Deconstructing Austerity I. Money

The narrative of austerity as proposed by Osborne and his cronies is that our huge national debt is the responsibility of feckless Labour politicians and their uncontrolled spending. An examination of the data from the Debt Management Office shows clearly that this is nonsense (this is shown in the graphic and discussed in more detail in my paper 'Who Owes Whom?'). The many billions that were spent as an emergency to prop up failing banks and prevent the financial system from crashing are the real explanation for the huge increase in the public debt. Osborne is a liar by omission because he will not discuss whether he would seriously have refused to invest this money and allow cashpoints to seize up.

 

The reality is that under Osborne far more money has been poured into preventing the cardiac arrest of the economy that results from a lack of circulating money. This is the money created through quantitative easing and the difference between it and what was spent by Darling during the crisis is that the QE money was direct credit creation whereas the money spent by Darling was generated through the sale of bonds and hence features in our national debt.

Since 2009 £375 billion has been created directly by the Bank of England and poured into financial institutions. They have greedily hoovered up this money and paid it to shareholders as well as improving their balance sheet position. They have barely loaned any of it to businesses or invested it in the economy, although the government could have used it for such direct investment, as I argued at the time. This explains why the wealthy and those with interests in finance are flourishing while the rest of us are suffering austerity. The £80 billion created for Funding for Lending has similarly not resulted in an increase in debt and has also been kidnapped by the banks rather than being fed into the real economy.

The Treasury bonds that were bought during the quantitative easing programme are still sitting inside the Bank of England presumably with a big label saying 'do not touch'. If they were to be cancelled, which they could be since they are IOUs issued on our behalf, nearly a third of our national debt would be wiped out in an instant. What a marvellous way of reducing the burden of austerity - or not depending on your political objectives.

These are political choices and hence the narrative of austerity politics that there is no alternative is simply a lie. Darling could have created money directly to save the banks; Osborne could create money directly now for investment in a renewable energy transition. Darling's unwillingness to resort to direct credit creation in the early days is hard to fathom and perhaps resulted from a failure of understanding. Osborne's refusal now to engage in any type of monetary policy that would assist the real economy is a consequence of his desire to use the financial crisis to achieve his long-term policy goal of destroying the public sector.

Almost without challenge Osborne portrays himself as the saviour of the economy while Cameron claims deceitfully to have reduced the debt. The national debt is of course still increasing (see the Spectator graphic) and while the deficit is slightly decreasing we're way off Osborne's original projections. However, this is all smoke and mirrors since the Conservatives have no intention and no desire of reducing the national debt: it's far too useful to them politically.

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Is the US About to Default?

There was just too much going on in the IMF report I blogged about yesterday to cover it all. However, one of the most interesting paragraphs is the following:
'The third advantage of the Chicago Plan is a dramatic reduction of (net) government debt. The overall outstanding liabilities of today’s U.S. financial system, including the shadow banking system, are far larger than currently outstanding U.S. Treasury liabilities. Because under the Chicago Plan banks have to borrow reserves from the treasury to fully back these large liabilities, the government acquires a very large asset vis-à-vis banks, and government debt net of this asset becomes highly negative. Governments could leave the separate gross positions outstanding, or they could buy back government bonds from banks against the cancellation of treasury credit. Fisher had the second option in mind, based on the situation of the 1930s, when banks held the major portion of outstanding government debt. But today most U.S. government debt is held outside U.S. banks, so that the first option is the more relevant one. The effect on net debt is of course the same, it drops dramatically.'

The report also suggested a buy-back of private debt, the other side of the debt coin that is holding back the global economy.

What is the explanation for this extraordinary change of heart, if not yet of policy? Could it be that the US acknowledges that its debt, both public and private, is simply unpayable? However great the temptation to return to the lure of further borrowing, eventually states as well as individuals must adjut that they are bankrupt. But the US has grown rich on producing debt that has been bought by other countries, and those at the top of the pile have grown the richest, fastest. There must surely be a price to be paid rather than letting the financiers and those who have gambled with them slope off to their mansions in the Hamptons.

