31 December 2008

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.

22 December 2008

The indifferent children of the earth

For those who no longer sign up to the official Christian faith this time of year can be rather tiresome. The desperation of prelates has reached such a pitch that they will resort to almost anything to fill their churches. A few years ago I went to a service where the vicar was performing a conjuring trick on the high altar with a children's ball and three plastic buckets.

But there is something at the heart of the myth of Christmas that can speak to green economics. This is the myth of God made flesh. It seems to me that this is an attempt to explore the tension that we feel between our spiritual and corporeal being. Something that sets green economics apart from other variants is its willingness to encompass the spiritual. The ecofeminists suggest that re-embedding ourselves in our bodies and in our environment is the first step on a journey that leads to living in harmony.

It is a commonplace of green critiques that the dualism between mind and matter that is usually attributed to Descartes is one of the sources of our current predicament. We call instead for holism--for the reuniting of man and woman, of spirit and flesh, or people and planet. Our spirit is not a ghost in the machine of our body; neither are we born of the stars and destined to return there. If we could learn to celebrate our fleshly inheritance and our earthly destiny we might make a better fist of our short span on earth.

Obscene over-consumption is no more acceptable than hair-shirt asceticism: what we should seek instead is balance and integration. The sort of integration we need is not the sort we learned in maths classes but the bringing together of all aspects of ourselves. There's a challenge for 2009!

16 December 2008

Frenetic engineering

There's nothing I love as much as a critical accountant - just thinking about the juxtaposition of those two words is delightful. It is a subversive job title. I recently attended a seminar by Jean Shaoul, Professor of Public Accountability (there's another subversive job title) at Manchester Business School and one of the UK's leading critical accountants.

Jean explained how 'financial engineering' developed as a tactic for squeezing profits out of economic sectors that had already been squeezed dry. She has made her name by analysing the waste of cash that results from privatising public industries. Her simple account of corporate accounts made it clear that if you make profits where once there was only a service either the service users (us) or the service providers (public-sector employees) will lose.

Since the deregulation of financial markets in the 1980s companies have focused on using their money to make money rather than investing in tiresome productive capacity and persuading people to buy things. It is in this setting that 'financial engineering' has flourished. Its predominance is indicated by the gulf between falls in sales and falls in profits. In the case M&S sales have fallen by 6% but profits by 50% in the past year. This gives an indication of how much of their profit was actually related to sales of stuff and how much was about financial fiddling the could engage in balanced on top of the stuff they were selling.

She had some other rather challenging statistics - such as that 67% of corporation tax is paid by three sectors: banking, insurance and oil & gas. And that in 1977, 70% of public expenditure went towards wages, whereas now the percentage is only 45%.

Talk about intelligent design. I sometimes wonder whether the whole financial crisis isn't a sort of cosmic joke. I like the idea of God(dess) as some form of comedian - probably not the stand-up sort; probably more like Alan Bennett - especially as I've noticed that since I've been putting more energy into spirtual practice I've lost my sense of humour.

Subversive job titles is one thing, but what about the potential for double entendres offered by a fiscal bailout that is made up of bonds which are also called gilts. Images of snouts in troughs and prisoners longing to break free abound. But it was the divine being who made Bernard Madoff into a fraudster that takes the prize - the crook that launched a thousand puns.

The Q&A of the Borrowing

I was recently commissioned to answer some questions about where on earth the government is getting all of this money from - a question asked by many in pubs and on buses up and down the land. Irritatingly, they did not then publish the answers I had spent time considering, so I offer it now, in a temporary change to the style of the blog. Comments and corrections are welcome.

What is government borrowing?

When I learned my economics this was called the PSBR or ‘public sector borrowing requirement’ but it has since been renamed the PSNCR or ‘public-sector net cash requirement’. These renamings usually have political intent and in this case I’m guessing it it is to get away from the unhealthy concept of ‘borrowing’. This is the annual amount that central government, local government and the public services borrow each year to keep themselves going. The ‘national debt’ is the accumulated total money that government has borrowed over the years which it couldn’t afford to pay back. Sometimes it goes down but, since the Bank of England was set up in 1694, the trend has been steadily upwards.

Where does this money come from?

The government has three sources of revenue: taxation, where it takes money directly from companies or individuals; from selling government bonds; and from printing money directly. The last of these has become increasingly unpopular since the Second World War, but is in fact a liberating way for government to create money without putting anybody into debt. At present government only creates note and coin in this way, which represents around 3% of total money.

What role do gilts play?

