The shaking of the foundations

In 2007 a remarkable thing happened: the poorest households in the United States – defined as sub-prime – defaulted on their mortgages and very nearly brought down the global capitalist system. Powerful banks (including Goldman Sachs) dependent on the high rates associated with risky ‘sub-prime’ loans, were on the brink of failure. Lehman’s collapsed. This was probably the first time in history that the poor had exercised such power.

In 2015 the poorest country in Europe is shaking the foundations of globalization – by threatening to democratically elect a moderate political party that wants to restructure the country’s debts.

 The very hint of such an intention by the impoverished and weakened Greeks has the European political establishment and global stock markets severely rattled.

Why should this be so? Greece’s economy is tiny and almost irrelevant to the European economy, not to mention the global economy. Second, the global economy appears to be recovering. The price of a key commodity, oil, is falling and many economists regard this as welcome in that it raises global disposable income. Third, the ECB promises to soon channel a generous dose of QE to the private finance sector. Fourth, deflation, while forcing down prices, wages and incomes, effortlessly raises the value of the finance sector’s most prized asset – debt.

Fifth, and perhaps most importantly, the globalized economic model of de-regulated, offshore capitalism, rising private debt, shrinking public sector services, deflating wages and prices, coupled with the privatization of public assets, remains intact.

What’s not for global financial markets to like?

After all, and from the point of view of financial markets, politicians and central bankers have done nothing to re-structure, re-balance or manage the existing economic model more effectively. Indeed the economic model that caused the gravest financial crisis in history has been strengthened since 2009. European (and notably British) politicians from across the political spectrum do not challenge the merits or weaknesses of the model. They turn a blind eye to offshore capitalism and instead have chosen to make a fetish of domestic budget deficits.

Misled by their politicians, taxpayers are similarly focused on domestic issues: budget deficits, immigration and scandals. They are not on the streets protesting at the guarantees, subsidies and other forms of financial ballast their governments generously provide to offshore finance.

Coupled with this, central bankers dish out largesse in the form of low rates and QE to global financiers.  The result is that business for bankers is better-than-usual. Now, with deflation taking hold in Europe as well as Japan, the sector can sit idly by as its biggest and most valuable asset – the vast European private debt overhang – rises effortlessly in value, relative to both incomes and prices.

This confidence is most manifest in the City of London, which is on a roll. Recruitment is expanding; the British Chancellor is working hard to defend bankers’ bonuses from attack by the EU; and financiers are pushing up rents in the City as the sector once again expands, sure of political protection.[1]

Given that so little has changed since 2007; given that capital mobility for the super-rich oligarchs remains unchallenged; and given that financial elites can expect more central bank largesse – why the latest stock market jitters over Greece’s threatened revolt?

The answer is that while the model might be dominant, the system is weighed down by costly, unpayable debt, and is therefore fragile and volatile. A poor, sovereign debtor could easily bring it tumbling down.

 American sub-primers were punished for their “revolt” with brutal evictions from homes. Politicians, lawyers, economists and central bankers did not rise to their defence, but aligned with bankers.  Now the global financial system is set to punish Greece, and is bolstered in that aim by heavyweight politicians and commentators from across the European Union.

They will probably succeed. The odds against Greece being treated fairly, or even humanely by European financial institutions and markets are very low indeed.

But for now, the poorest of the world are once again at the centre of the vortex – shaking the foundations of freewheeling, reckless, offshore capitalism.


1. London financial sector’s revival fuels office rental cost fears by Kate Allen, property correspondent, Financial Times, January 02, 2015.

Labour views economy through the wrong end of a telescope

“There is no path to growth and prosperity for working people which does not tackle the deficit”. Ed Milliband, 11th December, 2014.

The Labour leader has finally succumbed to a baying media pack that insisted he commit himself to an economic goal set by Labour’s opposition: namely “tackling the deficit.”

I am no politician, but such capitulation to  economically illiterate commentators, is surely both politically unwise as well as economically nonsensical. The reason it is politically unwise is that Mr. Milliband is succumbing to the Chancellor’s flawed and frankly dishonest framing of the public deficit as the biggest challenge facing Britain’s economy. But while Mr Osborne must be delighted at luring his opponents into a debate that cannot be won, he is plainly very, very wrong.

