13 Oct 2017

Ann Pettifor as Imagine2027.

I went to see Ann Pettifor speak last night. She was speaking as part of a series called Imagine 2027, organised by The Cambridge Commons and Labour History Research Unit of Anglia-Ruskin (the other university in Cambridge). The idea is that speakers will set forth what needs to happen over the next ten years for positive social change.

I've read many of Ann's articles and watched videos of her speaking, so I had some idea of what to expect. And she was everything I expected. I thoroughly enjoyed the talk and her answers to the questions. The Q&A went on for about an hour.

The event was videotaped so hopefully it will appear online at some point.

Ann talked mainly about two things:
  1. What money is
  2. The finance system should serve the real economy. 

What Money Is.

"Money is credit"

"Money is just a promise to pay" - quote from Joseph Schumpeter 

"Money triggers economic activity".

"Money is never scarce".

Ann spoke a lot about how most money is created by credit, by borrowing. When the government found £1,000 billion to bail out the finance system in 2008/9 it did not suddenly strike oil or gold and get rich. It simply entered the number in a computer and transferred it to the banks. The banks had to put up collateral and in some cases the government took ownership of the bank for a time, but the £1000 billion came into existence in an instant. The phrase "magic money tree" was not mentioned, but it might well have been, because all money these days is like this - we create more money by borrowing from banks. When we buy something on the credit card we create money. And so on.

My take-away from the night however, was that money is underpinned by institutions. By five institutions in particular:
  1. A central bank, which in the UK is quasi-independent, but in fact publicly owned which manages interest rates and provides reserves and guarantees for private banks.
  2. A currency, which is supported by tax payers paying their taxes in that currency
  3. Accounting systems to keep track of everything
  4. A criminal justice system capable of enforcing contracts. In the UK a branch of government. 
  5. A banking system to facilitate the transfers of money. 
If we look at this we see that money is dependent on the state. And furthermore it is ultimately dependent on tax-payers, who support the currency by paying their taxes in that currency. If we paid our taxes in US dollars, the UK Pound would cease to exist.

As we have seen in the last decade the private finance sector is actually a liability to this system. We spent £1000 billion bailing out the big banks to preserve the banking system after they recklessly destroyed vast amounts of wealth. Also we have to guarantee savings, because banks are unreliable these days. So finance is a liability. Finance makes a lot of money day to day, but as it is presently run is inherently destabilising and has cost us all dearly. 

Someone asked the obvious question about the private "crypto-currencies", such as Bitcoin. To which Ann stated, quite firmly that she believed them to be "Ponzi schemes" and "scams". They are based on the same monetarist theory that has been so disastrous in other areas. So expect no help from that direction. 

Making Finance Serve Us.

We lost control over our monetary system to the private finance sector ca. 1971. Ann emphasises the stability of the post-war economy (1945-1970) and the lack of recessions during that time, and though she didn't mention it, the vast sums we owed to the US to pay for the war. In 1945 government debt was 250% of GDP and this was addressed by expanding GDP massively by investing in infrastructure (hospitals, roads, schools, universities, etc). I think she simplified this period considerably. For example, the inherent instability of the US gold standard helped to undermine the system when the US started fighting an obscenely expensive war in Vietnam and needed more money, but could not create it (and were impeded by the French buying up gold at the same time). So it wasn't a perfect world and the system was ready to fall when it did. Simply recreating that system would be doomed. But there were real advantages that we could incorporate into what we do now.

The bottom line was that we want finance to serve the real economy.

A major policy discussed was the control of capital flows across borders. And a question brought out how we might do this. We could impose a so-called Robin Hood Tax on large sums of capital being transferred out of the UK. So that when some large multinational was moving vast sums out of the UK to avoid paying tax on them, there would be a small tax on that transaction.

Another was the issue of sovereign debt, but at this point I became lost. I was not clear what point Ann was making, other than that she considered sovereign debt good. Something to do with how it impacted the money supply.

The last point, and perhaps the most important, is that we need to focus investment on employment

If we invest in employment then we create a number of virtuous loops. The employed person is productive and less reliant on the state. They pay taxes to fund government spending. They also spend their money and this creates profits for retail and drives production. Above all we need well paid employees spending their wages in the (real) UK economy. That is what happened after WWII. Full employment, good wages, low crime, and strong economic growth.

Of course endless economic growth is a myth and a problem that was not discussed. But, for example, imagine if, having nationalised Royal Bank of Scotland, they were directed by their new owners (us!) to invest in green energy and jobs for Scottish people? Instead they continued to invest mainly in derivatives and other areas of the economy that produce nothing and create no jobs (except for a handful of bankers). So no benefit has accrued as a result, except that the share-holders of RBS have got their dividends. And they're probably not even paying tax on it. Here's another idea that just occurred to me - all shareholder dividends of UK companies should be taxed at source, like PAYE (and yes, taxed twice if they go offshore).