In an earlier paper I suggested that a default of the largest sovereign debtors was inevitable. I proposed that the price the world might extract would be to implement a new global currency regime that uses carbon as backing for the global trading currency. This would allow a fresh start but would limit the consumption of all countries to a level that is environmentally sustainable and will allow us to avoid frying the planet.

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More Links to Germany

As the parallels with the 1930s grow stronger, another commentator has written an article drawing attention to the way Germany was treated in the 1950s and the way the Eurozone, at Germany's behest, is treating the debtor nations of Europe's periphery. As Eric Toussaint notes, the 1953 London Agreement acknowledged that Germany was simply unable to pay its debts, and that failure to recognise this could cause social and political tensions within and between countries. With the second great European war still a vivid and personal memory for many this argument was heeded. Amongst our generation of politicians, sadly, the focus on punitive measures and judgemental attitudes is outweighing the good sense that says when countries can't bear, forcing them to do so will only break them and their populations.
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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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Who Owes Whom?

I spent my Easter weekend this year in an exciting meeting of social movements focused on rejecting the debt at source: on conducting a series of Citizens' Audits to ascertain exactly how we came to be in this disastrous position and to ask the question, Who really owes to whom? And why should the tiny percentage of the super-wealthy continue to extract such a vast share of the common wealth of nations? This is empowerment as an alternative to austerity.

In the room were around 60 activists from across Europe and the newly liberated countries of the Middle East. Countries represented included France, Egypt, Poland, Tunisia, Italy, Greece, Portugal, the UK, Ireland, Germany, Belgium, and Spain. In each country, popular movements have grown up to resist the disfiguring of societies that austerity brings, some with more technical approach to debt audit, some with more direct campaigning responses.

In Spain the campaign against the debt was launched in October 2011 under the rubric 'We don't owe; We won't pay'. A coalition of social and ecological movements, trade unions and political parties. Their objective is a general one: to raise the issue of the debt nationally and regionally and to challenge the perceived inevitability of austerity policies. This campaign is less focused on the specific technical aspects of debt audit, rather the campaign for an audit is used as a vehicle to demand a real democratic debate about the national debate and its social and political consequences. The aim of the campaign is to change the political model, taking power from the financiers and giving it back to the people. A special conference on the process of debt audit specifically will be held in Catalonia in October 2012.

In Greece the campaign against an unquestioning policy of austerity and in favour of a open discussion about policy alternatives forms an umbrella within which a number of groups operate including three who were represented in Brussels: Comite grec contre la d'être, No debt no euro, and the Greek Debt Audit Campaign. Specific investigation of the debt itself has been undertaken mainly by the third of these, and has consisted of research into single-issue examples of illegitimate debt. Overall the campaign is working at the level of popular education to share and explain the idea of debt audit and debt cancellation. The defining characteristic of the Greek crisis is a failure of trust elites and particularly where money is concerned. For this reason the Audit campaigners do not feel able to consult experts or to seek funding to pay economists or accountants to study the government accounts. In the current context they feel that this would only lead them to lose credibility in the eyes of the public. For this reason they undertake to forensically analysis the debt using the data they can gain access to, and in a voluntary capacity.

In Portugal the campaign against the debt was launched officially in a big public meeting on 17 December 2011. The focus is on working towards a full-scale public debt audit although, as we were told at the conference, 'All initiatives of resistance and a new social paradigm are unequivocally indispensable at this moment'. The aim of the campaign is to produce technically reliable results from a thorough analysis of government accounts. In the mean time, however, the campaign process itself is providing the opportunity for considerable public education. The common sense view in Portugal, as in many European democracies, is that the debt must be paid: that there is no alternative. The campaign has achieved widespread media coverage and is organising a roadshow to take its message around the country. One particular campaign is the launch of a legal action against accountants Ernst and Young, who have been found to be auditing companies they themselves work for in a way that may raised questions about the ability to provide independent audit.