The biggest threats facing the people of Britain, and therefore the economic issues upon which they will decide their votes, are as follows. First, the broken banking system – still not fixed seven years after ‘credit crunched’ in 2007, and still not lending at low rates to the real economy, in particular SMEs. Simmering public anger at a greedy and fraudulent banking sector has not diminished.   Second, a vast overhang of private debt, and the threat to the solvency of households, SMEs and corporates posed by a rise in interest rates. The “Alice in Wongaland” economy is not sustainable, and we all know it. Third the threat posed to all British voters by falling wages and spiralling deflation. Few of us understand deflation, but be sure it poses a very grave threat.  Fourth, the threat posed by climate change.

By overlooking these threats, and focusing on the public deficit, Labour  is not economically credible, and will fail to win the confidence of voters.

This is particularly so because Chancellor Osborne has proved beyond doubt that governments  – even his ruthlessly focused Treasury – cannot control the budget deficit. We argued as much back in July, 2010, when Professor Victoria Chick and I published “The economic consequences of Mr. Osborne”.  We wrote then that: “the public sector finances are not analogous to household finances. A household can reduce its deficit by cutting its spending, but the public sector is too important for that. What happens to the public deficit depends on the reaction of the economy as a whole.” By focusing on the deficit, Labour emulates the Coalition in viewing the economy through the wrong end of a telescope.

The plain fact is that the deficit is a function of the health of the economy (its share falls when the economy (i.e. employment) is expanding, and rises when the economy is failing). Because it is a function of the expanding or contracting”cake” that is the economy,  government is not able to control  its size – as George Osborne has found to his cost. Why would his opponents want to repeat his errors and failures?

Instead of promising to cut the deficit, Labour should be promising the people of Britain policies for investment in e.g. green infrastructure and nationwide high-speed broadband – investment that will generate skilled, well-paid employment, for all, including the millions of under- or part-time or zero-hours employed. Furthermore, because all expenditure  (both public and private) is income for someone else – both those in the public and the private sectors will gain from such public investment.  The investment to boost current private and public incomes can be financed by borrowed or printed money. Because the investment will generate income for both the private and public sectors -and tax revenues for government – the investment will pay for itself. Its not rocket science!

By raising wages, Labour could turn back the threat of deflation.  And by tackling both the broken banking system and the overhang of private debt – Mr. Milliband could offer the electorate a credible exit from the chronic, ongoing crisis of globalised capital.

If Labour were to do that, the deficit would take care of itself. ”

Capital, Wealth and Cannibalism

I am exasperated by John Kay in the FT today. His column The capitalists sold the mills and bought all our futures, is superb and for that reason deeply annoying.  Its really aggravating when someone can cogently express points that have gnawed away at one for weeks, and yet rendered one incoherently  inchoate.

Kay deals elegantly in his column with a flaw in Thomas Piketty’s analysis. It is to do with the definition and calculation of wealth, or patrimoine as defined in the French edition of his book, Capital.  I have felt convinced that Piketty, like a good accountant, has conscientiously (“heroically” writes Kay) totted up all the tangible wealth that there is to count.  But wealth, surely, is more than just the ownership of tangible assets.

It sure is, explains Kay. “If you want to measure the capital possessed by a nation, there are two ways of doing it. One is to travel the length and breadth of the country counting the houses, the bridges, the factories, shops and offices, and adding up their total value. The other is to knock on doors and ask people how rich they are. ….So there are two different concepts of national capital: physical assets and household wealth.”

Kay then explains that Apple, for example, has tangible wealth made up of “physical assets worth only about $15billion (and.. ahem… a $150 billion mountain of cash).” (Is Apples’scash tangible?) However it has a market capitalisation of $500 billion – a value based on “the anticipation of future profits.”  In other words, its worth, its wealth, is not just those measly, tangible $15 billion worth of computers, phones, stores, tables, Apple t-shirts etc.  The company’s real worth is the anticipation of future rents that Apple (and Microsoft)will extract from customers, by virtue of their oligopolistic position in the computer operating system market. And that position has been obtained not just by technological advances or skilful entrepreneurealism, but by virtue of great political power.

