspect of economy and society. The timescale is limited by the urgent need to stabilise concentrations of greenhouse gases in the atmosphere before the risk of uncontrollable global warming increases significantly. Today, there is a plan on the table that could revitalise our damaged economy while also radically restructuring it for a low carbon future. Now the vision is needed to implement it before it is too late.
-    ENDS –

For more information, or to arrange an interview with a member of the Green New Deal Group, please contact:

Ruth Potts, co-ordinator, the Green New Deal Group, on:

t: 020 7820 6357         m: 07749 026 203       email: ruth.potts@neweconomics.org

Quotes from the Green New Deal Group:

“There is a pervasive and infantile notion that government budgets are like household budgets. They are not. By spending and investing in jobs, governments generate tax revenues, reduce welfare payments – and cut government debt into the bargain. Government must spend away the debt – on flood defences, on alternative energy and energy efficiency.  By investing in green-collar jobs that can’t be done in  China, government spending will pay for itself, fill the economic crater caused by the collapse in private investment – and lead to a recovery in public finances.” Says Ann Pettifor, nef fellow and Green New Deal Group member

“In the bad old days of medicine, there was a popular belief that draining blood from the sick would help them recover. More often it hastened their demise. The idea that widespread cuts are necessary to help the economy recover and pay back the public debt may be appealing as a knee jerk reaction but it makes no economic sense. An economic transfusion of resources to build a low-carbon economy is what we need to get the patient on its feet. Do this and we will create jobs, raise revenues, cut carbon and increase our energy security. It is not a time for the economic policy equivalent of medieval bloodletting.” Says Andrew Simms, policy director of nef (the new economics foundation and Green New Deal Group Member

“This is about using fiscal policy - government spending, borrowing, and tax revenue – to create real jobs,  real investment and real energy security in our economy – and all of it green. That’s not just being green, that’s about working, financing, governing and sustaining green – all in a plan that works across conventional policy boundaries to show that the Green New Deal group doesn’t just talk about integrated thinking – it delivers it too” says Richard Murphy, Director of Tax Research LLP and Green New Deal Group Member

“Its time for the Bank of England’s quantitative easing programme to stop magicing money out of nothing to prop up the banks. Instead it should use this form of money to fund green jobs and business opportunities on a huge scale. Also people are saving not spending, so the Government needs to see ‘savers as saviours’ and provide inducements for them to use such savings to fund a Green New Deal”. says Colin Hines, convenor of the Green New Deal Group

Notes to editors:

1.    The cuts won’t work: Why spending on a Green New Deal will reduce the public debt, cut carbon emissions, increase energy security and reduce fuel poverty is the second publication of the Green New Deal Group. Meeting since early 2007, its membership is drawn to reflect a wide range of expertise relating to the current financial, energy and environmental crises. The views and recommendations of the report are those of the group writing in their individual capacities. The report is published on behalf of the Green New Deal Group by nef (the new economics foundation)

2.    The Green New Deal Group’s first report, The Green New Deal: Joined-up policies to solve the triple crunch of the credit crisis, climate change and high oil prices was published in July 2008.

3.    The Green New Deal report will be delivered to the Prime Minister, Gordon Brown, the leader of the Conservative Party, David Cameron, and the leader of the Liberal Democrats, Nick Clegg, with a letter signed by the members of the Green New Deal Group demanding a response to its proposals.
The Green New Deal Group are, in alphabetical order:

Larry Elliott, Economics Editor of the Guardian,
Colin Hines,Co-Director of Finance for the Future, former head of Greenpeace International’s Economics Unit,
Tony Juniper, Environmentalist and Campaigner,
Jeremy Leggett, founder and Chairman of Solarcentury and SolarAid,
Caroline Lucas, Green Party MEP,
Richard Murphy, Co-Director of Finance for the Future and Director, Tax Research LLP,
Ann Pettifor, former head of the Jubilee 2000 debt relief campaign, Campaign Director of Operation Noah,
Charles Secrett, Advisor on Sustainable Development, former Director of Friends of the Earth,
Andrew Simms, Policy Director, nef (the new economics foundation).

