OMG

The Guardian columnist Simon Rogers has produced a useful graphic, illustrating how the changes to growth forecasts announced by Osborne in the autumn statement affect our national borrowings.

This is truly scarey, especially if you notice how the GDP predictions in the later years have clearly been fixed to keep the borrowing possible in the next couple of years. As the predictions move through time it is clear that they lose contact with reality and are created post facto to make the numbers work inside the Treasury. What we will really be facing in 2014 or 2015 if we carry along the path that Osborne has set does not bear thinking about.
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Be Prepared

There have been many posts on this blog over the past couple of years detailing how the financial crisis has resulted in a massive transfer of wealth from ordinary working people to those who live from their cash. This year will be the time when we have to become political about changing that, and the platforms of the 'three main parties' in the upcoming election make clear that they will all be on the same side.

The media debate moved swiftly on from the horror over the £800bn. bailout to the necessity for public-spending cuts. Little attention was paid to the arcane and obfuscatory policy of quantitative easing. But by creating money to buy debt from financial institutions it was also a policy that allocated national value to the investment community.

While the media analysis has been deficient and much of the detail of the financial wheeling and dealing has been impossible to understand, most people in this country have a deep and lingering sense that they have been scammed. Once the election charade is over and the cuts begin that unease will turn into anger and action. Those of us who work in the public sector will have an active role to play.

I grew up in a household which had two rules that I have passed on to my children: don't tell lies, and never cross a picket-line. When I was younger and in the mood to question anything, I wanted to understand the ins and outs of every example of industrial action - this was the 1970s, remember, so there were plenty to choose from. My grandfather, who had seen Keir Hardie as a boy in Merthyr and remembered the General Strike, explained that nobody goes on strike lightly.

Now I have had my own experience of strike I know that this is true. There is exhilaration about taking power back into your hands, but also fear about losing your livelihood and knowledge that you will find it hard to manage without that week's, month's or even year's money. If workers are on strike you can assume they have good grounds; my own view is that it is therefore your duty to respect their decision and show solidarity. There is likely to be plenty of opportunity in the coming year.

And on a more personal level I pass on some advice from my comrade, 'radical uncle', and ex-boss Len Arthur. You can never really call yourself an activist unless you have a strike fund. Those of us working in the public sector are paid well and have the advantage over the strikers over the 1926 general strikers that we can put something away in preparation for a time without pay. I would recommend building up a reserve of about a fifth of your annual salary. And if we protect the public sector without the need for strikes, we can all have a big party to celebrate. 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

Busted Budget

This has been an extraordinary budget season. Our economic destiny for the next 50 years is being changed and, because of the way the red, yellow and blue parties have adopted mix-and-match policies in recent years, there is no real political debate. I was sorely disappointed by the Green Party's response, which focused on the £5bn. of investment in the economy and ignored the £175bn. of borrowing (itself a significant underestimate) which will really determine the future of the economy and of our society and environment.

There are three reasons why we must reject this level of government borrowing, and in fact the whole system of money creation based on debt. The first is that it is socially unjust: it operates as a means of transferring wealth from working people who pay taxes to those who live from investment earnings. In order to buy government bonds you need to have spare money to invest, but the interest that they return will be paid by those who earn their money through work.

The role of public debt in enabling a transfer of wealth from poor to rich is sufficiently routine after 300 years to raise no qualms, but the less advantaged in our society will surely notice the pressure of the debt that Labour has taken on over the past year through increases in taxation and reductions in public services, which will combine with the rises in unemployment brought by the Recession. We already hear rumblings from union leaders. Dave Prentis’s ‘carats for the rich; the stick for the poor’ speech is only the beginning of a return to the conflictual politics that massive borrowing makes inevitable. Unless the policy is changed we face a period of social unrest and community breakdown that will make the 1970s look like Blue Peter, and perhaps an even more right-wing political backlash.

The third reason to oppose a debt-based economic policy is that it creates an in-built pressure on the planet and its resources. When the government creates money through issuing bonds it creates a parallel future demand for goods and services—goods and services which can only be produced using energy and resources. So the system of paying for future consumption by public debt, just like the system of creating money as private debt, is the central cause of exponential economic growth and the environmental destruction it brings with it. Building up an ecological debt that is far more serious than a mere balance-sheet.

So what is to be done about this fine mess that capitalist economics has gotten us into? If we begin from the understanding that the debt is unpayable, then our only alternative is to bring the debtor and creditor nations together for a negotiated round of debt forgiveness, a global jubilee. Without such a deal the decade ahead looks grim as we face internal unrest over the struggle for diminishing output and trade wars and possibly worse abroad. Rather than reliving the sad history of the 1930s Depression and the Second World War, we could just fast forward to Bretton Woods and negotiate a stable and balanced financial architecture based on the abandonment of the reserve currency system and a trade system that treats all the world’s nations fairly. Tweet

Who Pays the Piper?

The public debate has moved seamlessly from outrage at the handing of vast sums of debt-based money to reckless financial institutions to wise words about the need to tighten our belts, pay more taxes and cut the public sector.

Even from a conventional economics perspective reducing government spending into the real economy in a Depression is a disaster. It is the normal pattern in recessionary times for the public sector to increase relative to the private sector; the fact that the government has already sent unimaginable sums in the direction of bankrupt banks does not alter this fact. The bailout was referred to as 'Keynsian' but in reality was nothing of the sort. Keynesian policies involve investment in public goods, not private losses.