Gilts is just another name for government bonds—gilt-edged securities—because they are safer than anything else, since so long as the country doesn’t sink the government is bound to pay interest twice a year on them. Investors will get their money back after a certain fixed time specified on the bond, however before that time the value of the bonds will fluctuate, depending on the rate of UK interest rates. If interest rates are expected to fall, investors will tend to buy bonds because they are likely to be worth more in the future.

Who is stumping up?

This is an interesting question. Why should anybody want to invest in UK bonds when our economy is clearly short of a paddle and in unpleasant surroundings? If you are somebody with plenty of money to invest your primary concern at the moment is going to be security, so bonds might look quite attractive compared to stock in a corporation. So your gamble is likely to be about which countries bonds are most attractive, based on your view of how the interest rates of countries are going to move. Given that all countries are cutting interest rates one would assume that all national bonds are equally (un)attractive.

This question makes it clear how we are all entangled in the same mess. China owns a vast quantity of US treasuries (their name for government bonds) and if it chose could sell these and destroy the US economy. But if it did that it would lose its main export market and its own economy would falter. So, on a global basis, owning more stock doesn’t necessarily make you more powerful. Remember the old adage: if you own £1m. the bank owns you, but if you owe £1bn you own the bank!

Why should anybody buy our national debt?

Your ability to sell you bonds depends on the general perception of your reliability as an economy. This was the problem Iceland faced, being a volcanic rock with a population the size of Bristol and no resources other than fish and hot water, it couldn't realistically stand behind the debts that its entrepreneurs had racked up. A country’s ability to do this depends on its perceived power in the global capital market. The most powerful economies are those that control the ‘reserve currencies’—the dollar, euro, pound, yen and Swiss franc. These are currencies other governments hold their national reserves in and therefore are good for massive debts. The US is in a special position because in 1944 it negotiated that its currency would actually be held as equivalent to gold in reserve terms. It had to maintain a link between its currency and gold to back this up, but broke that rule in 1971 and since then has been able to print paper and get massive amounts of resources in exchange for it.

The UK is therefore in a strong position in increasing its national debt. One important way of measuring this is comparing the amount our economy produces each year with the size of our national debt—the so-called debt-to-GDP ratio. Ours is currently around 40% and is predicted to go above 50% as the recession deepens. Argentina went bust in 2001 with a debt-to-GDP ratio of less than 40% and a healthy level of exports and resources. The difference was it did not have a reserve currency and when speculators targeted the peso the government could not defend it. So it is really about political rather than economic power.

Who calls in the debt, both to the banks and the government? When?

So long as government continues to pay the interest it owes on the bonds there need never be any ‘calling in’ of the debt. There never has been since this malarkey started in 1694. When the bonds come to the end of their life, the government creates new ones to pay back the people who bought the old ones. The same people probably buy the new ones—at least to some extent.

Aren’t we the taxpayer then going to pay for what we’ve lent?

Yes. Absolutely. This is why Percy Bysshe Shelley called the national debt ‘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. It is a way of transferring money from the poor to the rich and always has been. Amazing how they’ve got away with it for so long isn’t it? I wonder how many people will wise up now.

The banks seem to want to have their cake and eat it; they can take our money but still decide that we’re too much of a risk to invest in?

What is happening with the banks is a bit different. They do not lend pre-existing money but create money through a multiplier process—because they never expect all depositors to come back for their money at the same time. But to accept other banks’ promises to pay requires mutual confidence between the banks and this is lacking. You can see it as rather like a pyramid-selling scheme. While you can find new buyers it works fine, but when the market is exhausted the people at the end of the chain lose their money and the system collapse. That is what just happened. The only way out is for banks to believe in each other again—which is what the government is trying to ensure. Then they will bring money into existence again and the whole upward spiral can start again. So, to be fair, I don’t think the government gave money to the banks to be passed on in loans, but rather to reboot the system. This doesn’t appear to have worked and banks are only following their rulebook in not lending their own money.

Why does government policy on banking keep changing?

When the Rock started the rot the government still believed it could stop the rapid downward spiral if it stood behind just this one bank, initially just in theory. But the bad debts were so frightening to the banks that this didn’t work and it was clear that other banks—-perhaps all the banks—could go down like dominos. At that point it took complete control of Northern Rock. At each stage it has in mind to achieve the rebuilding of confidence as cheaply as possible. Supporting Northern Rock did not rebuild confidence so then they moved to the full-scale bail-out. This also doesn’t seem to be working, since credit is still tight. In a world where businesses rely on debt to survive this is now damaging the real economy that provides goods and services. So the economic bail-out is the latest stage. But it is still jump-starting and is by no means guaranteed. We will have to pay the damage whether or not it succeeds.

