Still the Best Brief Explanation of the Financial Crisis

Richard Koo sums up the problem in Japan which is exactly mirrored in present day UK and many other countries, all in less than 10 minutes.

And incidentally he also explains why concentrating on the current account deficit is detrimental to the economy at this stage.

Credit Bubble 2.0

The various rebel economists are all talking about a return to rising rates of household debt. Even the Independent picked up on it (George Osborne’s deficit reduction plan requires unprecedented binge in personal borrowing. 4 Dec 2014). In any cases the warning bells are sounding that private sector debt is no longer falling.

John Ficenec, Questor Editor, writing in the Telegraph:

Consumer spending during the past five years has heroically dragged the economy from brink of disaster despite falling real incomes. Retailers now face the horrifying prospect that having maxed out credit cards and plundered the household savings account households may have simply run out of money in the run up to Christmas.

As we know a build of debt causes a parallel build up of debt repayments. These repayments soak up money that might otherwise be spent in the economy. Low demand means continuing low investment (and hoarding of cash). And so on. And at some point there will be another tipping point that will send us back into recession. 

The Wrong Metaphor

Just listened to Ann Pettifor (a director of Prime Economics Policy Research in Macroeconomics) arguing with Liam Halligan (economist and Telegraph columnist) on BBC Radio4. It's painful when the presenter isn't really interested in an alternative view and goes out of his way to let the Neoliberal spout the same old lies (couched in the catch phrases that Tories employ so well). Pettifor is not quite a lone voice, but she is getting more exposure than many others. Those who are in the Neoliberal groove find it hard to understand another point of view and thus it's difficult for her to get her point across.

The basic problem is this: the Tories argue that the economy is like a cheque book. Thus when the govt borrows money to meet it's obligations to citizens, they say that this is like a personal loan. Perhaps it is like withdrawing equity from the a home by borrowing against it's value. Tories say that this saddles future generations with a debt burden. This is unfair and perhaps unethical. Therefore, according to Neoliberals, the government must simply reduce spending, start paying back loans as a priority, and aim stop borrowing at all. The result, as Pettifor points out, is that we are moving towards an economy that supports public squalor and private wealth.

But this metaphor is simply wrong. Pettifor tried to get this across, but the presenter's questions were premised on the Neoliberal ideology and he allowed Halligan who was talking in the same terms to get the last word. In fact national accounting is not like household accounting. Unfortunately with constant repetition the wrong metaphor has taken hold and is now being repeated endlessly.

Government's income is a share in the private sector's output - in the form of direct and indirect taxes. Their role is to administer services and facilities on a national scale for the nation: health, education, welfare, pensions, transport infrastructure. In the past this included much more, but with the rise of Neoliberalism governments have stepped back from provision of universal services and utilities like electricity, water, sewerage, public transport and university education.

The cheque book metaphor says that government spends money and gets no economic return - like a family spending money on food and so on. A family must buy food to stay alive, but the money runs out and must be continually replenished. If we find that govt income shrinks - as it did radically in 2008 - then the answer is to cut government spending aka austerity. But the government is not like a family buying food. This is because government spending is always someone's income. For every £1 the government spends it generates £1 + £x of economic activity (called a multiplier). Economists argue over the size of the multiplier effect, but as long as it is not zero it means that government spending is more like a business investing than a family spending.

The most dramatic example of this is post-WWII Britain. With the country in ruins after the war, public debt at 250% of GDP, the government embarked on a massive building and infrastructure program using borrowed money. Not only did the economy flourish for a generation, but Britain paid off it's massive public debt within that generation. That's how national accounting works.

Spending only gets you the thing you purchase. Investing continues to pay dividends over the long term. Benefits can be widely varied. If the government builds new homes that provides not just new homes, but jobs for builders and income for building supply merchants. The builders and merchants spend their income in other businesses, which spend their income and so on. And the government actually gets a percentage in tax at each stage. Each government pound spent has a momentum that enables it to continue circulating for a time. The benefits of public spending are broadly based and benefit everyone, though often indirectly.

Rather than being a burden, taxes are an expression of how much we care about our country and the people in it. It's clear that the wealthy, who think they could go it alone, are happy to denigrate the provision of public services. But most of us are better off if we help everyone collectively. The Scandinavian countries routinely come out on top of countries with the highest standards of living. Far and away the best places to live in Europe. And they have very high taxes and a very high level of support for each other. By looking after each other they prosper and flourish. It ain't rocket science.

