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

Is it the Economy, or is Osborne Stupid?

Now George Osborne has me really worried. We are all used to him misrepresenting how the economy works to score political points: there is no alternative to austerity, no wealth is created in the public sector, and so on. But this morning on the Andrew Marr show he seemed to just plain misunderstand something.

If you watch the beginning of the interview you will hear him make a familiar point about how we are benefiting from low rates of yield on our national debt because of market confidence in the savagery of the austerity policies being imposed. He then seeks to imply that this has a direct link to household finances via the interest rates they pay mortgages, and to growth via the interest businesses pay on loans. But in reality these are connected only indirectly if at all. The Bank of England has set the interest rate at 0.5%, which explains the comparatively low interest rates faced by households and businesses. If there is a connection between this and the yields financiers demand for gilts then I would be glad for a commentator to explain it.

This is precisely why the eurozone countries are in the hole they are in. They can control neither the rate they are charged for their debt, nor the rate at which money is priced, since they have abandond their central Banks and are now subject to the interest rate set by the European Central Bank. In fact, that rate has remained resolutely low as rates charged on Spanish or Greek debt has swung wildly, again illustrating Osborne's error.

The main advantage we have over the countries of the Eurozone is that we can print our own money and set our own interest rates. That gives us considerably more room for manoeuvre and scope for fiscal stimulus like that undertaken in the US, but which the European economies do not have the power to implement. Osborne should gain credit for helping to keep us out of the euro but, if he agrees with the independence of the Bank of England then the he cannot claim credit for low domestic interest rates.

Osborne's is, at best, a high-risk strategy. What if the markets turn? The rate they charge us for debt is entirely within their control and is the result of a calculation about how they can extract the most value from their various holdings of peonage and bonded labour across the world. If the countries of southern Europe cease to yield such healthy returns then they will turn their greedy eyes in our direction. We could find ourselves in the of a sterling crisis sooner than we think.
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Is this the year of the steady state?

The economy has ceased to grow, in fact it has begun to shrink. Interest rates are now at marginal levels and may soon drop to 0%. Combine this with the falls in stock prices and you realise that it is no longer possible to earn money from having money. These are the very characteristics of the steady state economy that greens have been calling for. So should we be celebrating?

The problem with interest and other forms of using money to make money is that it is mortgaging the future. Since money is expanding goods will need to be increased so that they are available when the people who have that money come to demand them. And all those goods need resources and energy to make them. This is an unsustainable way of running an economy.

Because of this link between expanding money supply and increasing demand for goods, in a capitalist economy unless you have constant and exponential growth the money system will collapse--as it just has done. But rather than try to reboot the money system and desperately try to stimulate more economic activity, wouldn't it be more sensible to use this opportunity to shift our economy onto a more sustainable path?

Herman Daly's concept of the steady state economy is one where you do not take more resources from the planet than can be replenished and where scarce resources are used frugally and recycled. The concept also has significant implications for the population, which needs to be stabilised. He argued that this is the only sort of economy that can be sustainable on a limited planet.

The coming year is going to be a grim and challenging one; we will see the darkest face of capitalism. But it will also offer great opportunities for those of us who have a clear vision and proposals for how to bring it to life to make those arguments. Tweet

Capitalist rollercoaster

Generally in economics 'long-term trends' are anything but. I was recently in a supervision session with a colleague who was describing an econometrics method used to 'explain' the behaviour of stock-market investors. It works with long data series, but these are minutes of investment decisions! So in a day you can create a really long-term trend!

For a discipline that makes great play of the differences between short, medium and long terms, economics is remarkably poor at analysing the long run. Perhaps that is because, as Keynes so eloquently noted, in the long run we are all dead. This is not a very helpful attitude for our grandchildren or the planet they hope to inherit.

In view of this prevalent short-termism what joy it was to find the long-term trend of UK (English) interest rates on the Guardian website. I would be interested to hear others' interpretations of what we can learn from these.

What immediately captures attention is that in the early phase of the life of the Bank of England interest rates are almost completely static. Is this an image we should hold in mind when thinking of the steady-state economy? A stable long-term interest rate suggests a lasting agreement about the return that the holders of capital may demand. This seems to suggest that, prior to 1800, there was little evidence of struggle over the value in the economy.

The trend becomes increasingly haywire from 1800 onwards, as industrial capitalism began in England and conquered the world. For the past 200 years we have been living on this rollercoaster with its endless economic and social conflict. The solution is not to return to the earlier phase of stable interest rates relying on an agreement that the rich man should stay in his castle and the poor man at his gate.

Surely a more fruitful solution would be to challenge the concept of interest itself. What gives a rich person the right to become richer merely because they have wealth to begin with? Removing the ability of money to store value through time would radically change the way we behave as economic actors--it is surely a prerequisite for any steady-state economy. Tweet