Child in escape chute, US National Archives, 1924
Mr Osborne’s most striking political achievement, with the connivance of the economics profession and media, is to reframe the debate about the most severe crisis in living memory away from finance and towards the welfare state – identified as causal of the crisis.
In reframing the debate he has succeeded in ‘capturing’ some of his opponents and convincing them of his framing and narrative.
He has done so by accusing Labour of reckless management of state finances.
Now Labour, egged on as it was under Gordon Brown by orthodox economists in both the Treasury and academia, does share responsibility for ‘light touch regulation’ of the City. But in no way can the Labour government be found guilty of “overspending”.
The opposite is true.
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After two days of trouble and strife in global stock markets, the Federal Reserve’s New York President William Dudley said in remarks to reporters that a September interest rate hike seemed “less compelling” now than in recent weeks. These two words alone calmed global financial markets, and pushed up the price of oil.
So everything’s going to be all right then? That is what some would have you believe. “Relax. Its just a correction” say the analysts. “The stock market always goes up and up and up. Hang on in there.”
However, I do worry. Where there’s volatility and instability, the causes are ultimately fundamental. Given this week’s events what can they be? Is it all to do with China?
I doubt it. When the governors of the People’s Bank of China announced a cut in interest rates – stock markets continued to fall. When a Fed governor uttered two words off the cuff – markets rallied. So when looking for a cause we need to look west, not east.
Most agree that the panic was sparked by a slowdown in China. The question then becomes: why is China slowing down? Some put it down to China’s credit binge, and the rise in debt hobbling local governments and property developers. Demographic change is another. Others believe that China’s extraordinary investment levels will now dive lower.
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Floor of the New York Stock Exchange, Thomas J. O’Halloran, 1963
How can we make sense of volatile global stock markets? Economists explained this week’s dramatic falls by pinning responsibility on China. They are at pains to assure us this is not 2008 all over again. I beg to disagree.
Even though data is not reliable, it appears that China is slowing down. By 2009, the Chinese authorities were embracing the Western economic model that had just brought down much of Western capitalism. Undeterred, they launched a massive credit-fuelled investment programme. Growth soared at 10 per cent per annum. Investment recently peaked at an extraordinary 49 per cent of GDP. Total debt (private and public) rocketed to 250 per cent of GDP – up 100 points since 2008, according to the IMF. Property and other asset markets boomed, as did consumption. The Chinese should have been warned, for they won accolades from Western economists for their “Goldilocks” economy.
China’s stimulus helped keep the global economy afloat in the years following. But there are economic, ecological, social and political limits to a developing country like China continuing to support richer economies. And there are limits to Beijing’s willingness to abandon control and adopt in full the Western neoliberal economic model; the Communist Party has begun intervening. It is this intervention, we are led to believe, that spooked global markets.
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The view from Robert’s handmade canoe
I have just spent a delightful few days in the US on some of Maine’s Grand Lakes. I was there at the invitation of David Kotok, chief executive of Cumberland Advisers. David has been visiting this area, the poorest county in the United States, for twenty five years. His annual fishing expedition has now morphed into an invited gathering of economists and analysts, mainly from the US, but this year including myself and Ross Ashcroft of Renegade Economics.
There are no powerpoint presentations at Camp Kotok; no formal speeches or debates. Just dining (and not a little wining), barbecueing, swimming, networking, singing (country and western, with lots of Johnny Cash) – and fishing. Proud to say my fishing went well…catching perch, bass and on the last day a fine salmon – hauled from a depth of 60ft. The guides and Grand Lake are governed by strict conservation regulation, and – with lures and hooks designed to cause minimum harm – most were returned to the lake. Which eased my conscience a little…
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In this new Prime Publication I discuss why the Euro is “the gold standard writ large”. Read an extended version of this article on Social Europe.
Delors Commission, 6 January 1986, European Commission Audiovisual Library
The euro not only replicated key elements of the gold standard – but went much further: European currencies were simply abolished. States lost control over both their currency and their central bank. Parallels with the operation of the gold standard explain why, like the gold standard, the euro will fail.
The euro system denies monetary policy autonomy to states, and like the gold standard, insists on full capital mobility, over-values the shared currency, creates a sense of euphoria and excess when introduced into a new state; then applies deflationary pressures on indebted states, and like the gold standard encourages nationalisms, protectionism and political resistance: the very opposite of the liberalizing motives of its architects.
Read the full publication
Now they need to turn their attention to rebuilding their economy. The first step must be to begin creating a new (and hopefully temporary) monetary system that can be used to get money circulating, economic activity jump-started and employment created. There are precedents for doing this, as I explain in a later post. Where possible government should help by using government resources (which could take the form of IOUs) to invest in jobs for Greek people (especially young people) and for ensuring firms, especially small family firms are revitalized and profitable. While it will be important to stabilize the banking system, this will only happen when the economy is stabilized, and recovery begins. It will not take long then for the banking system to return to health.
So the priority must be: recovery. And given that Greece has just endured possibly the worst depression in recorded history, it will be the case that most private sector firms and banks will be in a very weak position. That is why the Greek government will have to intervene and spend money (in whatever form it takes) on investment.
Such fiscal activism is more important to recovery than debt relief. That is why, as Andrea Terzi argues, it is important for Greece’s new finance minister to demand from Eurozone technocrats (EZ leaders are politically impotent) the fiscal space that is a priority for recovery, not just debt relief. Relief from debt payments – if it is ever negotiated – is a long-term process of lightening the burden of future debt repayments. But Greece cannot wait for that future. It needs action to revive the economy now – today.