But the saving grace (if there is grace to be saved here) of both Apple and Microsoft is this: they make tangible things that can be bought and sold from stores, and are useful (on the whole). What of the men and women that sell debt? Or insurance? Or any other asset that is based on what is known in polite circles as ‘financial engineering’ . These are intangible ‘assets’ that can be created without engagement with either the Land or Labour (in the broadest senses); whose creation is virtually effortless, but which are assets that guarantee a stream of revenue many decades into the future?

The individuals and corporations that own these assets do not just enjoy historically unprecedented levels of wealth. They exercise vast power – political, economic, social and market power.

But like the slave-owners of old they face challenges too. By effectively cannibalising the body that is the real economy – that space where people work, make or grow products, provide services, and generate income with which debts and premiums can be paid; by cannibalising the real economy, avaricious oligopolists threaten to kill it too. Like slave-owners tempted to subjugate and starve their slaves almost to death, there comes a day when the logic of the capitalist system breaks down.

The question John Kay does not address in his column is this: when will that day come?

Parliament discusses the creation of money



Magician Show, Le Saltimbanque Der Taschenspieler, The Mountebank Peint Par Louis Knaus Grave Par Paul Girardet

Today the British Parliament discussed the creation of money. The debate was led by Peter Baker, MP for Wycombe for the Conservatives and Michael Meacher, MP for Oldham for the Labour Party.

It was exciting that at last this issue is being raised at a political level. Much credit for this must go to the Positive Money campaign. However, we at PRIME have grave reservations about the proposals promoted by MPs for the centralised creation of the nation’s money supply.

We will write more about these reservations in due course. Watch this space.

Central Banking, State Capitalism, and the Future of the Monetary System

First published on the CFA Institute website 

The role of commercial and central banks in the process of providing credit may seem to be clearly understood by economists, bankers, and policymakers. But there are common misunderstandings about money creation, equilibrium, public money, central banks, and interest rates. The outlook for the global monetary system is not overly optimistic in the absence of overcoming these misunderstandings and altering the philosophies of bankers.

This presentation comes from the 67th CFA Institute Annual Conference held in Seattle on 4–7 May 2014 in partnership with CFA Society Seattle.

The liberalization of finance after the 1970s led to a significant buildup of debt in many parts of the world, especially in Africa, Latin America, and parts of Asia. The inexorable rise in private corporate, household, and individual debt leads to the question of whether professional economists truly understand money, finance, and credit. Good predictions and sound investments cannot, in my view, be made without a solid understanding of money.

Misunderstandings about Money Creation

Satyajit Das (2010) noted in a post on his blog that “modern finance is generally incomprehensible to ordinary men and women. The level of comprehension of many bankers is not significantly higher. It was probably designed that way. Like the wolf in the fairy tale: ‘All the better to fleece you with.’” Misunderstandings about money creation are not uncommon, as can be seen from the title and content of Martin Wolf’s (2014) recent article in the Financial Times: “Strip Private Banks of Their Power to Create Money.” Wolf does not acknowledge that the power to create money is shared jointly between borrowers and bankers. Without applications for loans, banks would not enjoy the power to “create money (deposits) out of thin air.” As a result of this misunderstanding, and because Wolf regards bankers as irresponsible, he calls for a form of centralized control of the money supply. His proposed solution should worry us all.

Most economists conceptualize money as a commodity. By conceptualizing money in this way, economists have come to believe there can be either a shortage or a surplus of money. Furthermore, they believe that the role of bankers is to act as intermediaries between those holding stocks of money and those wanting to “rent” or borrow money—that is, savers and borrowers. This theory is deeply flawed, as is the orthodox neoliberal economic theory that assumes central banks serve as a powerful control system for sound money. An example of this thinking is Allan H. Meltzer’s (2014) article in the Wall Street Journal in which he berates the Federal Reserve Board for its role in the growing threat of inflation. A more realistic assessment is that central banks do not have as much power to control the supply of money as is typically assumed by neoclassical thinkers like Meltzer.

