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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“a permanent change in ….our approach to fiscal responsibility – just as they have done in recent years in countries like Sweden and Canada.” (My emphasis)
“Governments of the left as well as the right should run a budget surplus to bear down on debt and prepare for an uncertain future.”
It’s an idea that is older than Lord Palmerston’s Victorian Commission for the Reduction of the National Debt convened 150 years ago.
And it is an idea that is revived periodically. Indeed the principle of stripping elected, democratic governments of fiscal policy autonomy underpinned the “corset” that was the gold standard – Keynes’s “barbarous relic” – both before and after the First World War. 
And we know how that ended.
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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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Originally Published on 14 May by IAI News as part of the festival HowTheLightGetsIn.
On 31 May, I will be on a platform with Isabel Hilton, Michael Howard and Robert Shiller discussing the theme ‘The Infinite Boom’.
Can continuous economic growth ever be sustainable, or is it merely a delusion?
We tend to assume that our wages or salaries should, and will always rise in real terms. That living standards will follow the same trajectory. That house prices will never fall. That the price of Picasso paintings or ruby rings can be trusted always to “smash records”. And that the economy will “grow’ exponentially over time. Indeed “economic growth” is hard-wired in the way we think about, and measure the economy.
This is delusional stuff, if only in linguistic terms. “Growth” derives from nature. Plants are seeded, animals are born, they grow, mature and then die. And although humans mostly live in denial of the reality, our lives follow the same trajectory.
Death is as inevitable as taxes.
We know, in our heart of hearts, that there are limits. That markets and firms, grow, mature and then die – or implode. Think of the market for sub-prime mortgages, CDOs, credit default swaps or even that for chimney sweeps. Think of firms like Woolworths, HMV, PanAm, Arthur Andersen or Enron.
They are no more.
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While Labour and LibDem activists mourn, and political opportunists seize the moment, is the loss of the election such a bad thing? Might this be a good time to lose an election?
I think so. The reasons can be found in both domestic and global financial imbalances, in the advance of de-globalisation trends that are manifest in shrinking capital flows and growing nationalist movements; and in rising geopolitical tensions.
As I write, out in the big wide world there are upheavals in Eurozone and other sovereign bond markets. Whether this violent volatility will lead to a global bond market crash is an open question, but in just two weeks markets have already marked up almost €1tn of losses. Shares in booming stock markets have begun to slide, while currency movements are increasingly erratic.
The causes of bond market volatility are unclear. But what we do know is that both the United States and China are slowing down, and emerging markets are dogged by too much foreign-denominated debt. Chinese local governments and households too are heavily indebted (Chinese private debt is 6x larger than in 2007 at about 150% of GDP in 2014) and so the central bank of China is forced to ease monetary policy – by lowering bank rates. This seems to have sparked an uptick in global oil prices, which in turn has led to fears (irrational in my view) of rising inflation. Inflation, it is argued, will erode the value of highly priced, low yielding government bonds, and hence the big bond sell-off. (I happen to think disinflationary and deflationary trends are still dominant, driven by weakness in demand from both the Eurozone (‘austerity’), China and increasingly the United States. But hey, deflation is bad news too.)
Given that we were all expecting such bond market sell-offs and instability to occur when central bankers inevitably raise base rates; and given that central bankers are clear such rises are a year or so away – this bond market turbulence seems premature. But let us not forget: central bankers long ago gave away their powers to influence market interest rates. Today these are effectively controlled by a global ‘invisible hand’ that moves in mysterious ways.
Because everyday interest rates are influenced by bond market yields, we can expect today’s rise in yields to translate into higher interest rates on UK and US mortgages and other forms of lending.
This is not good news for British debtors. As a famous (February, 2015) McKinsey Reportnoted, the UK experienced the largest increase in total debt (i.e. private finance sector, corporate, household and government debt) as a share of GDP from 2000 – 2008 with its ratio to GDP reaching 469%. Even adjusting for London’s role as a global financial sector, the McKinsey team concluded that the UK has the second-highest ratio of debt to GDP in the world – second only to Japan.
This is not an economy that will be amenable to higher rates of interest.
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First published on 14 April 2015 by the New Left Project
Deflation, as we have already seen, involves a transference of wealth from the rest of the community to the rentier class and to all holders of titles to money; just as inflation involves the opposite. In particular it involves a transference from all borrowers, that is to say from traders, manufacturers, and farmers, to lenders, from the active to the inactive.
John Maynard Keynes in A Tract on Monetary Reform (1923)
For more than three decades economic policy-making in western economies has been dominated by financial interests – those of bankers, creditors/moneylenders, investors and financiers. Their interests have been eagerly supported by most of the mainstream economics profession (including private, academic and official economists) in a variety of helpful ways. Perhaps the most helpful was the tendency of economists to look away.
Most economists have very little understanding of money and credit and of how the banking system operates. Hard though this is to believe, classical economic theory neglects the role of money, debt and banks in the economic system. Instead orthodox economists theorise as if money is neutral, simply a ‘veil’ over activity in the real economy, as if changes in the stock of money have no impact on wider economic activity.
This has led economists (wilfully or blindly) into promoting policies that have accelerated the capital gains of the financial sector, building up mountains of unpayable debts. These policies include the de-regulation and liberalisation of capital flows (‘globalisation’); the removal of constraints on lending and on interest rates charged to consumers and firms; the abolition of legislation that divided the speculative divisions of banks from their retail divisions, such as the Glass-Steagall Act in the US; and tax breaks for debt-financed investments – to name but a few.