The trouble with austerity is that government spending is a significant source of income for the private sector. So at a time when the private sector is suffering a drop in income, for the government to make cuts only worsens the situation by reducing income further. And this reduces the amount of taxes they collect, reducing their income, and tempts them to reduce their spending more. The logic of austerity is destructive of governments role in society and economy. Which is just what Neoliberals want - to be free to exploit everyone and everything for profit. And while the super-rich really can insulate themselves from the world to the extent that they fool themselves into thinking they don't need us, in fact everyone needs everyone else.

Ann Pettifor has pointed out elsewhere that George Osborne in practice acknowledges this and has taken his foot off the austerity accelerator and put money into infrastructure programs. Also the government is presently borrowing at 0% interest (or with inflation so low almost negative interest) and can easily afford to keep on borrowing like this for decades. If it would only borrow a little more to invest in Britain we'd all be better off. Note that the Tory policy for the election is hardcore Neoliberal: promises of more cuts in next parliament. And using the leverage they already have they can sell this to the public as a good thing. Mr and Mrs Bloggs will sadly shake their heads and agree that there's nothing else for it. Because they believe the big lie about government spending.

Ultimately we come back to the scale of private debt in the wake of deregulation of the finance industry beginning in 1971. With private sector debt on the massive scale that we have in the UK (and everywhere in the G20) we're going to see debt repayment and interest payments soaking up any excess income that might otherwise be spent. Household debt, where spending really is like a cheque book, is very high and rising again after a period of falling. House prices rise at something like 400% of inflation, driven by foreign absentee buyers, a chronic shortage of stock, and landlords who know they can make easy money gouging the rental market. But credit card debt is also rising again. We're borrowing against the promise of growth when the forecasts are all for stagnation or worse.

Business on the other hand is stymied by low demand and is not investing, but doing the opposite, i.e. hoarding cash. Or entrepreneurs simply cannot get loans because banks are still not lending (they are still deleveraging after the crazy over-lending of the 1990s and early 2000s).

It's vitally important that someone starts to take apart the lies and talk sense about the economy. Ann Pettifor is a voice of reason, but the message needs political backing. The Greens seem to get it, but they're small-fry and as recent events have shown the political discourse is very easily hijacked. Nigel Farage has dominated the news coverage for months now - and is doing so again. Every time the liberal press attack him he seems to become more popular. And the right-wing press know that his message on Europe and immigration resonates with the electorate. The other political parties lurch into announcing immigration policies in reaction to UKIP showing that they know this too and making Farage seem more credible. But the Tories firmly control the discussion about the economy and the opposition parties seem to have largely capitulated to them. Even ostensibly the Socialist Labour Party has an openly Neoliberal economic policy (although it has had for 20 years now - Brown was a thorough going Neoliberal) and doesn't seem to be able to counter the mantras that Tories chant. They don't even point out that "hard-working families" is a phrase they coined!

In an ideal world the solution to our problems would be debt relief for households to enable them to spend without more borrowing and without an instant rise in wages (since wages still appear to be falling with respect to prices). An injection of cash at that level - a modern debt jubilee - would prime the economic pump. However, if it led to another credit bubble it would be disastrous. Citizen's need to be weaned off debt. We need to return to the wisdom of previous generations and not get into personal debt. Business need to see a definite and sustained increase in demand before they will invest their hoarded cash.

It's so depressing watching our politicians game the system - use propaganda techniques to control the narrative all with the aim of holding on to power. They all do it, but some are better than others. Unfortunately Neoliberal narratives are close to being normative nowadays. Britain is fast becoming the nation that doesn't care about anything except facilitating the enriching of oligarchs. Britain used to be the country where you could pop into the neighbours to borrow a cup of sugar. Now it's the country where you probably neither know nor speak to your neighbours and don't care about them or anyone outside your own circle. We are the country were the solution to beggars on the street is to make begging illegal.

The UK economy: recovery or relapse?

GDP per Capita

tradingeconomics.com

Much of the GDP growth is down to immigration.

Buddhist Economics?

I've been a Buddhist for 20 years and a member of a Buddhist Order for 9 years. I'm always intrigued when the idea of Buddhist Economics comes up. Of course we'd all like to see some alternative to the gross utilitarianism of Neolibertarian economics. But what is Buddhist economics? Well, given that the Buddhists ideal is a monk who neither handles money nor engages in economic activity, Buddhist economics is at best an abstraction.

Perhaps we could get an idea of what Buddhist economics are like from looking at countries that are traditionally Buddhist?