The Bank of England (BOE) helped shed light on the issue in its recent Quarterly Bulletin (2014a). The BOE’s staff explained that “the majority of money in the modern economy is created by commercial banks making loans” (p. 16). Mervyn King, the recent governor of the BOE, explained that UK private banks are usually responsible for 95% of the money supply; the central bank only provides 5%. The BOE staff went on to explain that “banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits” (p. 16).

The bottom line is that there is no such thing as “fractional reserve banking,” which is the theory that a fraction of a licensed, commercial bank’s loans are backed by actual cash (or “reserves”) on hand. In contrast, savings banks do indeed lend out savings. There has been no such thing as fractional reserve banking since the BOE was founded to manage the banking system in 1694. This misperception is very common, even among respected economists.
Continue reading… ›

Vicious loop: rising private debt merging with falling wages, productivity & inflation

The Bank of England’s Andy Haldane is a fine economist. He occupies an ideology-free zone. This is highly unusual in central bank circles. He has just made a particularly skilful, and nuanced speech. Many gushed over it. Gillian Tett of the Financial Times suggested that it was good enough to qualify Haldane as a journalist.

But Haldane is not a journalist. He is a central banker. And that makes his ‘Twin Peaks’ speech particularly ominous. For while he bows to his political masters in the Treasury by acknowledging the growth in UK employment, his speech tilts definitively towards gloom. Let’s analyse it more carefully than I was able to do in a brief BBC Newsnight interview (eleven minutes into the show).

First, as part of his positive ‘Peak’, Haldane notes that “consumer price inflation, at 1.2%” has reduced “the squeeze on households’ real disposable incomes”. That is questionable, given the ongoing squeeze on household incomes. [Later in the speech he gives it to us straight: “average weekly earnings growth adjusted for consumer price inflation – is currently running at close to minus 1%” (My emphasis).]

He then goes on to make a remarkable “positive” statement. “According to financial markets inflation is expected to return and stay close to target over the medium term.” That is in my view a highly unlikely trajectory. And Haldane appears to agree, because later, in his conclusion he makes a tortured reference to disinflation as “the weak pipeline of inflationary pressures” – weak because of falling wages and commodity prices. So the financial markets are likely to be wrong again. And all the while deflationary pressures intensify.

Note that he, a policy-maker at the Bank of England is not telling us what the Bank considers the future direction of inflation to be. Instead he implies that the future direction of inflation is in the hands of markets, and not the central bank. That is depressing, but right of course, because the Bank of England, like the Federal Reserve has done almost all that can be done to manage inflation, given that the committee of men and women who decide on policy, have only one, not very effective weapon or policy tool: the central bank rate of interest. The current rate cannot reasonably fall much lower. Indeed the Bank can only maintain a 0% nominal rate – or as it is known, a Zero interest-rate policy (ZIRP).

What Haldane is saying here quite pointedly is this: the Bank of England can do no more. Continue reading… ›

Secular stagnation is the outcome of deliberate policy; it can (still) be reversed

Secular stagnation within a deflationary context, let us be clear, is the outcome of deliberate policy choices. It has not come about by accident. It has not come about for lack of economic understanding, learning or analysis. It has not come about for lack of economic tools – both fiscal and monetary, or indeed for lack of human agency. Instead secular stagnation is the deliberate outcome of policy choices made by those dominant in the world’s most powerful policy-making institutions, including the IMF.

