US Monetary Selfishness is Devastating for 'RoW'

Remember the World Series? The naming of this League has always struck me as an interesting insight into how the US sees the rest of the world. In reality only US teams play in the league, implying that the US is the world. Their economic and monetary policy has always adopted a similar worldview.

The phrase 'the world is your oyster' has really described the approach the US has been able to take to global markets since the agreement at Bretton Woods in 1944 that dollars would become the fundamental backstop of all global value. This role used to be played by gold, which we all had a fighting chance of digging out of othe ground and so had some degree of neutrality. Since 1944 it has been paper money, under the control of the US bank the Federal Reserve.

The agreement also stated that the US had to hold enough gold in Fort Knox to back the dollars it issued. But Nixon unilaterally abandoned that agreement in 1971 and since then the US has been able to create money at whim, and import goods from the world in exchange. This extraordinary and deeply unfair situation has funded excessive consumption and an impossible deficit at home, and left foreign countries - particularly China - holding vast quantities of US debt.

Since the 2008 crisis, the US has used this unfair avantage to pour money into its economy to prevent it suffering the sorts of recessions we have seen in Europe - around $85bn. per month have been shovelled out through buying treasury bills back from financial institutions, in other words a massive amount of value being created and given to banks. Now the US has decided recovery is sufficiently secure to reduce or 'taper' this policy, but the financial institutions are objecting and the stock market has fallen radically as a consequence.

You can see this discussed in a useful video called The Epstein Report. It is also explains why this will lead to an increase in US interest rates. If you think of interest rates as the price of money it makes sense that, as the cheap or actually free money will be reduced, the price of money will tend to rise.

But the consequences of such an interest-rate rise in the US are small beer compared to the devastating consequence of this policy to other economies across the world. US monetary selfishness has led to a financial collapse in Argentina and devaluation of currencies in Brazil and Turkey as the US, in the words of the Brazilian central bank governer, hoovers out of 'emerging markets' the money it is no longer injecting into its markets at home. Decades of openness in global finance, forced on the world's economies by the IMF, have left them completely vulnerable to this US policy, as there are no controls on capital movement and they cannot now establish barriers.

Never has the US's selfishness been more clearly demonstrated. And never has the need for a global settlement on finance, agreed by all parties rather than imposed by the US, been more clear. Tweet

We Are All Greeks

Over the weekend I was able to engage in some discussions about events in Greece. It is an increasingly desperate situation akin to similar situations in democratic countries put under pressure by finance capitalism. Political views are polarising between the extremes. Syriza, the coalition of left parties, is building towards a majority, but the fascists Golden Dawn are handing out bread and simple slogans - and they are also infiltrating the police. When people are hungry enough they may vote for a socialist party; whether that party is allowed to take control of the country is another matter.

Our comrades from Greece spoke movingly about how supported they felt by the use of the slogan 'We are all Greeks', that has been seen increasingly in recent months. It goes beyond the need for solidarity; it goes beyond the need to attack racism, however subtle; it goes to a deep understanding that the nature of capitalism as a system that requires co-operation if it is to serve human needs without leading to war. The rules of the global system need to be focused on balance and prosperity for all, rather than enabling the stronger, larger economies to profit at the expense of the rest.

This was the argument made by Keynes at Bretton Woods, in his desperate and failed bid to create a global financial and trade system that would not set us on the path to future wars. It is simple: in a system of exchange one country's success will inevitably lead to another country's failure and so rules have to be introduced to enable the weak to gain as well as the strong. Economic policy should be based on the principle of circulation rather than accumulation. While Germany refuses to recirculate its accumulated wealth in Greece it will not only damage the Greeks and increase tensions, but ultimately damage itself.