We have the Theravādin countries including: Burma, Sri Lanka, Thailand, Cambodia and Laos. They are either outright military dictatorships with command economies, or the military plays an prominent role in running the country (Thailand is presently under martial law). In fact there's nothing about any of these countries that would want to make us emulate their economic policies. They are poor, repressive and retrogressive. The whole of South-east Asia was a war-zone for decades and of course Cambodia gave us Pol Pot. Modern Western economics is sometimes criticised for prioritising profit over people, but there's nothing here to inspire us.

Thailand has been particularly in the news for opposing the ordination of women (despite there being no valid theological argument against it). When some Australian monks took it upon themselves to ordain some women, there Thai head office threw them out of their organisation and made sure that non of the new nuns were allowed to travel to Thailand. Since the clergy is a branch of the government their word is virtually law.

What about those countries which practice a form of Buddhism more influenced by compassion (Mahāyāna Buddhism), including: China, Japan, Vietnam, Korea and Tibet. I'm not sure I could briefly describe China's current economics, but what we do know is that their cities are the most polluted in the world, that they certainly do not prioritise people and the government is authoritarian and repressive. Japan is a basket-case economically and it will be many decades before they pay off their 200+% government debt. Vietnam is a 3rd world country which also has a history of repression, it is famous as the home of monks who immolated themselves as a political protest against political oppression. Tibet was a feudal state until it was taken over by China. Korea is a country of two halves. The North needs no commentary: insane military ruler and repression on a scale seldom seen. The South was mugged by the World Bank/IMF gang in the 1980s and has yet to really recover. The one plus I can think of is that when the government was bankrupted by the machinations of the Western libertarians, the women of South Korea donated their gold jewellery to the nation to help pay off the debts. I think that might have been the influence of Buddhism.

Nepal might be included in the list, since there are Buddhists living there, but their ruling family were Hindus until relatively recently so they're not likely to be practising Buddhist economics. Nepal was in the news a few years ago when the crown prince murdered most of his family to get to the throne. And the country was torn apart by a violent Marxist insurgency for decades, though things seem to have settled down now.

The one Buddhist country that is sometimes held up as an example of economic sanity is Bhutan. In Bhutan they coined the term "gross national happiness". But that happiness is only for the Bhutanese and they are busy persecuting Nepalese refugees who fled from the Marxist insurgency. The Bhutanese state, like old Tibet, was until recently a feudal state in which peasants were indoctrinated into believing that the priestly royalty were gods. In Bhutan this has made the attempted transition to democracy difficult because the peasants don't want to vote - they are too busy prostrating themselves to their god-king to actually want self-determination.

In all of these countries the monasteries gradually suck money out of the economy through tax free donations, sometimes of staggering proportions. In Tibet and Nepal the myth of god-kings who reincarnate is used to control that wealth. In Japan they abandoned celibacy and started handing down monastic wealth and power in patriarchal structures. In other countries like Sri Lanka and Thailand the monasteries were simply nationalised.

So much for Buddhist economics in practice: totalitarianism, feudalism, and systematic economic oppression of women and racial minorities and the poor. So far it's not looking good. Why then are we still talking about Buddhist Economics? A lot of it has to do with the collision of tradition Asian Buddhism with Western Modernity. The outlines of chimera that has resulted have been delineated in David McMahan's The Making of Buddhist Modernism (note the emphasis in the title).

One of the products of Buddhist Modernism is a little book by E. F. Schumacher which has a chapter entitled Buddhist Economics. The books is seriously anachronistic with respect to Buddhism and hopelessly sentimental. Schumacher's analysis is a mishmash of ideas. He says for example:

The Buddhist point of view takes the function of work to be at least threefold: to give a man a chance to utilize and develop his faculties; to enable him to overcome his ego-centeredness [sic] by joining with other people in a common task; and to bring forth the goods and services needed for a becoming existence. 

But this is not really a Buddhist point of view, since as I say Buddhism says that ideally one ought to disengage from economic activities of all kinds. Schumacher actually sounds more like a Marxist than a Buddhist. The article by Maria Popova praising Schumacher that sparked this response says:

Buddhist economics must be very different from the economics of modern materialism, since the Buddhist sees the essence of civilization not in a multiplication of wants but in the purification of human character. Character, at the same time, is formed primarily by a man’s work. 

And links this to something that Gandhi said. But Gandhi was not a Buddhist and persistently opposed the Buddhist idealism of Dr Ambedkar when the two of them were helping to form the new Indian state (Ambedkar wrote the new constitution of India and was forced to make concessions to Gandhi's middle class Hinduism).