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.

As world leaders meet in Pittsburgh and then Istanbul (for the World Bank and IMF meetings) expect much self-congratulation and back-slapping for having got the world through the post-Lehman crisis.

But behind the cacophony of self-praise, watch out for three alarms flashing red:

• The escalating foreclosure and rising mortgage delinquency rates in the US
• The dramatic contraction of credit in the US over the summer – putting paid to any hope of the US acting as the ‘engine’ of a global recovery
• That big accident waiting to happen to the European economies –Spain

With the help of a great new book – about to be published in the US – let’s take a look at why there is no room for complacency.

“No way to run an economy” (Pluto Press, 2009) is by a man whose research and analyses I have come to respect and rely upon – Graham Turner of GFC economics. While the book is full of solid facts and data – it is eminently readable for those prepared to unleash their inner wonk.

Turner lived and worked in Japan through the last twenty years of debt-deflation – and now looks at the US and European economies through the prism of that prolonged deflationary crisis. And it’s not a pretty sight.

He first takes a close look at the Bernanke/Geithner/Summers strategy for reflating the US economy. There are, or at least were, five planks to this strategy – lower interest rates, the Public Private Investment Program (remember that?); mortgage modification; fiscal expansion and ‘stress tests’.

While free money and fiscal expansion, Turner argues, may have helped the Dow move up – it’s not reflating the economy. On the contrary, debt-driven deflation is the order of the day – reflected in debt defaults, falling house prices, rising foreclosures and mortgage delinquencies. But stabilising the housing market is key to bank solvency, to generating employment and to kick-starting a full recovery.

All the signs are that despite their massive collective brain power the Bernanke/Geithner/ Summers strategy will not give President Obama and the Democratic Party the sound economic recovery needed to win over the electorate in 2010.

So self-congratulation should be put on hold for a while…..

What of the Europeans? They will be at Pittsburgh to boast of imminent recovery, and to contrast their economies with Anglo-American economies. They will imply that in Euroland policy-makers were more cautious about lending, and that their economies are therefore less prone to Anglo-American-style bubbles.

That might be plausible – if it were not for Spain, Ireland, Eastern Europe and the European Central Bank (ECB).

For if the Federal Reserve has blundered – and it has – the governor of the ECB is guilty of criminal inaction and continued complacency. Indeed at the height of the crisis – in July, 2008 – the ECB actually raised interest rates! Consider one of the most disastrous impacts of that massive strategic miscalculation: the growing debt-deflationary crises in Spain, Ireland and Eastern Europe.

Of these the crisis in Spain is the most alarming. Just as in the US, real interest rates are still high – despite recent, belated cuts by the ECB – and remain well above falling and negative prices and wages. According to Variant Perception the Spanish real estate crash is worse than widely believed; banks are hiding their losses, and while Forbes magazine might argue that “Spanish banks are in Top Form” – that may be because Forbes has not looked closely at their balance sheets. Spanish banks are hiding their losses, it is alleged – by sophisticated accounting tricks, by not marking loans to market (i.e. valuing them higher than the market would) and by lending to what Variant call ‘zombie companies’ – mostly in the construction sector.

Sound familiar? Could this be happening in other parts of the global financial forest?

Spain, like the US is experiencing deflation. Prices have been falling for three months in a row. At the same time – and just as in the US – unemployment is still rising – heading towards a socially and politically disruptive 25% .

It’s worse in much of the rest of the European periphery. Prices in Ireland are falling at an annual rate of 5.9% – the highest deflation rate in the world.

The big losers will not just be the poor and middle classes of these countries: deflation will have ‘broad ramifications across the European banking sector’.

Why? Because countries on the periphery are net debtors, and the rest of Europe – including France and Germany – are net creditors. When the debtors stop paying their creditors – then Germany, France and other members of the European Union will face huge losses. On top of that they will need to re-capitalise Spain and the periphery economies – costly to their taxpayers.

When that crisis comes, Mrs Merkel may well have survived a German election campaign. But other G-20 leaders will not be so lucky.

Their management of the global economy and their legitimacy will have been severely tested – this time by voters.