From Egypt we heard from Noha el Shoki, of the Campagne populaire pour l'audit. A trained economists she told us of her campaign's goals to suspend payment of the foreign debts inherited from the Mubarak era and to enter into negotiations with debt holders. They have a rather dubious history of such 'rescheduling', such as the 40% downgrade in foreign debts that Mubarak was allowed in exchange for his support for the Iraq War. The campaign is undertaking a technical exercise to audit their country's national debt from this point. They are meeting with the new parliament's public accounts committee and are being well supported with information. Less encouragingly, Noha told us that during the period between the overthrow of Mubarak and the election of the parliament, Egypt was allowed to borrow at 8 times its previous annual rate, acquiring illegitimate loans that the new democracy will now be forced to pay back. These loans were agreed in documents that were not even translated into Arabic.

A similar situation arose in Tunisia, which will host the World Social Forum in April 2013. Fathi Aloui told us how the national debt is preventing the fledging democracy from succeeding. As in Egupt, during the interim between old and new regimes, Western countries massively increased their loans for questionable projects, tying Tunisia into future debt bondage. On 17 January 2011, three days after Ben Ali was ousted, the World Bank took control of the Tunisian Central Bank. The campaign is seeking to make these facts known to the Tunisian people: without economic democracy political democracy is worthless.

Ireland is, in some ways, the most inspiring example, since three academics from the University of Limerick have already completed and published an audit. The Audit drew some interesting conclusions about the relationship between the Irish state and financial speculators:

'The profile of investors in Irish sovereign debt has changed significantly since the Irish banking guarantee was put in place in 2008. Prior to the crisis, Irish debt was viewed by the market as a low yielding, low risk asset and it usually found a home on European banking books, insurance companies and pension funds. The crisis has changed the nature of Irish sovereign debt and has led to the creation of a number of credit instruments that affect the credit risk of the Irish sovereign. Over the past three years the trading activity in Irish sovereign debt and related instruments has been unprecedented both in terms of volume and trade-type.'

Once the state was guaranteeing returns, the market was open for profiteering and extortion, spiking in 2011 when returns were at their maximum. The academics also question the democratic acceptability of having secret bond-holders owning government debt.

In Britain we are still at the early stages of building a coalition to call for a Debt Audit. A technical exercise is useful, but if nobody notices its findings then it does not take you very far. Instead we need to build an ideological movement to reject the austerity vs. growth dichotomy and find a third way of trascending debts and moving towards a stable and sustainable economy.
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Can't Pay Won't Pay

It was three years ago that I first used this title in an article I wrote for the Welsh left magazine Celyn (it means holly). Back then I argued that:

‘The implications of the public-spending cuts caused by bailing out the banks on such a massive scale are devastating. Borrowing announced in the budget amounted to £175bn. in 2009/10 and a huge £701bn. over the next five years. If you add in our liabilities for bad debts we have ‘insured’ (since they are already bad debts it seems certain that we are going to have to pay these liabilities) then the total we are in hock for is more than twice the value of all the activity in our economy for a whole year. Just the interest on this borrowing is more than £40bn., about a third of total NHS spending in any one year. Following this year’s budget public spending will fall from 48% of national income to just 39% by 2017-18.’

My conclusion was:

‘So this can be our political demand: an international debt jubilee to relieve the working people from the slavery of repaying mountainous debts for which they are not responsible.’

Although in Britain the majority have accepted the Big Lie about the public debt being our fault and our responsibility to repay, across Europe a movement for debt relief is spreading like wildfire, and expressing itself in the form of citizens' debt audits. In Ireland the process was rather academic and not political, but resulted in a popular call to abandon expensive attempts to support 'zombie banks'. In Greece the audit committee has become the focus of a nationwide campaign for an alternative economic policy. A civil society movement is building in France where it was launched at a meeting of 700 people in Paris in January.