But here's the thing. Buddhists never talk about the essence of civilisation or character for that matter. The terms here are Romantic. One of McMahan's observations is the extent to which the values of Romanticism, Protestantism, and Rationalism are expressed by Buddhist Modernists as though they are entirely consistent with Buddhism; or indeed as though such values are Buddhist values. By blurring the distinctions, people like Schumacher are able to "speak for Buddhism". But this is a form of intellectual colonialism or cultural appropriation. By presenting Romantic/Marxist ideas as Buddhist Schumacher surfs the wave of enthusiasm for Buddhism that existed in the 1970s when he was writing. Perhaps he even believed that the ideas he was articulating really did represent Buddhism. But he appears to be entirely ignorant of the history of Buddhism and the economics of Buddhist countries. The modern day situation is replicated in the past, with perhaps a more extreme concentration of wealth and power and more repressive regimes.

In reality there is no such thing as Buddhist economics. Schumacher is not a Buddhist and presents Romantic, Humanist, and Marxist economic values as Buddhist values. In practice Buddhist countries have adopted a range of economics: though they lean towards the extreme right-wing ends of the economic spectrum: to fascism and feudalism. There is not a single example in the 2500 year history of Buddhism of a state which ran its economy in a way I would wish modern day Britain to emulate!

What we wish is that society in general would make real the Romantic ideals of Buddhists: i.e. to institute a Buddhist utopia that no Buddhist state has ever managed to bring about. Perhaps we think that with all their power and wealth modern Western states will manage what Buddhists have never managed for themselves. And isn't this just the kind of hopelessly naive fantasy that we expect from religious people? Buddhists make up less than 1% of the population of Western countries, and until recently we were outnumbered by Jedi in the UK (2001 Census recorded 0.3% Buddhist; 0.7% Jedi).

I too would certainly like to see our societies change towards liberal values. Unfortunately libertarianism dominates at present. Do we really think it makes sense to present people with a religious alternative in the present day, when the "no religion" is the fastest growing census category; when religious extremists are in the news every day destroying the lives of ordinary people in Burma and the Middle-East; when religion stands for everything that liberals reject these days? How stupid do we have to be to fall for this rhetoric. I'm a committed Buddhist and I'd vote for secularism and freedom of conscience, before I ever voted for a Buddhist state. Religion and power is a bad combination and this is so self-evident in the present that it hardly needs arguing.

To me "Buddhist Economics" is a distraction. Let's just talk about economics and if we want to look at values other than profit then let's not queer the pitch by throwing religious utopianism into the mix! People matter because they are people.

UKIP Victory = Failure of Mainstream Politics

Despite persistent attacks from all sides and despite being exposed as bigots, UKIP have done very well in the elections, taking votes from all the main parties. UKIP are shambolic, bigots, and only have one recognisable candidate. So we need a better explanation from commentators on why people would vote for them. I think we need to look at the political system as a whole.

Most people think politicians are very untrustworthy. If we don't address this then we get UKIP. Which is not a solution to the problem, but a way to kick mainstream politicians. If all we can do is vote against them, then we'll do it. Watch the Scottish independence vote closely. Scots don't trust Westminster to represent their interests - and they'd be entirely justified in thinking so. Given an opportunity to kick them out they might well do so and bugger the consequences.

Many feel don't feel politicians listen to them, care about them, or even know they exist. Politicians are part of an elite concerned with grabbing money and wielding power. They fiddle expenses, fiddle their taxes, bankrupt the economy by massively over-borrowing and make ordinary people pay it back. Bankers still reign supreme while the NHS is gradually being sold off to businesses in which MPs have financial stakes. And so on.

How ugly do the mainstream have to be to make Nigel Farage look attractive? Well we know the answer to this question. And it means that when, say, David Cameron attacks Farage that his (Farage's) charisma only increases. Farage can only do better while being attacked by the man who epitomises the status quo.

Farage preaches self-determination and sovereignty - imagine you're on a zero hours contract and how you might feel about those issues.

Because Farage hasn't had media training and thus doesn't talk like a broken record, because he looks natural with a pint glass in his hand, because he just says what he thinks (even when he's not thinking clearly) it makes him seem more like one of us - forget the fact that he's a commodities trader (read "rapacious bastard").

I don't think UKIP and Farage are the answer to our political problems, as I don't think an independent Scotland will suddenly be free of the taint of political corruption (though I'd be voting for Independence if I was Scottish because it's a start). And the media circus surrounding them just distracts from the real issues.

What we need is some real engagement and real change, but I don't see it coming. The government/media complex is a soap opera. It merely distracts. Meanwhile, for example, the Arctic is melting.

Something better change.