Keynes argued for the bancor, a neutral trading currency, and for countries to be fined for holding trade surpluses as well as trade deficits. What was agreed was the dollar as the trading currency and no rules to achieve trade balance. The euro was created to enable Europe to compete against the dollar, but it created its own imbalances which are the responsibility of the system designers, not the Greek people.
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Spies, Cash and Conspiracy Theories

The similarities between the current global economic crisis and that of the 1930s has led many more thoughtful commentators to re-evaluate the importance of history to the development of policy. A striking recent example, which has been poorly trailed but is well worth watching, is Stephanie Flanders recent series Masters of Money. The link with the Open University shows, but isn't it time we all knew a little more about the variety of economic theories? Flanders makes a sterling effort to explain the thinking of three 20th-century giants - Keynes, Hayek, and Marx - none of whom, interestingly are being paid much heed by contemporary politicians.

I revealed my own interest in economic history in a recent article that was posted on the New Statesman economic blog Current Account. What perked my interest was the revelation that Harry Dexter White, Keynes's sparring partner at the Bretton Woods negotiations and effectively the architect of the post-war global financial settlement, was in fact a Soviet spy. As I point out in the article, in 1944 the US and Soviet Union were still allies, so this is not such a bizarre situation as it might have been by 1948, but none the less it does raise questions about exactly what the negotiators at Bretton Woods were seeking to achieve.

Perhaps the most touching lesson from history is that 100 or so years ago key figures in public life made it their life's work to understand the complexities of the economy. Their objective was not self-aggrandisement or self-enrichment but the impulse to make life better for their fellow citizens. While I find Hayek's idea that politicians should never intervene in markets to be utterly misguided, I can understand how he learned this lesson during the hyper-inflated Vienna where he was a young man, and that his scholarship was dedicated to preventing the same sort of suffering from occurring again. How distant and quaint such motivations seem today, when the highest aim of most authors is to be granted the accolade of a TV series.

As I conclude in my article about Bretton Woods, both the authors of the compact appear to have died of broken hearts: Keynes was dead within two years of the ending of the conference, worn out by his attempts to ensure peace in his time and ours. White outlasted him by two years but could not survive the pressure of the McCarthy era. He suffered a heart attack shortly after giving evidence to McCarthy’s House Unamerican Activities Committee in August 1948.
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Enough to Bury a Skyscraper?

If, like me, you are tired of hearing the same old simplistic dichotomy between austerity and growth you will enjoy the new retrospective on debt from the Jubilee Debt Campaign. It leaves aside the waffling nonsense from the credit raters and finance friends who got us into the mess. It has a simple and appealing message: the system of political control over finance worked, and it is long since time that we went back to it.

The political system we are talking about is the one agreed at Bretton Woods at the end of the Second World War. It was by no means perfect, and had the serious downside that it allowed dollar domination, but until Nixon broke the link between the dollar and gold in 1971 it did guarantee relative financial stability on a global basis. Since currencies have roamed free we have had an increasing number of financial and debt crises, each more serious than the one preceding it. This conclusion comes from that well known source of radical and anti-capitalist opinion: a Bank of England policy paper. In fact their conclusion is even more damning:

'The current system has coexisted, on average, with: slower, more volatile, global growth; more frequent economic downturns; higher inflation and inflation volatility, larger current account imbalances; and more frequent banking crises, currency crises and external defaults.' (p. 8).

The JDC report gives a useful account of the past 30 years of debt crises, and their human consequences. They give as an example the island of Jamaica, whose people have struggled with debt for the past 35 years:

'At independence, the country inherited a legacy of dependence on exporting cash crops such as sugar, coffee and cocoa. . . The IMF and World Bank began lending large amounts of structural adjustment bailout loans in the 1980s, with the consequent austerity. For example, through the 1980s, the number of registered nurses fell by 60 per cent. The most drastic adjustment took place under the programme in 1989-1993, with large increases in inequality and poverty following financial liberalisation in 1991. . . Since the most recent financial crisis began, Jamaica’s debt has increased by one-third. In 2011/12, a quarter of government revenue was spent on foreign debt payments. In 2010, Jamaica went on an IMF programme again, borrowing $850 million from 2010 to 2012. One of the IMF’s conditions was wage freezes for public sector workers in 2010 and 2011, which given inflation, amounted to a 20 per cent real terms cut.' (p. 17).