Whither The Revolution?

Ann's personal revolution was the Jubilee 2000 Campaign which she directed. It resulted in world governments cancelling £100 billion in debt to poor African nations that could not afford to pay the interest, let alone the principle.

However, while her ideas are revolutionary, she clearly doesn't see herself in a leadership role. She is an educator and adviser, but her call is for us to educate ourselves and for us to organise ourselves, not to follow her. And one cannot help but be a little disappointed by this. Movements require leaders and organisation. In Malcolm Gladwell's terms, a revolution requires connectors and persuaders and ideally someone at the head who is both. Someone who articulates a vision, has a practical program to achieve it, and who provides the focus for organising the mass demonstrations required. Not an easy role, I imagine, but a necessary one I think.

When our political leaders are so very disappointing (venial, dishonest, ideologically driven, parochial, self-serving, etc etc) we might well look outside the mainstream of politics for leadership. Ann is just as charismatic in person as I had expected her to be, and is someone I'd happily get behind if she ran for office (I struggle to think who else I might say this of). Of course I have long been a convert to these kinds of revolutionary ideas in their broad outline, so I am biased.

However, I ran into an old acquaintance outside the lecture hall and we were both bothered by the lack of an obvious movement to get behind. Some years past, in a rash mood, I joined the Labour Party, but it simply translated into being bombarded with requests for donations and invitations to fund-raisers. Inspiration factor zero for me and I quickly removed myself from all their mailing lists (which took a while).

If not Ann Pettifor (and I would ask her, Why not Ann Pettifor?) then who? Whose banner ought we to follow? Jeremy Corbyn? He may well look good in the aftermath of the inevitably train wreck that is Brexit and the collapse of the Tory Party due to infighting, but I don't think he is the revolutionary leader we need. He may well tip the government back towards liberal social policies, but he's not planning to take back control of the monetary system (as far as I know).

But at least we have someone who is capable of articulating the vision and who is quite high profile for a left-wing intellectual these days. At least there is a coherent alternative to the Neoliberal gibberish we have been drowning in. At least there are people, like Ann, who are telling us that the status quo is not inevitable and that things can change. She reminded us that in the past things have changed, and that it is people who change them. So at least there is that. 

19 Jan 2017

Land Taxes

There are three factors of production: land, capital, and labour. Respectively these yield: rent, profit, and wages. Governments raise money by taxing these. But over the years the proportion that each makes to the total has changed. For example a document form the National Archive notes that the contribution from land taxes has fallen dramatically. 

What this means is that for the government to raise taxes it must rely more heavily on taxing profits and wages. Taxing profit is seen as having a negative effect on business, and since business runs government, tax on profits are also dropping. Tax on wages bear the brunt. And wages are squeezed by business so as to maximise profit. The other source of taxation is indirect: such as taxes on spending or inheritance.

Land is special though. One must risk capital and apply labour to it to make profit. Wages are related to working. But land just accumulates value with no risk or effort. Land prices just keep going up. If the council improves your road using tax money, the value of the land goes up without you doing anything, and your contribution through taxes is minimal. Owning land is a way to accumulate wealth with no effort and very low taxes. Indeed the wealthy are adept at avoiding taxes, so the big landowners are getting more wealthy at the cost of everyone else. This in turn means that the demand for land is high and pushes up the price - creating a vicious circle.

So the rational thing to do would be to levy significantly higher land taxes and reduce the taxation on wages and profits; or lower the taxes on spending (VAT). This would cause more money to circulate in the economy. And it would force the wealthy to pay their fair share of taxes - you cannot hide land in an offshore tax haven!

17 Jan 2017

Too Much Finance Hurts Growth

In a brief, but fascinating and accessible article a team of economists look at the relationship between finance (as expressed in credit to GDP ratios) and growth in developed and emerging economies and focus on the EU.
Chong, E.Y. L.,  Mody, A., and  Sandoval, F V. (2017) Finance and growth: The direction of causality. Vox EU. 17 January 2017. http://voxeu.org/article/finance-and-growth-direction-causality
The key finding is that when credit-to-GDP ratios exceed 90% economies slow down. And this is particularly noticeable in the EU. However, the authors also say that as economies slow down beyond this 90% ratio, it leads to more rapid expansion of the finance sector. Causality could point both ways.