But the most important element of these pro-finance policies is, and was, their anti-inflationary, or the downright direct deflationary, bias. Deflationary policies were actively promoted by orthodox economists at the IMF, at western central banks and in OECD Treasuries.
Its easy to understand why. Inflation erodes the value of a financier’s most valuable asset: debt.
‘Inflation’ for these economists and financiers is strictly defined and refers to the inflation of wages or prices – rises in earnings of workers and in the prices charged by firms. But there is another kind of inflation – asset-price inflation – and for decades economists and central bankers ignored asset-price inflation, when they weren’t actively stoking asset-price bubbles.
Assets are owned on the whole by the rich and the rentier class – and include real estate, race horses, works of art, brands, software, football clubs etc. – from which an endless stream of rents flow. (Think of revenues from the sale of ManU tickets and t-shirts flowing straight into the pockets of the Glazer brothers.)
While wages and prices were suppressed, asset prices were allowed to let rip. Which goes a long way to explaining why the rich got richer and the rest got poorer over those three decades.
Now finally inflation has been slain, and deflation is taking hold across the world. In the UK, as Geoff Tily of the TUC hasshown, inflation is falling faster than across the Eurozone. This is largely the consequence of private debt, which first caused the catastrophic collapse in 2007-9, and is now constraining recovery, exacerbated by austerity. This has meant prolonged weak growth in incomes, while the UK economy, for example, has performed well below its capacity, and the Eurozone is weakening fast.
Financiers, their friends in the media, most notably the Financial Times, and the economic profession, are celebrating ‘good deflation’. Their argument is that falling prices provide room for consumers to spend more, and that deflation will therefore boost the economy. This approach requires them to once again turn a blind eye: this time to the vast volume of private debt that continues to act as a drag on economic activity, in particular on investment and on the creation of skilled, well-paid employment.
As prices fall, the relative value of debt, and of interest rates, rises. (Just as inflation erodes the value of debt, deflation inflatesthe value of debt.) So, for example, if generalised prices fall 2% and interest rates remain at 2%, then in this deflationary environment the real rate of interest is 4%.
The prospect of debt and interest rates rising in value, regardless of the actions of borrowers or central bankers, even while prices fall and incomes remain low, is of grave concern. It is particularly concerning for all those productive actors in the economy that need to borrow. This includes businesses who need to make improvements to their firms, and anyone who needs an overdraft, student loan or mortgage. Deflation is a particularly big threat to households that have had to borrow large mortgages to afford a decent home.
In 1933, Irving Fisher concluded gloomily that:
deflation caused by the debt reacts on the debt. Each dollar of debt still unpaid becomes a bigger dollar, and if the over-indebtedness with which we started was great enough, the liquidation of debts cannot keep up with the fall of prices which it causes. ……Then we have the great paradox which, I submit, is the chief secret of most, if not all, great depressions: The more the debtors pay, the more they owe. The more the economic boat tips, the more it tends to tip. It is not tending to right itself, but is capsizing.
How often has deflation been mentioned during this General Election campaign – by any of the political parties? Because this generation has never lived through a period of deflation, and because the finance sector has so successfully captured the imaginations of politicians, there is widespread ignorance of deflation’s impacts.
Far from being lulled into complacency, society and the political parties should be protesting loudly at the failure of the government and the Bank of England to adequately address the threat of deflation to the people of Britain, who are burdened by some of the highest levels of private debt in the world.
In the Scottish leaders’ TV debate last night, Jim Murphy (the leader of the Labour Party in Scotland) has challenged Scottish nationalists to explain where the money will come from under the ‘full fiscal autonomy’, since the full gains of the Mansion Tax would not be available to Scotland. In effect Murphy is arguing that “there is no money” – or that the proposed Mansion Tax is the only source of income for reversing austerity.
Derek Mackay, the chairman of the SNP, responded on the Today programme this morning(at 70 minutes), where he was confronted also by points from the fiscal hawks at the Institute for Fiscal Studies. In defence of the SNP case he partly resorted to alternative sources of money (including oil revenues) to cover spending. (In fairness to Mackay, he did try to make a growth argument, but the BBC wasn’t interested).
While there is clearly a bigger picture here, the assumption behind Murphy’s assault on the SNP mirrors that of the Chancellor’s attack on Ed Balls. It is typical of flawed austerity economics and austerity politics, and is a battle that nobody can win – least of all the Scottish or British people.
The point of rejecting austerity policies is surely to recognise that cutting public spending in times of economic weakness harms both private and public employment and earnings, and economic activity generally.
If sound public infrastructure spending is expanded, then well-paid, skilled employment will be expanded.
The ‘money comes from’ that same increase in employment and economic activity, as higher labour income leads to higher tax revenues and lower benefit, tax credit and housing benefit expenditures.
It’s not rocket science.
While there may be a brief lag between any spending and these gains to the public finances, the gap is easily made up from short-term borrowing. The latter might be from capital markets, high street banks, even the Bank of England – it does not matter (though of course ‘the cheaper the better’ might be the best guide). The borrowing can be repaid as appropriate when the gains to the public finances materialise. Current government borrowing rates are at historic lows. And as economic activity and government revenues pick up, the debt to GDP ratio – the main international indicator – improves.
All this is the point of fiscal autonomy. This is the point of a sovereign government with its own central bank.
That is why the UK should take the lead, and in so doing could help the Eurozone to escape from the depressing, deflationary downward spiral of austerity.
That can only be achieved by a newly-elected British government that has the intellectual capacity and confidence to move beyond the sterile, flawed “there is no money” argument.