Drawing on both the reports cited here we can conclude that the unregulated globalised economy has been less successful in terms of stability, growth and equity than the system that preceded it, which constrained capitalism within politically agreed boundaries. There are people who are gaining from the absence of political controls but, since they are probably around about the 1% who are the source of so much rage just now, shall we agree that next time we are going to vote for politicians who are prepared to challenge and control them?
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Free Trade or Bioregional Security?

Word reached me yesterday that Colin Hines is writing again about the destructive nature of the global trade system and the need to protect our security of supply. In standard economic theory protectionism is a dirty word, the impulse to be resilient and self-reliant undermining the ability of merchants to achieve arbitrage profits. My own view is closer to that of Gandhi when he said ‘Any country that exposes itself to unlimited foreign competition can be reduced to starvation and therefore, subjection if the foreigners desire it.’

So much for theory, what about the practice of trade in the globalised economy? The governance of global trade is overseen by the World Trade Organisation (WTO) which replaced the General Agreement on Tariffs and Trade that the global body with authority in this area under the tripartite systems established at the end of the Second World War, signed by 23 governments in 1947. Its aims was to replace the chequered history of mercantilist policies based around the protection of national interests that had dominated the early years of capitalism and was considered to have been implicated in the unstable and conflict-ridden history, especially of Europe, up to that time.

The WTO ‘does not adopt a neutral stance on trade policy. It is passionately against protectionism and just as profoundly for trade liberalization', in the words of Richard Peet. In its mission to liberalize trade the WTO has proceeded well beyond the GATT’s aim of ensuring efficiency and stability and follows this imperative even when this ‘conflicts with the need for environmental protection in an age of burgeoning production, massive consumption and the use of powerful technologies’ and even when the restrictions on trade are intended to ‘protect the environment, ensure food quality and safeguard public health’. According to Peet’s critical account, the single-minded emphasis on free trade undermines national attempts to ensure environmental protection, as well as undermining the power of labour to ensure decent working conditions and acceptable levels of pay.

The failure of talks to extend the liberalization of global trade further, the so-called Doha Round, indicate that the nature of the WTO as a membership organisation has resulted in a political stalemate, with the rising nations of the South refusing to accept the terms of trade that favour the more powerful nations that have traditionally dominated trade talks. Global trade is now governed by a patchwork of bilateral and regional trade agreements, the regional agreements between the countries of Latin America (Mercosur) and South-east Asia (ASEAN) being examples of co-operation at different levels that contrast with the continued rhetorical emphasis on globalisation.

The last time we had an economic crisis on anything approaching the scale of the current one the response by the competitive world powers was to engage in trade wars that eventually led to real wars. This time around the wars seem to be being fought through currencies, while trade remains in the hands of corporations. While the objective of avoiding war must remain the priority, this does not preclude the introduction of policies to ensure national security in essential goods and services. On this basis I look forward to what Colin has to say.
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Financial Chincanery Threatens Our Future

While our policy-makers have been striding around their Cotswold estates burning off an excess of Christmas pudding, elsewhere in the world events are occurring that provide further signals that the economic game we have played so effectively for the past two centuries is being superseded.

Do not let your festive white-out blind you from the important decision taken a historic decision to avoid the dollar in their trade relationship. As reported on this blog, for some time China has been arguing for a change in the global terms of trade, a system that has hugely benefited the USA since it was negotiated at Bretton Woods in 1945. The US has refused to negotiate and so China is now taking bilateral action, and Japan appears to be following a similar strategy.

Japan and China have agreed to make direct currency exchanges to settle their external trade balances, rather than negotiate via the dollar. In addition, Japan will buy Chinese government bonds. This shifts the Chinese renminbi towards the status of a reserve currency that China's economic power suggests, although the currency is still controlled entirely by the government, rather than being available for free exchange as the other reserve currencies have been until recently.

The extraordinary fact that the dollar is still the global medium-of-exchange, giving the US completely undeserved and misused global economic advantages, is omitted from discussion of our economic woes. And yet the way that the City operates as the 52nd state leaves us increasingly vulnerable in a world where the powerful economies are those who produce and gain access to resources, rather than those who control currencies.