This is the opportunity offered by the debt crisis: the old route of passivity and Danegeld has broken down in the face of the excessive greed of the owners of capital. What stands before us is the prospect of an economy based on equality and participation. The rest is up to us.
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Argentina Learns not to Pampa Financiers

As the credit noose tightens, it is not surprising that commentators are seeking examples of countries who found their way out of unrepayable debts - and lived to tell the tale. In the case of Argentina, whose debts at the time of its default in 2001 were $81bn. - a record for the time although dwarfed by current debts - life after debt has proved to be a very positive experience.

The story is told in a couple of podcasts made by Peter Day for his World of Business series on Radio 4. A paper I wrote about Argentina's barter networks introduces this story. Caught in the orbit of the US dollar, Argentina was unable to allow its currency to adjust to the needs of its own economy, much as the smaller economies of the Eurozone are today. This culminated in a financial collapse in 2001, with the loss of huge amounts of savings by the members of Argentina's middle class.

What becomes clear from the podcast is that clever young economists within the Argentinian finance depart and/or central bank were alive to the causes of their crisis and took political control. As a recent report (pp. 58-62) indicates, refusing to pay socially impossible debts was a positive decision both in Argentina and in Russia. Default was the first step, followed by a decision not to become involved in debt again. Similar decisions by other Latin American countries actually threatened the future of the IMF - since without debtors a bank is defunct - until the credit crunch in Europe gave it a new lease of life.

With no possibility of receiving credit Argentina had to live from its own resources, which turned out to be a blessing rather than a handicap. With a massive and fertile land mass, and a popuation of only 40 million well-educated people, Argentina had nothing to fear in its debt-free future. As food and fodder prices have boomed, so has Argentina, with its government benefiting from a 35% export tax on soya production.

Another interesting lesson is the rapid growth in the 'informal' sector, which is a typical feature of many poor economies but less typical of a highly sophisticated economy like Argentina. This may also be a feature of the future of European economies. On the positive side it can be interpreted as self-provisioning and self-reliance, but its shadow side is exploitation and precarity.

The sting in the tale of the story of Argentina is that its economic success has enabled it to seek foreign finance. The credit vultures are circling and seeking their share of the natural wealth of the country. How far will Argentina's politicians remember their lesson and keep control of their national wealth?
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Repudiating Odious Debt

The frustrating reality of the situation we face in this unwarranted Age of Austerity is the difficulty of turning the anger against the banks and the unwillingness to pay for their corporate corruption into meaningful political action. While it seems unglamorous the answer may be to establish a national Audit Committee.

This idea comes from Ecuador, where President Correa was elected in 2005 to preside over an economy which was oil-rich but whose wealth was being drained whose people were left in poverty because 50% of national income was being spent on servicing foreign debt. The Audit Committee was established to investigate who were the creditors and how they had persuaded the former politicians to take on the debt. Eventually, it found that some 70% of the debt was illegitimate and the creditors were forced to sell at reductions of around 90%.

The story is told in a film called Debtocracy, whose main focus of attention is the debt situation in Greece, where a national Audit Committee has been established. The idea has now spread to Ireland. Exploring the sources of and responsibility for national debt can help to shift the violence in the streets towards a quasi-judicial process and may help to focus political anger, but as London-based economist Costas Lapavitsas makes clear in the film, these are political rather than economic or legal decisions.

The film also helpfully resuscitates the concept of 'odious debt', created by the US in the 19th century to enable it to repudiate the debts it inherited from Spain when it conquered Cuba. It used a similar legal wheeze to renege on Iraq's debts after the 2003 invasion, although it kept this quiet for obvious reasons.
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Money on the Move

It would be nice to portray David Malone as an Everyman, stumbling disbelieving through the financial crisis and documenting his rising confusion, frustration and rage. To an extent this is true: he may be a leading documentary film-maker but when it comes to credit-default swaps and fractional reserve banking, we have almost all been brought to the same level of ignorance and disbelief.