Let's just consider again the size of the sums involved. The cost of the bailouts plus potential liabilities is around £617bn. This is the same amount of money as the whole of public spending last year. There is absolutely no way it can be recouped from tax increases or spending cuts. The arguments for them are rhetorical and political rather than prudent.

If we add together the size of the public debt and the cost of the bailouts we arrive at a figure of £1,527bn. The British GDP is only £1,473bn. RBS’s liabilities are £1,800bn. so if we add that to the public debt it rises to £3,327bn. which is more than double the size of our GDP. The only way out of this mess is to negotiate our way out of these debts on an international basis. Attempting to pay them back will lead to a decade of Depression and several lifetimes of wage slavery.

What can we do about these misguided and unjust policies? For those who can get there, demonstrations in London around the time of the G20 should be fun and should help to vent some frustration. More important is to refuse to go down the road of the inevitability of public spending cuts: challenge every person who argues the case to you. There simply is no reason why an asset bubble and a transfer of value to the rich should mean that the rest of us have to suffer a savage cut in the standard of our public services. Tweet

Gordon is Not a Moron

On Monday Alastair Darling will announce his plans for borrowing. He will be quite explicit in his hypocrisy. All the ideological ranting we have listened to for the past 40 years about how spending would destroy the economy has suddenly been abandoned. Was it wrong for all those years? Or is our economy so close to collapse that all the rules we have lived by can be gleefully abandoned?

The scale of borrowing is set to exceed $100bn., which is three times more than the government predicted. What are we to make of this? How can we possibly take any more of those projections - neat lines of exactly 45 degrees on x-y axes - seriously ever again? It is quite clear that the government economists are not in control and don't know what they are doing.

So what are the economic rules for? One begins to suspect they may be made up to find excuses for not doing what the people in the democracy demand. Want a new hospital funded from government spending? Sorry, we can't possibly borrow more than 40% of GDP. Could we have more investment in the railways so that people have a serious alternative to driving? Can't do that because we can only borrow to invest.

It all turned out to be nonsense. Because when it looks like a situation might arise where really radical economic change is called for, any amount of money can be borrowed to ensure this doesn't happen.

When this level of borrowing was first mooted I remember waxing biblical and wailing about the debt hanging around our descendants necks unto the tenth generation. I thought I was being rhetorical, but the size of debt we're talking about raises questions of intergenerational equity in financial, not just planetary, terms.

What is our chuckling ex-chancellor thinking about all of this? I have a sneaking suspicion that he may have been expecting it just like I was. Is it just possible that he is deliberately provoking this massive indebtedness to force us towards the grand jubilee, the wiping out of all national debts, and the road to the New Jerusalem? Tweet

Where does money come from?

If you ask people where money comes from they will probably tell you from a bank. Dig deeper and you will find that people believe that the money they take out of the bank has been deposited there by somebody: by the person herself, in which case it is simply a withdrawal, or by somebody else, in which case it is a loan. This is the first big myth of money, because the truth is that all or nearly all (depending on your theorist of choice) the money you take from the bank has been created out of thin air by the bank itself.

When you begin teaching students about the economics of banking you teach a fiction known as ‘fractional reserve banking’ and many who have never taken economics as an academic discipline or worked in a bank have a hazy notion about this system. It is understood, because of Hollywood movies about ‘runs on the bank’,that the bank does not actually hold, or need to hold, as much money as it lends to people. Because it is highly unlikely that everybody will come and ask for all their money, all at the same time, the banks can consider themselves to be acting with probity if they retain only a proportion as ‘reserves’, this proportion being understood to be around 10 per cent. Let us for the time being take this story as a reasonable account of how banks create money; it is the one that is reproduced in most economics textbooks. The first stage is the deposit of some money by a punter, let us say £100. Because banks have learned from historical experience that only one in ten of such punters will want her or his money back at any given time, they feel quite secure in lending £900 on the basis of this deposit, effectively inflating its nominal value, and thus reducing its real value, tenfold.

The second myth about money that is universally believed is that it is, and needs to be, backed by something of real value. Governments create money and this money has credibility because the government has a sufficient store of gold in its vaults to support its value. Like the reserve banking story, according to this fiction governments can create more money than the gold they have, but only up to a certain limit. This story was true for some time, but it was found that the uncontrollable growth of the capitalist economy rapidly outstripped the gold available to support it and maintaining a ‘gold standard’ stifled economic growth.

Eagle-eyed and sharp-minded readers will have noticed that there is an inconsistency between the two stories told so far, in that they disagree about who is responsible for creating the money. They have in common the idea that, while there should be something of real value backing up a currency at least in part, who owns this collateral and who therefore creates the money could be either the bank or the government. This was how things were, both banks and government were entitled to create money: governments created money as fiat issues, whereas banks created it in return for a debt.

So there are several different types of money, distinguishable by the nature of their back-up and by who controls them. Banks can create money on the basis of deposits, as credit. Governments can create money by selling bonds, or just by making a decision to create currency. It may be efficient to leave the job of generating credit for economic activity to banks, so long as they operate within political controls, but it will also be necessary to have money created by government both as credit, to fund public works, and as currency, to facilitate economic activity without the creation of parallel debts. The graph shows how the political attitude to money since the Second World has effectively been the privatization of money creation. It shows the relative proportions of money created by banks and governments over that period. This has had the inevitable consequence of increasing the proportion of money paid to bank shareholders and producing a squeeze on the money available for public investment.

. . . to be continued (when you can bear it!)

If you can bear any more just now you might like to follow this link to a short presentation about money.

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