Another sign of the UK's vulnerability emerges from a report showing that we have been overtaken by Brazil in terms of the global economy league table. As the UK economy shrinks and those of the resource-rich and industrious economies outside the West expand, this is more a shock than a surprise. These economies face another significant advantage over those of Europe: they are able to create their infrastructures in a way not dependent on fossil fuels and hence face significant advantages in terms of a green economic future.
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Why is the Euro so Strong?

With chaos in the negotiations with Greece, rumours of potential bankruptcy in Italy, and real concerns about the economies of Portugal and Spain, you would expect the currency that binds all these countries together to be falling through the floor. The graphic indicates that, over the past calamitous year, the range of movement has been between 1.48 and 1.28, and that at the value of the euro is hardly any lower than it was a year ago.

I was stung by a comment on one of my blogs from last week, complaining that I was being incomprehensible and jargonistic, so here I am going to explain simply why I think this is the case. This comes down to a discussion about what I have been calling for several years the 'currency wars'. When faced with hard times countries seek to return to growth and one means of doing this is to increase the volume of exports. Having a weaker currency makes your exports cheaper to the countries who buy them. So countries have been deliberately reducing the value of their currencies.

There are various ways of doing this. Some commentators claim that the US policy of quantitative easing is deliberately designed to achieve this end. Certainly, putting a lot of extra currency into circulation should reduce the inherent value of that currency. A more obvious way is just to lower your interest rates: since interest rates are effectively the price of money, this is an automatic means of making your money cheaper and causing its value relative to other currencies to fall.

To keep some sort of idea of the relative value of different currencies we need a standard, sometimes called the numeraire. In the 19th century gold was used as this standard, but this had all sorts of distorting effects on economic activity - primarily the fact that you couldn't increase economic activity unless bare-chested chaps deep in the bowels of the earth were digging up enough of a golden metal, which was frankly completely irrational, although emotionally appealing.

At Bretton Woods, the conference where the victors in the Second World War negotiated the shape of the world economy in the decades to follow, it was agreed, reluctanctly, to allow the dollar to take this role and to become the world's reserve currency. The consequences were hugely beneficial to the US in terms of imports, but ultimately destroyed its productive economy.

As the power of the dollar wanes, the other currencies that traders consider strong enough to take the role of a global reserve currency - the Japanese Yen, the Swiss Franc, the euro, and even sterling itself - have all become more attractive. This explains why we are not facing the speculative attacks that Greece is, not the performance of George Osborne at international conferences. As each currency becomes attractive to traders seeking a safe haven, the authorities that control its value seek to undermine it, since they do not want to suffer the export problems that result from having a highly valued currency.

In this form of reserve currency, the euro is still an attractive option and its interest rate of 1.5% now seems high by comparison with just 0.5% in the UK and 0.25% in the US. In addition, its competitors in terms of being the currency of last resort would resist its value falling too far, since that would require them to take more of the strain. This has led to the currency wars, which are a form of trade war in disguise. Because such wars cause international tensions, a solution that involves the creation of a neutralreserve currency, run for the benefit of the world's people and not an individual state, has long been my preferred option.
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Currency to Serve People and Planet

We need to see the Irish tragedy as part of a wider picture: the ongoing currency wars and the struggle for domination of the global capitalist economy. Since 1945, the US has enjoyed extraordinary power as a consequence of the Bretton Woods Agreement that the dollar should be acceptable in the place of gold as a global numeraire. Since the US reneged on its promise to support its currency with gold in 1971, its government has been able to print dollars at will, and claim goods in return. This, more than anything else, explains the decadent US lifestyle - and its planetary consequences.

Europe's response, after years of decline and unfair competition, was to establish the Euro. This was a fatally flawed strategy since, unlike the USA, Europe is not a natural currency area, and there is no single democratic body that matches the currency area. Hence it has always operated like a strait-jacket, with some currencies having interest rates too low for their needs (hence the Celtic boom and bust) and others having interest rates too high. It was Germany's currency, the Mark, which gave the Euro its credibility, and the German economy that provides the ballast for the currency. Hence what worked for Germany has been forced onto the other members of the Eurozone, with disastrous results for their national economies.