Calculated choices, including the following, have led to stagnation:

  • policies to liberalise/de-regulate finance, and in particular debt creation – and a deliberate refusal to manage the very unstable, and de-stabilising global financial system.
  • a policy to allow the potentially dangerous shadow banking system to expand, without rigorous micro-prudential regulation or oversight. (According to the IMF “the global shadow system peaked at $62 trillion in 2007, declined to $59 trillion during the crisis, and rebounded to $67 trillion at the end of 2011.”)
  • policies to use taxpayer resources to rescue the private finance sector from its own fraudulent and anti-free market conduct – without imposing and carrying through severe conditionalities.
  •  policy to leave the banking system pretty much as it operated before the crisis: with deliberate decisions not to re-structure too-big-to-fail banks, and separate retail from the speculative arms of banks.
  • A refusal to write off, re-structure or manage the repayment of vast debts owed by, and to the private banking system.
  • A deliberate decision to allow effectively insolvent banks to carry on speculative activities – but this time with taxpayer backed-guarantees, and with resources obtained at very low, central bank rates.
  • policies to lower wages (through globalisation/liberalisation/attacks on trade unionism).
  • policies for liberalising trade, without policies for managing and transitioning the complex impacts of what is often wrongly defined as “free” trade.
  • A deliberate refusal to act to re-balance the unbalanced global economy – away from speculative, rentier activity and towards full and meaningful investment and employment of both human and other (finite) resources.
  • A deliberate refusal by powerful leaders and policy-makers to co-operate at an international level to fix imbalances (trade, financial and ecological) between surplus and deficit countries.

Debt-deflationary policies which lead to stagnation are the policies of choice of institutions dominated by creditors.

This is because deflation has one great macroeconomic upside: it inflates the value and the cost of debt. Just as inflation erodes the value of debt.
Continue reading… ›

Why the Scottish Uprising will not lead to independence

It is a campaign to end allegiance to Westminster politicians that promote and/or tolerate austerity and the accelerating privatisation of the NHS and other national assets.

Rising anger against the establishment has mobilised support behind the campaign for Scottish independence. We share this anger and believe the Scots are right to challenge both the above, and also the narrow focus of Britain’s politicians on, e.g., voters in marginal seats.

But the uprising is led by a political party (the SNP) whose campaign will lead to Scottish subordination to the British state on the one hand, and to multinational corporations on the other. And make no mistake: the SNP’s determination to fragment the British state—even if achieved peacefully and even if it were possible to define a Scottish government as progressive—ultimately serves the interests of footloose finance capital more than those of the Scottish people.

The currency question

The SNP seems to have ruled out an independent Scottish currency and central bank, which we and other economists recommend as the only solution consistent with sovereignty and independence—even if it, too, is a risky strategy for a country of less than five million taxpayers.

The SNP’s commitment to a currency union with Britain, as many have argued, is a commitment to subordinate Scottish economic independence to the control of the British Treasury and the Bank of England (BoE). As the Governor of the BoE Mark Carney repeatedly says: a currency union is not compatible with sovereignty.

Under a currency union, the Bank of England and Treasury will influence and shape the exchange rate of Scotland’s currency (sterling) and Scotland’s interest rates. Furthermore, the British Treasury will insist on final control over an independent Scotland’s taxation and spending policies, and the management of its public debt. Scotland can today have some say over Treasury policies. An independent Scotland in a monetary union will have no say.

Post-independence, 59 million British taxpayers will not be willing to guarantee, via the BoE, the bank deposits of 5 million Scottish citizens. The BoE will no longer regulate, manage or lend to Scottish banks. As a result and over time, money will flow out of Scottish banks, bankruptcy will loom, so banks will quickly migrate their HQs to London, to flout free market ideology and seek protection from losses from British taxpayers. Continue reading… ›

Twenty Two Days that Changed the World

In this carefully researched book, Ed Conway tells a gripping human tale about the July 1944 Bretton Woods Conference – “the biggest battle of the Second World War – fought behind closed doors”. He provides remarkable insights into the personal, geopolitical and intellectual dynamics that played out that summer within the confines of the Mount Washington Hotel, nestled within New Hampshire’s Bretton Woods.

His story of how 730 delegates from 44 nations worked together to build the post-war international monetary system is a highly readable account of a gathering that was to transform the global economy. Pivotal to the success of the conference was President Roosevelt’s and Keynes’s determination to bar Wall St. and the City of London from participating in preparations for the conference; and to deny the private finance sector (with one exception) access to the conference proceedings. After the catastrophic economic failures of the 1930s Haute Finance was to be denied a role in the construction of the post-war international economic order.