Malone's book The Debt Generation is a positive response. From the summer of 2008, when he first glimpsed the 'Mad Max Future' he kept a regular diary of the news of financial mayhem. The book is humorous, but there are few belly-laughs. However, the very personal nature of the account is its main strength. We all took the same journey from a sunny summer, through an incredible autumn and on to the coninuing winter of our discontent. The difference is that David Malone kept a regular record, and in the era of ephemeral information this is invaluable.

Here is an extract from February 2009:

'Now here is a surprise. Jean-Claude Trichet, the head of the European Central Bank, has just declared, 'We live in non-linear times' . . . Our leaders and economic masters are linear recidivists. They still think of the economy as if it were a machine that has broken down. . . They imagine all they need to do is pour in lots of lubricating money, replace a few bent and busted parts, then press the big green GO button and the machine will roar back to life.' (p. 79)

Malone concludes that the financial system - indeed the whole economy - is a system. The problem we have is systemic and only systemic change can fix it. As crises pile up the wisdom of this position becomes clearer by the day.

In a world where community has broken down and mutual aid is, for most, no more real than the legend of King Arthur, all we have to rely on is our money. This is the message of capitalist invididualism: your money will make you happy; your money will keep you safe. This is why the financial crisis is so pointedly and destructively frightening and why people are losing their heads. Some are reacting with anger, others with despair, while the majority resort to denial, analgesia and shopping.

For those of us who are keeping our heads there are a rising number of campaigns for a new type of banking system, new money, or a whole new economic system. You can find out more about David Malone's work at The Debt Generation website. Positive Money is a campaign growing out from the New Economics Foundation. There is even a Bill that has been introduced in parliament which you can ask your MP to support. Tweet

Laughing all the way . . .

So the banks are in profit again, and this is apparently a cause for celebration. The number of questions being begged by the mainstream media mounts by the day. Robert Peston, our most promising hope as a curious voice, limits his comments to an arm-waving complaint about the banks' failure to lend in sufficient quantities to small business, a complaint they bat away with tired lies about low levels of demand. Politicans have failed to enforce strict new capital requirements, indicating that banks are still more powerful than our political representatives. And the profits are a clear indication that the money being made at the public expense is being spent on both bonuses and shareholder dividends, and not to rebuild capital reserves.

We are living through a time when history is being rewritten. The Tory line is that Labour has mismanaged the economy leading to a fiscal crisis, a socialist tradition they enjoy drawing attention to. This is a Big Lie to conceal the reality that we have barely survived a monetary crisis that is a periodic symptom of a capitalist economy system.

Let's ask a few of the questions that the pundits are ignoring. The first is: where do the profits come from? This is a difficult one to pin down, for the very reason that the banks' international venture-capital operations are mixed up with their domestic banking operations so we cannot easily see where the profits are being made. However, the wider distance between Bank of England base-rate (which has been at half a per cent for 18 months) and bank interest rates indicates that much of the profit is coming from the people they lend to. Another source of public subsidy to the banking industry and small cause for celebration.

The media line that we should greet news of a return to profitability by the banks with unbounded joy since belong to us and so their profits are our profits also seems disingenuous at best. The debts we incurred by rescuing the banking system in its entirety two years ago are on the public balance-sheet and the cause of the massive public-sector deficits and consequent cuts. The odd billion here and there that may come into the public finances via the bank levy seems a small compensation. Tweet

Who is rating whom?

What exactly are the credit-rating agencies up to? I've been intrigued by the debates about who in the world economy is really behaving like a pig. Under the rules agreed at Maastricht, all the EU members have to produce a periodic report detailing how well they are meeting the criteria agreed there in terms of national economic probity. This relates primarily to how much you borrow relative to how much you earn as a nation, measured in terms of GDP. The latest reports for 2009-10 are available on the EU's website.