Yet the problem of dollar dominance persists. Hence Skidelsky's call for a 'bancor', or bank gold, a proposal for a neutral currency to facilitate world trade and form the basis for national currency holdings. This should be the call of the Irish people: global justice and a balanced system of international trade. This has been the call of the Chinese for some time. It is only because we live in the Anglo-American media bubble that our perceptions of the dollar demise are so distorted.

I have been calling for some time to consider the possibility of linking the new global currency to carbon emissions, thus putting an automatic brake on economic activity on a global basis, and rationing CO2 emissions by country. Another possibility is that the exchange rates between countries might be fixed in an inverse relationship with wages, so that no country can undercut another by restricting rates of pay. In this way, a neutral global currency could not only stabilise the financial system but also end the 'race to the bottom' that globalisation has brought in its wake.
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Don't Mention the Trade War

Have you ever noticed how your German friends can't pronounce the name of their own country correctly? No doubt grown tired of us correcting their pronunciation, according to Martin Wolf in the FT they have no made an alliance with China and actually become Chermany . I wish this were a joke, or some sort of economic chimera, because the reality of Germany and China turning inwards and offering only stern words to the rest of the world about our budget deficits is a very worrying development.

It is extraordinary how many politicians fail to understand that, in a globalised and interconnected world, running a surplus is just as destructive as running a deficit. It is only when national economies are in balance that all can thrive; large-scale imbalances lead to tension between countries and suffering and strife within them. This is not news: it was Keynes's understanding at the Bretton Woods conference, which is why he proposed a global trading system within which those with a surplus, as well as those with a deficit, were fined by a global regulatory body. At that time it was the US, flourishing as the purveyor of arms to the world, that resisted; now it is Chermany, which is vaunting its economic strength and ignoring the political consequences.

Martin Wolf draws attention to the problem of 'chronically weak aggregate demand'. This is the most frightening code-word that an economist can find: it means people aren't buying enough stuff. From the point of view of a capitalist economy that spells disaster. The shark has stopped moving through the water and will soon expire. The other code-word of note in his piece is 'protectionism', contrary to expectations one of the most threatening words in the economist's lexicon because it means less trade. In capitalist economics, without growth the economy will fail and the best way to achieve growth is to sell stuff to other countries.

The facile posture adopted by Dave and the Boy George at the G20 is almost as laughable as their suggestion of 40% cuts. We are, apparently, to grow our way out of the recession by exporting more. Leaving aside the understanding of readers of this blog that the planetary limit makes any further growth impossible I have two simple questions for the dining-club boys: what are we supposed to export (the demand for financial services having declined rather rapidly over the past two years), and who on earth is supposed to be buying? Tweet

The Tripartite Hegemony

It is clear that the problems facing the world economy have their origin in the financial system and that the curbs on bank powers proposed by Obama, significant as they are in a country where financial interests are so powerful, are insufficient and misdirected. What we need is not a behaviour management programme but a democratised system that serves the interests of all the world's people. Since the problems of the post-war period have resulted from too much US power - especially in global finance - it is unlikely that a solution is going to emerge from the President of the United States.

This is made heart-warmingly clear in a lucid and congent book that I have been enjoying recently: Unholy Trinity: The IMF, World Bank and WTO by Richard Peet. Like others I have been waffling on about the need for a new Bretton Woods without feeling entirely confident about the workings of the system that has proved itself to be so wrong. Professor Peet has been spending his time cutting through the verbiage and obfuscation of the financiers and has now presented his understanding in this excellent book.

From the travails of the 1930s that led to the conviction that politicians must take control of finance, through the weary Bretton Woods negotiations and the even wearier surrender by the war-ravaged European to US domination, Peet maps out the path we trod to arrive at a system where capital is supreme as never before - in spite of its clearly demonstrated incompetence and destructiveness. For those with a taste for abstract concepts like securitization and who thirst to fully understand the workings of a special drawing right, I can promise that you too will be satisfied by the thorough research and clarity of writing. Peet has no interest in demonstrating how smart he has been to work all of this out: his intention is to help us all to follow his lead so that our proposals for change will be better informed and more powerful as a result.