The authors conclude:
"One interpretation of the data is that beyond about 90% of GDP, additional credit is largely counterproductive. The evidence certainly supports that inference. Especially after 1990, many advanced economies exceeded the 90% of GDP credit threshold, and more credit beyond that level is associated with lower growth. Also, emerging and developing economies have credit-to-GDP ratios below 90% of GDP and in those countries, more credit has been associated with higher growth."
"The data are, however, also consistent with an alternative interpretation, one in which the causality runs the other way. Emerging and developing economies start from relatively low incomes and have, on average, higher growth potential. As they grow to realise that potential, the demand for finance leads to greater financial development." 

Getting an accurate and trustworthy figure what that the private sector debt in the UK currently is can be difficult because mainstream economists still see it as irrelevant.

12 Jan 2017

Article Alert

Keen, Steve. (2017). The WHO* warns of outbreak of virulent new ‘Economic Reality’ virus. Review of Keynesian Economics. 5(1): 107-111. DOI:http://dx.doi.org/10.4337/roke.2017.01.08

A new virus, known as ‘Reality’, has started to afflict Mainstream Economists, causing them to reject the ‘as if’ arguments they used to use to justify their models. There is no known cure for the virus, and complete avoidance of ‘Reality’ is the only effective strategy to prevent infection.

12 Oct 2016

Business Debt in China

This speaks for itself really. Corporate debt in China is now 165% of GDP. Every time I see a figure like this my question is, "What interest rate are the paying on that?" Say it's 10% APR. That would mean that 16.5% of the GDP of China is being spent on interest payments. The next question is "Who are they borrowing from?". That is, where is 16.5% of China's GDP going? We know it must be going to banks, but Chinese banks, American, European...?

7 Oct 2016

Rent Seeking

@AnnPettifor tweeted a picture the other day. It was a cutting from the 2012 Financial Times. It turns out the article is available online.

The monumental folly of rent-seeking.
The success of market economies is not achieved by policies that encourage greed. John Kay.
"The activities of Shah Jahan epitomise rent-seeking – the accumulation of a fortune not by creating wealth through serving customers better but by the appropriation of such wealth after it has already been created by other people. Both are routes to personal enrichment and the tension between them has been a dominant theme of economic history. Whenever the balance shifts too far in favour of appropriation over creation, we see entrepreneurial talent diverted to unproductive activity, an accelerating cycle in which political power and economic power reinforce each other – until others become envious of the proceeds of appropriation, and the resentment of the oppressed undermines the legitimacy of the regime. Political and economic instability are an inevitable consequence."

Extracting and paraphrasing the definition
Rent seeking is the accumulation of wealth by appropriating wealth that has been created by other people rather than by producing something. Both rent seeking and production are routes to creating wealth. 
When the balance of wealth accumulation shifts towards appropriation over creation, i.e. when rent seeking over takes production, entrepreneurial talent is diverted into unproductive activities (such as the finance industry) and away from more beneficial activities.
I'm not sure how the last part follows from the first. I think the author skipped a few steps. But we can see that if people's effort is going into accumulating wealth created by other people without contributing anything that that is a problem. And we can see that for the last 40 years or so successive governments around the world have been facilitating rent seeking at the expense of producing things. Britain, which used to be a major producer of steel and manufacturer of steel products, is now more focussed on providing services, especially financial services. The banking and finance sector has expanded rapidly as manufacturing has shrunk.

In Britain, people with spare cash do not invest it in business, they buy a house and rent it out. This is the most basic form of rent seeking. It creates a divisive situation in which most housing is primarily a source of income for the wealthy rather than a home for anyone. It leads to the situation where too many people benefit too much from high house prices and therefore high rents and this distorts the market. In Britain too over at least two decades few houses have been built to meet the demand for housing, especially in the low-cost portion of the market.

This is exacerbated by drug lords, kleptocrats, and other world-scale criminals are using the London property market to launder their money. This tends to force prices up in central London and that has a ripple effect. The housing market has inflated at between 500%-1000% of the consumer price index.

Most people can now never dream of owning their own home. A lot of us can never dream of even renting our own home and must find lodgings or live communally. Rent money, wealth created through labour, goes to landlords who produce nothing but simply accumulate wealth created by others. It might be forgiveable if there were investing in housing so that there were enough houses for everyone, but they are not. And it would be very interesting to see how much tax large scale landlords are paying.

Another form of rent seeking is lending money and charging interest on it. But that is another story.

2 Oct 2016

The Warning

I don't usually cross post blog posts, but in this case I'm making an exception

I've just watched an excellent documentary which provides another important angle on the 2008 financial crisis. It actually first aired on PBS in the USA in Oct 2009. The Warning.

Hat tip to Ann Pettifor of Prime Economics for tweeting about this.