And the magic is this: if a new currency (say IOUs as used for example, by bankrupt California in 2009) were to circulate quickly; if jobs are created by this new ‘money’, then economic activity will take off, wages, income and profits will be generated. Some of that income can then be used to pay taxes (and the Greek government must up its tax collection game!) – because income finances spending, investment and taxes. (Its not rocket science.)
As a result, the government’s debt burden will automatically decline – without any help from creditors – as a share of the economic cake (GDP). That will happen because the economic cake and the income it generates will expand, and income from the expansion (bigger cake) can then be used to repay debts. Above all, that income can be used to save the livelihoods of millions of Greeks, to increase the profits of small firms and thus to breathe life into Greece’s comatose economy.
So the task of the Greek people now, is to ensure that the new Greek Finance Minister forcefully rejects the archaic, self-destructive and private bank-friendly monetarism of the Euro system – and creates fiscal space (government spending) that will restore jobs, income, profits and tax revenues to the people of Greece – in both the private and public sectors.
In the immortal words of John Maynard Keynes: if the Greek government “takes care of employment, the (Greek) budget will take care of itself.”
As mayhem breaks out on stock markets; as Eurozone banks freeze up; and as the global financial system approaches a frightening ‘danger zone,’ the champions of the globalised ‘free market’ and of the Euro are in search of a scapegoat.
Instead of accepting that it is the broken banking system; the de-regulated financial Eurozone, and the deflationary monetarist policies of the Maastricht Treaty that are the roots of the crisis, the Troika (the IMF/EU/ECB) want to identify a convenient whipping boy.
Instead of going after the real culprits — un-regulated bankers that lent recklessly, confident they would always be bailed out by taxpayers — the approach of the Troika is to scapegoat Greece. The implication is that the whole fabric of the Euro, and with it the global economy, is torn apart because one poor country, Greece, will not enforce ever-deeper austerity on her people.
Let’s get this straight. The Greek economy — and with it the Euro — is disintegratingbecause Greek politicians are implementing austerity, not because they are failing to.
As one of the poorest of the Eurozone economies, Greece was always the most vulnerable to the global financial crisis. The ‘Troika’ can build a credible case that Greece’s politicians should not have borrowed from the private bankers of Europe, and therefore Greeks share responsibility for the debt.
But Greece was only able to borrow because, with the help of Goldman Sachs, she was welcomed by Europe’s bankers and leaders into the pre-existing de-regulated, financial framework that is the Eurozone. A monetary union designed above all to promote, protect and subsidise the interests of money-lenders and speculators in the private bank-debt and sovereign debt markets.
Greece’s entry into the Eurozone was of course a mistake. But the idea that Greece has misbehaved to an extent that deems her responsible for destroying the European and global financial fabric is, frankly, absurd.
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We call on David Cameron to support the organisation of a European conference to agree debt cancellation for Greece and other countries that need it, informed by debt audits and funded by recovering money from the banks and financial speculators who were the real beneficiaries of bailouts.
We believe there must be an end to the enforcing of austerity policies that are causing injustice and poverty in Europe and across the world.
We urge the creation of UN rules to deal with government debt crises promptly, fairly and with respect for human rights, and to signal to the banks and financiers that we won’t keep bailing them out for reckless lending.
Frances O’Grady, General Secretary, TUC; Len McCluskey, General Secretary, Unite the Union; Paul Kenny, General Secretary, GMB; Manuel Cortes, General Secretary, TSSA;Sarah-Jayne Clifton, Director, Jubilee Debt Campaign; Paul Mackney, Chair, Greece Solidarity Campaign; Nick Dearden, Global Justice Now; Owen Epsley, War on Want;James Meadway, New Economics Foundation; Ann Pettifor, Prime Economics
And the following MPs: Diane Abbott, Dave Anderson, Richard Burgon, Jeremy Corbyn, Jonathan Edwards, Margaret Ferrier, Roger Godsiff, Harry Harpham, Carolyn Harris, George Kerevan, Ian Lavery, Clive Lewis, Rebecca Long-Bailey, Caroline Lucas, John McDonnell, Liz McInnes, Rachael Maskell, Michael Meacher, Grahame Morris, Kate Osamor, Liz Saville-Roberts, Cat Smith, Chris Stephens, Jo Stevens, Catherine West, Hywel Williams.
There’s a petition to cancel Greece’s debts here, too.
First Published in China’s People’s Daily on 29 May, 2015
Sovereign debt can be uniquely complex, from both a financial and political perspective. It is covered by private law, yet there is no international law equivalent to insolvency law for sovereign states. Unlike individual and corporate debtors, who can appeal to the law of bankruptcy to draw a line under their debt, the citizens of poor countries remain infinitely liable for debts incurred by their governments. This is the case even if their exchange rate has collapsed and the debt has a far higher value than when incurred.
There are welcome recent efforts by the G77 and China to put in place a fair international process for sovereign debt crisis resolution. By contrast, the IMF is pursuing a far more limited path of improving the technical wording of bonds, to enable collective action clauses that enforce organized write-down or restructuring of debt more easily. While making some improvements, this does not resolve the root problem.
Underlying most recent sovereign debt crises is the fact that, under today’s global financial architecture, there is no adequate management of exchange rates and of cross-border capital flows. These footloose, de-regulated and often short-term speculative flows encourage excessive borrowing, reckless lending and risk-taking. With increased regularity they cause financial crises.
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The need for the biggest British opposition party to restore a degree of economic credibility is urgent – both in its own interests, but also in the public interest. But it will be tough, with little help expected from a majority of the economics profession.
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