As with many books that arise from the left, this one is weak on prescriptions. But perhaps that itself is appropriate. We are clear about the need for the reclaiming of power over capital for the world's citizens, and the need for a new international negotiation to establish a world economic framework based on the twin principles of sustainability and equity. Beyond this we surely need the humility to listen to those of the world's people who are not responsible for the spectacular mess the smart guys in the west have gotten us into. Tweet

Tobin or Not Tobin

At first blush we may be surprised to hear Adair Turner, the closest thing to crumpet the City ever produced, supporting a tax which has long been proposed by those who oppose financial speculation, the casino economy, global capitalism and everything the City stands for. But if we dig a little deeper we begin to see that this may be a very cheap way out of a very deep hole for our sharp-suited adversaries.

James Tobin was far from being one of us, and in fact was rather offended that it was the anti-capitalists who picked up on and propagated his idea for a tax on currency speculation. Until he died in 2002, his had been a fairly typical career for an orthodox economist: teaching the bogus ‘science’ at Harvard and Yale, advising the government on same, a seat on the board of the Fed., and a ‘Nobel Prize’ for developing an econometric modelling technique. How disturbed he would be to find his idea working against everything he stood for from beyond the grave.

It should be made clear that the Tobin Tax, which would be levied on all international currency transactions, is proposed at a tiny rate. Tobin originally suggested 1% and even lower rates are now being bandied about. The fact that it is worth introducing a tax at this rate indicates the vast sums of money that move across the international currency exchanges every day. Taxing may extract some of that value to be invested in worthy projects, but relating the tax inversely to the length of time the investor holds their investment would do so more effectively. This principle could then be applied to investments in general, discouraging the short-termism and rapid movement of investment cash that so destabilises the real economy.

The Tobin Tax is Green Party policy and is a good step towards gaining some return from currency speculation for the public benefit. The fact that the financiers are so opposed inclines one to support. The idea for the tax grew out of the last financial crisis – when Nixon unilaterally dismantled the international financial architecture that had been agreed by a group of nations at Bretton Woods, following the Second World War. It may be part of the solution to the current crisis, but only in the context of a new international negotiation, and one in which all countries engage on equal terms. Tweet

Plus ca change . . .

Now the dust has settled, what are we to make of the G20 conference? Such high hopes; so little real achievement. When the whole process began the discussion was around a new global financial architecture, then it moved to a major financial stimulus, but what we got was a strategy of inventing money to boost the coffers of the world's disaster management bank, the IMF.

I'm not surprised the architecture went nowhere. It took more than two years and some of the best brains in the world to pull Bretton Woods together. The media circus that was G20 shows how the world has moved from substance to superficiality since then and no amount of clever graphics or smart clothes can conceal this.

We might draw our own conclusions about why no fiscal stimulus was agreed. Presumably a combination of warnings from bankers that they would tolerate no more public debt and a reluctance from some of the countries in Europe that do not control reserve currencies pushed this off the table.

So we are left with the controllers of powerful currencies using this power to make money from thin air which they then deposit with the IMF. The poorer and less powerful countries that we have economically destroyed are then forced to beg our humble permission to borrow this money, which they then pay back to us. The inequity of personal banking writ large.

We wait to see what conditions the IMF will put on these loans but we may expect that they will be the sorts of conditions that allow the globalising sharks to take control of the resources of the poor countries as they have in the past, first through colonialism and then through trade. It leaves me wondering how much difference the expansion from G7 to G20 has really made. Tweet

G20-20: No Vision

Yes, I know it's tempting to smash things up. I can't remember the last time I felt so frustrated as when I watched that glass window go at the RBS building and realised I could have been there if I hadn't been in an Economics and Accounting management meeting. Even the thought of being hemmed in by thousands of coppers without access to a toilet failed to persuade me I'd made the right decision to go to work today.

