31 January 2014

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.

24 January 2014

Reclaiming the Economy

Davos 2014: Who is Wearing the Trousers?
Surely one of the important roles the media plays in our modern society is framing the narrative, determining the parameters within which we understand reality. This week the world's media is doing an important job in normalising a situation where politicians who should be representing us are instead subjugating themselves to the elites who gather annually at Davos.

In my recollection the role of the journalist at this point would be to challenge a situation where the most important decisions about how our economy will evolve over the next few years are being made by a group of self-selected wealthy people inside a ring of steel in a Swiss ski resort. But times have changed and journalists no longer see their role as having anything to do with speaking truth to power or working for the common good. In the reality they are normalising through their breathless broadcasts their role is to rush about the expensive venue seeking out the most important, rich, or famous person that they can find so that we will be gratefully able to hear their views.

This morning, for example, I discovered that Matt Damon found himself surprised by the youth of the Finnish Prime Minister. Thanks for that helpful insight into the leading issues of the day. It's not that I don't like Matt Damon or that I'm not interested in his opinions, it's just that in my version of reality he belongs in Entertainment just as Michael Schumacher belongs in the Sports section of the broadcast, and the weather belongs in, well the weather. When I pay my TV licence I think the news I am paying for should be about important significant events and how those who we have elected to run the country on our behalf are going to tackle them.

Which brings me to David Cameron, who is making a speech at Davos today. You might ask why he is making a speech in Switzerland rather than Scunthorpe or Swansea or somewhere in this country where people have the chance to vote for him and people are expecting him to represent them. The answer is very clear: he does not believe that the economy is any longer subject to any sort of democratic control.  He has gone to Davos to offer the services of the working people of Britain to a corporate boss and what he is offering is cheap labour with poor conditions and cheap energy with wasted environments. If the Davos elites need fracking we'll give them fracking.

Surely even Tory voters are horrified by this lack of self-respect in our country and our citizens. Are we so desperate that we have to send our politicians to Switzerland with a begging bowl to rattle in front of the corrupt and exploitative corporate elites? But our current politicians are working hand in glove with the corporations where they will take up well-paid non-executive positions when they retire, having worked for them undercover during their time in office. This unhealthy relationship has seen our resources privatised, our public services destroyed, and now our creative energies being sold off to the lowest bidder.

It is this process of undermining democracy through the use of economic power that I would like to see dissected by decent journalists working to challenge power rather than rushing about through marbled halls sycophantically seeking it out.

8 January 2014

Wafer thin MINT theory

Ever since I first heard the idea of grouping together a number of countries under the heading BRIC I began to wonder what on earth was going on and what these countries might have in common. The first and admittedly shallow question I asked myself was whether countries with the initial letter I were being included in these groupings simply to make the acronym work. The disgraceful dismissal of the Mediterranean economies as PIGS is a case in point. Ireland's economy was certainly in trouble as a result of a housing boom but otherwise had no place in this group. Could its usefulness in having an initial 'I' actually have exacerbated speculative attack against its national debt?

In recent days, and largely because he has a new series on Radio 4, the man who invented the acronym BRIC, Jim O'Neill, has emerged from the shadows to claim his laurels. It is remarkable in economics how often a person can be remembered for simply one phrase or concept, no matter how shallow, so long as it supports a move that benefits the global economic elite. Jim O'Neill it transpires is a Goldman Sachs man, part of the international club that bankrupted the global economy: so why on earth is he being allowed to frame the future direction of that economy on prime-time national radio funded by myself and other British citizens?

But let's return to my initial question about whether the idea of the BRICs has any theoretical merit. The four countries involved have wildly different cultural backgrounds, motivations, and religious orientations. India and China being by far the most populous countries on earth are clearly very influential, but their economic trajectories have been utterly different in recent years. Brazil sits in the US's backyard, which has Left an indelible mark on its political economy, while Russia has emerged during the past 20 years from several generations of communism into a form of oligopolistic capitalism.

On considering this question more deeply it becomes obvious that I am crediting the idea with much greater sophistication than it deserves or claims. The answer to my question 'What do all these countries have in common?' is a simple one: they have natural and human resources that can be exploited to generate value for the global elites. They represent the most likely site for the expropriation of value. Hence the term BRIC implicitly demonstrates how globalisation works and the mindset of those who are driving it.