Reading through these is a lesson in the cultural variety of Europe and so finding the necessary figures is not as straightforward as we might hope. The figures reproduced here illustrate two distinct measures of the state of a country's finances: the amount each needs to borrow this year (the deficit) and the amount of historical borrowing (the national debt). Both are as a percentage of GDP - the accepted measure of how much life there is a nation's economy.

This is important, because it means that the absolute sums of money Greece needs to borrow are much smaller than those Germany is borrowing, but because the comparator is larger Germany's debt appears relatively small. This is valid, in the sense that Germany can pay for its debts because it exports more. But the size of borrowing by Europe's larger nations reduces the pool of available investors, and itself makes Greece's debt less attractive. As speculators work against Greek debt, Greece has to pay a higher rate of return, which pushes it further into debt.

The first figure illustrates how much the countries expect to borrow this year. It illustrates that, in a recession, countries borrow hugely to keep their economies from imploding. Capitalist economics and the debt-money system makes this inevitable. But the comparison makes clear that the UK is borrowing more than Greece, with Ireland only slightly behind. This has been illustrated graphically by researchers at the University of Sheffield. The reason that Greece is coming under the cosh is that its politicians are not convincing the credit raptors that they will succeed in cutting wages and services, whereas Ireland has.

If we turn to the second figure, which illustrates total national debt, then we see the problem for Greece, whose historic debt is 124% of its national output in any year. This is the result of a country with a small capacity for production attempting to give its people a European lifestyle. But wasn't that the promise the European Union offered?

And what about the UK, which comes out of the second figure looking surprisingly - dare I say suspciously - healthy? As Faisal Islam explained on Channel 4 News on budget day, the reason that more money was found and the UK's deficit had apparently shrunk was almost entirely the result of changing the projections about economic growth. Even with these unrealistically positive expectations, our national debt is still projected to rise to 77% of GDP by 2013. I dare say the politicians in Greece wish they could get away with this, but they can't. Because we have the pound and they have given up their own currency to become subject to the whim of Germany, the bulwark of the Eurozone.

It was the large and powerful economic nations of Europe who created the euro, and in spite of the mealey-mouthed justifications around sharing the wealth with the transition and Mediterranean countries, it was always going to work in their interests. Export markets increased and the transaction costs of sending goods overseas fell. The price that had to be paid was supporting the weaker economies of the EU; Germany and France are now reneging on their part of the deal.

This is a dangerous game. The Greeks have already responded to German self-interest by raising the spectre of the Second World War. So the monetary pact is increasing the very tensions in Europe that the EU was created to prevent. Tweet

The End of Hegemoney?

Now that the cracks caused by the earthquake that struck the global economy last year have been papered over to the satistfaction of most casual observers, and with stock markets forging ahead (fuelled by the quantitatively eased money that cannot be found for the public sector), the more interesting consequences of the financial crisis are beginning to unwind.

The most potentially momentous is the threat to the hegemonic position of the dollar in world capitalism. Way back at the G20 in April - when our attention was successfully diverted by the trivial tittle-tattle about bankers' bonuses - the Chinese kept their eye on the ball. They joined the Russians in proposing a new neutral international currency to replace the dollar. This call was repeated yesterday by a UN panel - was it a coincidence that this happened on the same day that news leaked about secret deals between the oil states, the Chinese, Russia, France and Japan to end the rule of the petro-dollar by trading petroleum for a basket of currencies? And from a UK perspective, notice which of the 'leading world economies' is missing from this list.

The embarrassing visit by Hilary Clinton to Beijing in February, where she effectively begged the Chinese to continue buying US debt, indicated the desperate position of the US economy - and polity. With quantitative easing on a grand scale being the only thing keeping the once-mighty dollar afloat its credibility as the foundational currency for the world economic system is utterly undermined. If China ends the rather one-sided deal by which it acquires pointless bits of paper in exchange for massive quantities of consumer goods, the financial crisis will return with a vengence and the US economy will be sucked down into the whirlpool of its own debt.