It is not difficult to say where the G20 should be going - the media are choosing to hear from the same old men with blue eyes and pale faces who caused the problem. The sense appears to be coming from people dressed up as apocalyptic horsemen and clowns. I am sorry to say that the Green Party has taken to wearing suits (and having a leader) in the mistaken belief that this will ensure we are given more serious attention by the media and political classes. If only it were so simple I might wear a suit myself.

But lest you despair, I will share with you the radical, visionary and just policy that was passed a fortnight ago at our still fully democratic party conference in Blackpool:

International finance

EC960 The present international financial system provides disproportionate benefits to banks, trans-national corporations and currency speculators. It must be replaced by a system in which money returns to its proper role as a medium of exchange, not a commodity in its own right. This requires international negotiation. The result could be a reformed World Bank and International Monetary Fund at the centre of a global economic system with commercial institutions playing a much diminished role.

EC961 The tripartite global system regulating international finance should be replaced by three new bodies: an International Reserve Bank to administer the neutral international exchange currency (EBCU); an International Clearing Union to oversee goods and carbon trading; a General Agreement on Sustainable Trade.

EC962 All countries belonging to the tripartite system should make their currencies convertible but according to internationally negotiated and fixed exchange rates. Domestically countries would be expected to administer exchange controls.

EC963 The global trading system would aim to achieve balance trade between countries; those which operated extended surpluses or deficits would be fined.

EC964 The US dollar should no longer be accepted as equivalent to gold in international transactions and other national or supra‐national (i.e. the euro) currencies should no longer be used as international reserve currencies.

EC965 Their role should be taken on by a neutral international currency ‐ the EBCU ‐ linked to the right to produce carbon dioxide. Tweet

G20: Some Achievement!

I am impressed by the results of the so-called global negotiation that took place in Washington in just one day. It is a remarkable achievement to have been able to agree solutions diametrically opposed to those that would serve people and planet and to be so spectacularly wrong on all points!

Cut taxes and increase public spending: in a world of open economies and free movement of capital this will vastly increase national government debt across the world but is not guaranteed to achieve anything for national economies. Public spending directed specifically at green objectives and politically managed would be a preferable option.

Stabilisation of national financial systems: without a negotiation between countries about reasonable exchange rates and a political agreement to reinstitute exchange controls this can provide no guarantee against future destabilising speculation in currencies.

Economic growth and more global trade: both will only increase inequality within and between nations and force a further damaging exploitation of natural and human resources.

The expansion of G8 to G20 is something to be celebrated, but not much consolation if you are in Lesotho or Papua New Guinea. Without the poorer nations of the world being included in the negotiations how can we expect to end the desperate global inequality that scars our world?

The absurdity of attempting to negotiate anything in one day and without the world's most powerful player was obvious from the start. The lengthy negotiation towards a just and sustainable financial structure should begin as soon as possible. It should begin with the loss of the dollar's role as global currency and end with the cancellation of trade and debt surpluses. Nothing less radical can provide a genuine solution to the economic and environmental crises facing us. Tweet

International Monetary Farce

Where do you turn as national chancellor when your country is bankrupt? If you don't have a reserve currency to protect you this is a situation you are pretty likely to face in the coming months. Your only option is to hope that you get in while the IMF still has some funds.

The International Monetary Fund is the part of the global financial system that is supposed to support the occasional accident that results from over-exuberant capitalist enterprise. It is not in a position to support the whole global banking system. Its pot apparently only extends to $200bn, which, given the size of money flows we've seen recently, appears extremely modest.

So, it could be that the Fund will be coming to national governments, asking them, on our behalf, to put our hands in our pockets again. Now we will be expected to bail out not only our own banking system, but whole economies across the world. The countries themselves will be required to take on more debt - the last thing they actually need. Surely it would be better to cancel all these debts in one almighty jubilee and negotiate the whole system again from scratch?