Which brings us to Jim O'Neill's new radio series and his exciting new acronym MINT. (Incidentally his Wikipedia entry tells us that he previously included Korea in this list but has substituted Nigeria either for theoretical reasons or simply to make a more attractive word.) The four countries whose initial letters are combined to create the word MINT--Mexico, Indonesia, Nigeria, and Turkey--again appear to have little in common other than natural resources and willing governments.

I accidentally caught five minutes of the programme on Mexico and was shocked by the shallow application of crude theory, such as O'Neill's dismissal of the thousand-year-old market in Mexico City as inefficient. His level of analysis was frankly embarrassing and I questioned who could have allowed him onto the BBC. But of course the program is not commissioned for its insight but rather as an advert to those who are seeking new territories for their investment. For this reason perhaps countries whose initial letter is a vowel might think urgently about changing their names.

3 January 2014

Secular Stagnation or Spiritual Growth?

One of the techniques that economists use to control the global economy and corner its value is to create concepts that constrain our thinking about what is possible and how much change we may be able to achieve. Think about the way the word 'stagflation' was used to influence the politics of the 1970s. The economic hypothesis that it was impossible to have high unemployment and high inflation simultaneously was proved to be nonsense. Rather than admitting their theories were wrong economists simply created the concept of stagflation and blamed the power of labour for the 'failure' of the economy to grow.

It seems that following the success of their bullying concept of austerity economists have now moved on to the idea of 'secular stagnation' to explain or constrain what is happening in the global economy. See, for example, an article published in the FT by Larry Summers last month which includes the phrase 'the implication of these thoughts is that the presumption that normal economic and policy conditions will return at some point cannot be maintained.'

My interpretation of this article is that following the crisis of 2008 capitalism-as-usual can no longer be maintained. Capitalism is evolving into a new form and Summers is trying to influence the form the new economy will take. Of course the priority for global elites is to maintain a system that enables their excessive wealth and power to continue. Austerity has done this very effectively in the short term but in the longer term levels of discontent will rise and Summers appears to be proposing an alternative characterisation of future trajectory of our economy, for which he is using the phrase 'secular stagnation'.

I have to say that I agree with Summers that the rules of the game have changed: 30 years of politically unconstrained economic activity ruled by market forces have resulted in a vast build-up of debt and widespread ecological destruction, to say nothing of the huge and increasing levels of inequality. Debt appears to have been the only viable stimulus outside the USA which, because of the particular and illegitimate power of the dollar, can simply create enough money to keep the economy growing.

Japan was the first country to move beyond economic growth and is used by Summers as an example of secular stagnation in practice. The response in the Japanese case was Abenomics, a concept created by journalists to describe the policies of Japan's prime minister Shinzo Abe over the past year that have been focused on stimulating demand to end Japan's 'stagnant' decades. The policy menu has included dramatic increases in monetary stimulus at home, combined with attempts at competitive devaluation of the Yen to encourage exports. To address the lowering of domestic demand employers are encouraged to increase wage rates and workers are encouraged to stay in the labour-market longer; immigration by young productive workers is also encouraged.

Perhaps I should have pointed out earlier that to economists the word 'secular' has nothing to do with religion but means a trend that persists beyond the short and medium terms. So we might explain the phrase 'secular stagnation' by saying that economists have concluded that the lack of growth is now a defining characteristic of the global economy rather than a temporary phenomenon. This is perhaps the most pernicious implication of the phrase: its inherent suggestion that growth is good and that a stable economy is stagnating. It is typical of the frenetic, perhaps adolescent, character of capitalism that it must consider stability to be equivalent to stagnation.

Given my work with the Green House think-tank and our Post-Growth Project it is interesting and important to me to consider the political power of countering the phrase 'secular stagnation'. We are in the process of thinking through what the post-growth economy might imply in terms of political engagement, the funding of public services, and the manipulation or otherwise of consumer demand. But the most important first step we must all take is to challenge the hegemonic nature of growth amongst economic commentators, of which the concept of secular stagnation is merely the latest emanation. Summers' suggestion that 'stagnation might prove to be the new normal' is designed to be greeted with horror by orthodox economists; but the earth and her defenders would greet it with a sigh of relief.