Asked about the financial crisis of 2007/8 and the subsequent recession/depression, the mainstream - including those still in charge of the economy - often reply that we could not have seen this coming. But this was only ever true because the mainstream were just not looking. Instead, they had their heads buried in troughs of money.

Brooksley Born
In American a woman called Brooksley Born did see it coming and was in a position to do something about it. She tried, but was shut down by Bill Clinton's financial advisors: Robert Rubin, Larry Summers, Tim Geithner and the Fed Chief,  Alan Greenspan.

Born warned that the market in derivatives--bets and insurance on the future price of assets and bets on those bets--was huge, completely unregulated, open to fraud, and likely to cause huge damage to the USA and world economies if they failed. Evidence that they certainly would fail was already evident in 1994 because of law suits brought by Proctor & Gamble and others against the hedge fund that lost their money in risky investments in derivatives. Banks were massively invested in the derivatives market. In 2008 this market was worth USD500 trillion. For perspective the UK's annual GDP is about USD2 trillion.

Greenspan was an disciple and acolyte of Ayn Rand. He did not believe in the necessity of pursuing fraud prosecution because "the market would sort it out". The others were like-minded. They shut Born down and made it impossible for her to continue in her role. The argued vociferously and repeatedly against any regulation of financial markets.

Greenspan retired in 2006. Then in 2007, Lehman Brothers went bankrupt. In 2008 the Great Financial Crash happened. Later, Greenspan recanted his free market ideology during a senate hearing. But does not seem to have been help culpable for this costly errors.

Rubin took over City Bank in time for it to be bailed out by the US tax payers because of it's reckless gambling in derivatives.

Obama's financial advisors are... Larry Summers and Tim Geitner. So we know that Summers and Geitner basically facilitated the financial crisis and they are the economic advisors to the President.

One of the problems for Hillary Clinton is that she is associated with this crowd of losers who wrecked the economy and walked away from it unscathed, like drunks who walk away unharmed from the multiple car pile they caused.

Brooksley Born is a name that ought to go down in history.

Further Reading

The Great American Bubble Machine (2010). Rolling Stone Magazine. "From tech stocks to high gas prices, Goldman Sachs has engineered every major market manipulation since the Great Depression -- and they're about to do it again."

 The Woman Greenspan, Rubin & Summers Silenced (2009) The Nation.

27 Sep 2016

Emerging Market Debt

via @IIF [Institute of International Finance] on Twitter today
"[Emerging Market] non-financial corporate indebtedness rose more than $1.6 trillion in H1 2016, surpassing $26 trillion"

The report this comes from is available to members only.

Note that corporate Saudi Arabia is currently accruing large amounts of debt. Not sure what is going on there!

A brief recap on what happens when the private sector gets over indebted. Business changes its behaviour from maximising profit to minimising debt. Rather than investing in growth, business seeks to minimise their interest payments. It's really the only rational thing to do. But it results in an economic slow down. Richard Koo calls this a balance sheet recession. He explains it well in this short video.

25 Sep 2016

Private Debt

A chap called Richard Vague seems to know what he is talking about when it comes to private debt. His essay in Democracy, A Journal of Ideas is called The Private Debt Crisis and comes with the strapline: "China is drowning in it. The whole world has too much of it. History suggests: This won’t end well." The essay is reprinted in Evonomics where it is called How to Suffocate Your Economy: Drown it in Massive Private Debt.

The essay looks mainly at USA private debt, but the remarks are salient to any economy. When your consumers have large aggregate debts the interest payments become a significant proportion of income and they become reluctant to spend. We get slowdown in demand, which ripples through the economy and undermines growth.
"a growing body of research suggests that when private debt enters the range of 100 to 150 percent of GDP, it impedes economic growth."
Vague points out that high levels of private debt also makes consumers and businesses unwilling to borrow more. Borrowing for investment is a fundamental principle of the capitalist economy. I would point out that, until the modern era, this is how banks made their money. Now of course, banks make 90% of their money by speculating on asset and commodity prices and derivatives.

The essay also looks at the situation in China where private debt has been growing rapidly and seems likely to be the next flash point in the global economy. That much private debt accumulated that quickly, cannot help but cause problems.

The essay finishes with some ideas on how to alleviate the problems caused by private debt. This blog is inspired by Steve Keen's idea of the modern debt jubilee (government gives money to consumers instead of banks, with the proviso that they must pay down debt before spending).

What the essay does not do is address the fundamental problem that leads to very high levels of private debt and repeated economic crisis. The actions of governments in the 1970s and 1980s who stripped away of regulation designed to prevent exactly this ought to come under scrutiny. We know how to prevent this happening.