But are the Chinese seriously proposing the Yuan as a viable alternative? Can the currency of a state capitalist economy play the role of currency of first preference in the global economy? China is now selling its own debt in Yuan rather than dollars and because their currency is backed up by real economic power it should prove popular with investors. But the Yuan is not subject to even the limited influence of speculative movement by international capital. It is non-convertible and still politically controlled by the Chinese Communist Party. It is this control that has enabled China to expand so successfully, because it never faced the risk of having its currency picked off by global capital if it looked too threatening, as happened with the once fierce Asian tigers and the Russian rouble in the late 1990s.

So what is China's game? What does it plan to do with the power its people have won for their state through their hard manual work over the past 30 years? For the sake of humanity let us hope that they plan to use this power as political leverage over the US at Copenhagen. The US needs to be helped to manage its way down from the position of bloated, gun-toting pariah that controlling the world's hegemonic currency has left it in. If the US offers a serious movement on carbon reductions in December, perhaps the rest of the world can allow it a graceful descent, rather than the catastrophic demise which China could precipitate at any moment if it were to flood the market with US Treasuries, or refuse to buy more.

The asset bubble that led to last year's financial crisis began way back in 1971, when Nixon reneged on the Bretton Woods deal. The supreme economic dominance that the US has enjoyed since then was won by foul means, not fair ones. The people of the world and the planet itself have borne the cost in wars the US should not have been able to afford to fight and a lifestyle that was never earned from its own work or resources. But secret deals between the leaders of a small number of powerful nations is no way forward for a peaceful and stable world. We need to repeat the call for a global financial structure to be negotiated democratically, not fought out between Washington's Dogs of War and the dinosaurs of the Chinese Communist Party. Tweet

Once More Unto the Brink?

The world has fallen silent on the issue of the financial collapse. This blog included, interest has moved elsewhere. Perhaps we are all hoping that we can take a summer holiday from the credit crunch?

Mervyn King, to his credit, is persisting with his doggedly conventional view that public borrowing of the level that we are seeing it is unsustainable. Intermittent but persistent warnings filter through the media - real news occasionally penetrating the celebrity gossip columns that our newspapers and radio programmes have become.

A recent article in the London Review of Books gives a thorough and lengthy account of the crisis, and shares my uneasy sensation that we are pausing for breath rather than breathing easy. The debt crisis has not gone away. Some portion of the debt has been pushed onto the public and out of the private sector. And with our money we have bought insurance that the rest of the debt will be repaid from future economic growth. Growth on the scale to make this bet pay off is unimaginable - even if it didn't signify the death of the planet.

Lanchester has calculated that the money given to banks so far means that each UK household is in debt to the tune of 160% of its annual income. He concludes that debt on this level is quite unpayable and goes as far as suggesting that capitalism - as a system - has failed. This is, presumably, why this message arrives via the London Review of Books and from a novelist, rather than in the American Economic Review and from an economist. (Lanchester extended version of the analysis - a book called Whoops! - is eagerly anticipated.)

The big lie that is circulating at present, and that we are all working hard to believe through various denial and displacement strategies, is that we stared into the abyss and stepped back. A financial crisis threatened but, through paying a huge price and now through working hard in future and tightening our belts we can get through this.

The problem is that this just ain't so. The crisis has been postponed not resolved. As Lanchester puts it the policies adopt are 'not so different from dressing up in a costume and dancing in a circle praying for the intervention of the Market Gods'. The marketeers and their politicians have reached that mental double-bind that leads to insanity. They cannot solve the problem without accepting that capitalism doesn't work. Tweet

When is a risk not a risk?