The book details the well-known tensions that arose both before and after the conference between the US Treasury’s Harry Dexter White and John Maynard Keynes, representing Britain. As importantly Conway reveals “the surprising influence of China, Brazil and India” but also the significant role that Russia played at Bretton Woods. Conway is the first to consult Russian Finance Ministry archives on the part played by the Soviets at Bretton Woods; files made available to researchers at the end of the Cold War but never before used.

Conway explores the controversy surrounding Harry Dexter White’s supposed collusion with the Soviet authorities during the negotiations. He shares a growing consensus that as late as 1946

“the general opinion in Washington was that ‘Stalin has been our best friend’…In other words, there simply  was not during this period the stigma attached to  dealing with the Soviets that developed over the following years…White simply viewed his interactions with the Russians as a means of carrying out broader American foreign policy – without having to go through the odious State Department.” (p.162)

The Bretton Woods conference is often relegated in importance to the summits held at Yalta and Potsdam. Conway writes that:

“For some reason, while it remains one of economics’ few household names, Bretton Woods is frequently ignored in accounts of the period.” Continue reading… ›

Out of thin air - Why banks must be allowed to create money

‘I know of only three people who really understand money. A professor at another university; one of my students; and a rather junior clerk at the Bank of England.’  Attributed to Keynes [1]

In a recent paper, ‘Money creation in the modern economy’[2] Bank of England staff explained that:

‘[B]anks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits … Commercial banks create money, in the form of bank deposits, by making new loans.’

Because there is widespread confusion about the role of banks in creating money, it did not take long for the Bank of England’s report to ignite debate on the comment pages of the Financial Times. In his regular column, Martin Wolf called for private banks to be stripped of their power to create money. [3]

Wolf’s proposals are radical, and would give a small committee – independent of the state – a monopoly on money creation. His ideas are based on the Chicago Plan, advanced among others by Irving Fisher in the 1930s, and shared today by the UK NGO, Positive Money. They agree that all ‘decisions on money creation would … be taken by a committee independent of government’.

Furthermore, Wolf argues, private commercial banks would only be allowed to:

‘…loan money actually invested by customers. They would be stopped from creating such accounts out of thin air and so would become the intermediaries that many wrongly believe they now are.’

Because I am a vocal critic of the private finance sector, many assume that I would agree with Wolf and Positive Money on nationalising money creation. Not so.

I have no objection to the nationalisation of banks. But nationalising banks is a different proposition from nationalising (and centralising) money creation in the hands of a small ‘independent committee’. Indeed, the notion to my mind is preposterous. It is an approach reminiscent of the misguided and failed monetarist policy prescriptions for controlling the money supply in the 1980s.

Second, the proposal that only money already saved should be made available for lending assumes that money exists as a consequence of economic activity, and equals savings. But that is to get things the wrong way around. Rather, it is credit that functions as money, and it is credit that creates economic activity and employment. Deposits and/or savings are the consequence of the creation of credit and its role in stimulating investment and employment. Employment, as we all know from our own experience, generates income – wages, salaries, profits and tax revenues. A share of this income can then be set aside as savings.

To restrict all economic activity to savings would be to contract economic activity to an ever-diminishing sum of existing savings. Furthermore, the restriction of all lending to existing savings would lead to higher rates of interest, because the level of savings is much lower than the level of potential economic activity and employment. Savers would be in a position to demand a higher return on the loan of their savings. This would return society to the dark ages, when investment and economic activity was subject to the whims of great feudal landowners, putting the financial elite in control of society’s surpluses or ‘savings’.

Money in an historical context As Douglas Coe and I explain in a recent PRIME report,[4] the UK monetary system – complete with the power to create money ‘out of thin air’ – was established back in 1694 with the goal, among others, of facilitating commercial transactions and the financing of the king’s wars. But there was an additional and just as important goal: to mimic the Dutch in reducing the rate of interest facing commercial interests. British firms, households and individuals were keen to bring rates down and into line with those that prevailed in the financially more advanced Netherlands. Lower rates made investment and employment viable. Continue reading… ›