Imagine yourself as that national chancellor. You have only done what you were advised by economic theory. You have no control over global capital flows, and is isn't really your fault that your rely heavily on oil, or steel, or that you are a country which financial speculators don't like the look of.

The IMF tends to make offers to people who are in no position to refuse, and the offers are usually in the neoliberal mode, requiring restraint on public spending, a contracting state, and more market liberalisation. Exactly the sorts of policies that got those countries into the mess in the first place.

Interestingly, in the past few years many of the poorer countries who have been the recipients (victims?) of IMF loans have wised up and chosen to repay (see stories on Argentina and a story of recent IMF politics). In the insane world of banking, without anybody to lend to, the IMF would have gone bankrupt. It does seem a strange coincidence that exactly at this point a whole new range of countries are being forced into bankruptcy and into crippling loans that will keep the IMF afloat for another few decades. Tweet

Thomas Atwood Award 2008

On Tuesday Austin Mitchell received the 2008 Thomas Atwood Award for his services to monetary reform in putting forward EDMs about public credit. I was able to say a few words in support of the award and reproduce them here.

The ceremony took place at the Palace of Westminster in a committee room. While we waited the Chancellor and other cabinet ministers passed by. We felt right at the heart of power, yet it is astonishing how the ideas we were talking about, which are the key ideas of our age, are marginalised from political debate.

So here is what I had to say:

For those of us who have spent our lives awaiting the collapse of capitalism these are interesting times. I work in a Management School and have lived for many years with the slogan that a threat is also an opportunity—suddenly that banal aphorism has taken on an exciting new life!

Capitalism is an economic system that focuses around money. It is a twisted game where the power to control money allows a minority to extract the energy (usually in the form of work) of the majority and of the planet itself for their own exclusive benefit. If the money system fails the game falls apart. Suddenly we are all equal—we become limited only by our own expectations.

To remake the world along just and equitable lines we need two things: a plan and the courage to execute it. It is because Austin Mitchell has demonstrated the wisdom to choose the right plan and the courage to publicly stand by this choice that he is being given the 2008 Thomas Atwood Award.

Courage is a personal matter—a matter of the heart. If we believe in something better we must overcome censorship, embarrassment and fear and stand up for that belief. But the plan is always changing as we learn more and our ideas develop: open minds are invited to engage. I will spend the rest of these few words discussing the outline of plans to change the way our money system operates at three levels: personal, national and global.

First, at the personal level, what should we do about our need to have a bank account and a credit card? There is an easy solution here, since the Co-operative Bank offers both, and other mutuals such as the Nationwide also provide bank accounts. The same applies to other financial services such as insurance and mortages, which can be switched to CIS and the mutual building societies. It is no coincidence that they are not facing the same instability and are rather having to close their doors to new business because of rising demand. Co-operative businesses do not exist to maximize profits but to provide services, and their financial services are more reliable and more ethical than those of their private-sector competitors.

At the national level, we need to be arguing for the reclaiming of the system of money creation so that it is democratized, rather than left to the vagaries of the market and the profiteering of the private sector. Banking also needs to be decentralized, so that local banks can profit from the creation of money to be invested in their local economies, as they did in Atwood’s day. To build resilience in our local communities governments should encourage the flourishing of local currencies through exempting them from tax—at least in the initial phase. And government should take on the major role for the creation of money, as Austin Mitchell’s various EDMs have argued.

Finally, at the global system, we need to go back to the drawing-board, or rather the Bretton Woods conference table. We need to renegotiate an international financial system that uses a neutral currency, as Keynes argued in 1944, and that links to a balanced international trade system. We can go further than this, and by linking the currency to carbon dioxide emissions, use it as a means to tackle climate change as well as global poverty.

We know that the money system we have is flawed, that it is breaking down. Even in its heyday it created massive inequalities and pressurized the planet; now it is failing even in its own terms. What I am proposing here is a massive, radical change and it is easy to lose heart. But the manifest failings of the existing system should give us the courage to believe that we are right.

I would be happy to work with others—especially those with political power—to discuss and develop these ideas. Together we have to decide on the model for money that we want: they we have to just do it. Tweet