Today the the talk is all of the additional money we are now required to find in the future to pay for the past mistakes of banks. This time the discourse has shifted subtly. Rather than bailouts this is, apparently, insurance.

Let's spend a while to ponder that concept of insurance. The original insurance companies were mutuals, which meant that it was a way of genuinely sharing risk. The risk was that something would happen that you couldn't afford to pay for. Perhaps you would die and there would be nobody to earn money to feed your children; or your house would burn down and you would need money to rebuild.

Once you privatise insurance the risk becomes the sort of risk a gambler enjoys. Now we have a whole new profession - the actuary - whose job is to do the complicated statistics that enables a company to charge each person enough so that the small number of catastrophic events that befall the minority of policy-holders will cost less than the premiums taken from all - thereby generating profits for the company.

In this situation we are still dealing with sharing of risks between people whose chance of facing disaster is more or less the same. But the sort of insurance we are talking about in the financial world - when it comes to AIG, for example - is of a different order entirely.

Companies that ensure 'financial products' that they don't understand and can't investigate closely are gambling on something over which they have no control. The financial companies that create and sell the products are simply passing the risk down the line. In the good times the insurers are raking in premiums and making money for old rope. When the bubble bursts they are going to be the first to go bust, since they are at the bottom of the pile.

Apart from us, of course. Because under the pyramid of bad debt sits Joe Public. Today we are being asked to 'insure' the losses of Lloyds and RBS. The problem with the use of the word 'insurance' to describe the £600bn. we are going to oblige our children to pay is that the disaster has already happened. We know that the loans made by the banks will not be paid back. This must represent another creative move by the financial engineers: a move into ex-post-facto insurance. Tweet

Robbing hoods

The fact that, as a national economy, we operate with a large and growing level of debt is now accepted as being unproblematic. Yet, as well as being a way of mortgaging our future, the national debt is another mechanism for transferring money from poor to rich. The government borrows money by selling bonds in itself, i.e. a promise to pay the purchaser the sum they invested plus an interest payment at some specified future date. The interest on the bond is paid from taxation income. Since the creation of the Bank of England in 1694 it has operated as a manager of the government’s debt, which it has managed to the advantage of its rich investors. The Bank’s website quaintly states that ‘the public’ were invited to subscribe, although we can imagine how many butchers and seamstresses contributed to the £1.2 million initial capital stock. To the poor debt represents fear and loss of control; to the rich it is an opportunity to use their money to make more. Government debt is the ideal form, since there is no risk involved and if all else fails you can claim you own the country!

Criticism of the national debt is a common thread in radical economics. For poor countries national debts force them to engage with an unfair trading system to generate enough foreign currency earnings to pay the interest. They are tied into a system of debt-bondage with which the rich countries replaced their more unsightly imperialist policies. The national debts of rich countries are less immediately troubling, since if you have a reserve currency at your disposal you can accrue as much debt as you need. In this setting the debts are rather a pump that operates to transfer money from the poor to the rich, since the earnings on government bonds are paid for through taxation of those who have to work because they do not have enough money to live by making investments, including in bonds. Hence the national debt of the UK is making the rich richer and the poor poorer just as the national debt of Tanzania or Peru is.

Shelley identified this fraud nearly 200 years ago when he wrote, in 1820, that ‘the public debt is a system for transferring income from the labouring segment of the population to those who’ had money to lend to government and would thus accrue interest, and who profited from government expenditure in wars. He related this process to the debasement of currency through the printing of paper money, noting that once a real link with gold is broken: the system of money creation thus enables those with power to use money to extract labour from others: ‘to increase the labours of the poor and those luxuries of the rich which they supply . . . to augment indefinitely the proportion of those who enjoy the profit of the labour of others as compared with those who exercise this labour.’ His radical conclusion is that the consequences of this new system, which we would now have the benefit of calling ‘capitalism’, ‘have been the establishment of a new aristocracy, which has its basis in fraud as the old one has its basis in force’. Tweet