There is still no plan to address the problem at source, which is the gap between nominal value in terms of finance and real value in terms of what our economy actually does. On a global basis, 98% of the transactions that take place everyday have nothing to do with the real economy, they are just gambling in the casino economy, most of it speculation in the possible future rises and falls in the value of the various currencies. This is a much more efficient way to make money than actually making stuff.

This sounds like a merry-go round rather than a rescue plan?

It always was a merry-go-round. That is how finance works. It has worked fairly well for the 200-odd years that we have lived in the capitalist economy, but with periodic booms and busts. To achieve a steady-state economy would also require stable money. Government could just create that money by fiat—we would believe it because we believe the government, just like investors believe in the value of government bonds. But this would be money creation without debt. The difference would be that the process would not require our work to pay back the national debt and would therefore undermine the work-money nexus at the heart of capitalism. Sounds tempting doesn’t it?!

Surely the global financial system as currently configured is on any accepted measure a write off?

I agree with you about this. I think the only solution is to go for the full-scale jubilee and go back to the Bretton Woods conference table. We could then reinstate the two major planks of Keynes’s plan at that time: balanced budgets between nations with fines for deficits and surpluses, and a neutral international currency so that no government had the ‘reserve currency’ advantage. In addition I think we could tie this currency to an agreement on climate change and therefore stitch the environmental crisis into the solution too. The main difference between then and now is the liberalization of finance so that it is not under national control. This needs to be reversed with the reintroduction of credit and exchange controls. Without control of finance how can a government claim to be sovereign? And how can we imagine we live in democracies?

8 December 2008

Don't be fooled by the credit window

The private market banks have failed and the function of banking has moved into the public sector. But, taking one step bank, we see that the function of creating money in the private market has also failed. Reducing interest rates, i.e. making money cheaper to borrow, has not managed to stimulate the money creation system that is privately operated, and relies on debt for its existence.

So this monumental market failure requires the public authorities to pick up the pieces again. As all existing money disappears into bottomless pits of commercial debt, governments are considering exactly how they are going to put more money into the economy. Now is a useful time to learn, because the fact that governments can do this proves the case that has long been made by monetary reformers: that we do not need to go into debt to create money to pay for public services or a citizens' income scheme.

The money that will be created by public credit is plainly and unquestionably our money which gives us an unarguable right to decide precisely where the metaphorical helicopter is hovering when the balding and over-excited economist starts shovelling crisp notes out of the side door. No doubt the bloated beneficiaries of government largesse in the construction and arms industries are gesticulating wildly for attention. My choice would rather be using this opportunity to introduce a Citizens' Income scheme. The money would be much more likely to be spent than saved, and therefore achieve objectives other than simply keeping the capitalist economy afloat.

The image of the economist at the helicopter door is particularly appealing, since I have always believed that most economic theory is analogous to the window that was pushed out of aircraft during the war to mislead radar systems tracking their movements. For those with alert antennae this is a time when the real workings of a capitalist economy show themselves especially clearly.

2 December 2008

Time to Stir it up

My friend Barbara Panvel posts weekly at The Stirrer: 'campaigns that count in Birmingham, the black country and beyond'. Her latest post is addressed to Helicopter Ben - Ben Bernanke of the Federal Reserve who is now following up on Milton Friedman's suggestion that dropping money from helicopters might be a way to deal with deflation.

Nothing could better illustrate the desperation of policy-makers than such an arbitrary and aimless dumping of money into the economy. The language of strategic injections has been abandoned. There never was any attempt to direct the money towards those who might need it.

As Barbara points out, why not simply create money for public projects, along the lines of the proposal from Robertson and Huber? This would allow governments to invest in all the services their citizens need without the need to pay back the debts.

There have been a whole string of Early Day Motions calling for money creation in this form. Such a monetary reform could also pay for the shift towards a low-carbon economy that we so urgently need. It appears to be implicit in the Green New Deal proposal, which is perhaps why that has not gained the attention it deserves.

As Barbara identifies, a key mover in favour of this radical revision of the money creation system has been Austin Mitchell MP. For this he was given the Thomas Atwood Award earlier this year. The reason this proposal is not taken up is purely political, and the political consensus rests of public ignorance. The financial crisis has lit the fuse under this debate.