Sisterhood is Powerful

The most successful challenge to the global domination of neoliberalism has been slowly maturing in Latin America. The latest development is an interesting coalition between two women in powerful positions where you might least expect. In Argentina, where stereotypes suggest the men rides horses and the women are pushed around the dance-floor like shopping trollies, the female President and female head of the Central Bank are cooking up a distinctly different monetary policy.

The banker, Mercedes Marco del Pont, has recently achieved the rare accolade of being voted 'worst central banker in the world' by the lackeys of the financiers. Her sin appears to be balancing the needs of the Argentinian people with those of the finance sector. She is refusing to have the sole focus on inflation that the IMF demands and has annouced that financial stability, employment creation and economic development with social equity will also be objectives of monetary policy.

Somewhat predictably Christine Lagarde, Managing Director of the IMF threatened Argentina with a 'red card', to which President Cristina Fernandez de Kirchner responded 'My country is not a soccer team. It is a sovereign country and, as such, is not going to accept a threat.' Last time we caught up with Argentina on this blog, they were celebrating their liberation from debt-based financing, and  reclaiming their right to the value of the country's resources. Wray updates us: the recent poor weather has threatened both of Argentina's main exports: soya and beef. This helps to explain the inflation problem that the central bank is facing, but so far the political and monetary sisterhood in Argentina is holding firm.

This story is based on the account of Modern Monetary Theorist Randall Wray; he tells the story in greater detail on his Economonitor blog.
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Money system of last resort

In a system that relies on debt to create money, as capitalist money systems do, there is always a temptation for individual banks to take imprudent risks and be unable to repay their creditors. Because greed tempts bankers to destabilise their own business, and a run on the bank leading to bank collapse would undermine faith in the whole system, capitalist economies have a 'lender of last resort'.

The lender of last resort in the UK economy is the Bank of England. When banks hit sticky times they turn to the Old Lady for a shot in the arm, and she must oblige. This is exactly what happened last year, when banks had massively over-borrowed, they were loaned vast sums by the Bank.

You may be left asking where this money came from: who were the creditors? The answer is that, because there was no one left to lend money, the government itself acted as what we might think of as the 'borrower of last resort'.* When all else fails, a government can decide to create money by political fiat - the quantitative easing policy. And who do they borrow money from? The answer, I'm afraid, is you and me - and we are now being asked to pay this back through spending cuts, higher taxes and more work.

Leaving aside the question of whether the UK is really capable of paying back this level of debt without unacceptable suffering and civil unrest, let us consider for a while longer the concept of a borrower of last resort. When demand in the economy is so low that we are in a self-reinforcing downward spiral, as we are now, a capitalist economy requires the government to step in and borrow, just as it would expect the central bank to step in and lend to banks. So rather than cuts and austerity in the public sector we need to see borrowing and investment.

So far I have only considered the last resort in a financial sense, but what about the ecological crisis we are facing: the ultimate situation of last resort. Surely it is time for the government to act as borrower of last resort and produce a massive spending package to create the infrastructure and home renovation projects we need to achieve the carbon reduction targets that are now enshrined in law? Mad as it may seem, if you insist on creating money as debt, that is the only way that we are ever going to be able to buy ourselves a future.

*Thanks to Richard Douthwaite for this useful thought - and so many others. Tweet