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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IMF Study Supports Public Money Creation

My post earlier this month reporting that Adair Turner, one of the front runners for the post of Governer of the Bank of England, has suggested that the financial assets the Bank bought in return for its quantitatively eased money should be simply cancelled felt fairly shocking at the time. Around the same time my attention was brought to a paper emanating from the IMF that has the even more surprising proposal that we should return to an effective 100% reserve on the creation of credit. In layman's terms this removes from banks the power to create money and reduces their role to re-lending money that has been deposited with them.

The paper is couched in terms of a re-examination of the proposal from Henry Simmons of Chicago University and later summarised by Irving Fisher in 1936 and is thus called The Chicago Plan Revisited. The report has two authors, a Czech economist named Jaromir Benes who works for the Reserve Bank of New Zealand and Michael Kumhof who is a staffer at the IMF. While the report states clearly that its findings do not represent the policy of the Fund it has been approved for publication.

The authors summarise the Chicago Plan as follows:

'The key feature of this plan was that it called for the separation of the monetary and credit functions of the banking system, first by requiring 100% backing of deposits by government-issued money, and second by ensuring that the financing of new bank credit can only take place through earnings that have been retained in the form of government-issued money, or through the borrowing of existing government-issued money from non-banks, but not through the creation of new deposits, ex nihilo, by banks.'

Fisher argued that such a policy would remove the ability of banks to introduce instability into the monetary system. More crucially in view of the highly damaging consequences of the massive public debts being carried by a number of developed economies, the Plan would allow for the elimination of these debts, since money would be created by public authorities rather than borrowed from banks with interest, which creates a corresponding debt, given that irredeemable government-issued money represents equity in the commonwealth rather than debt'. Fisher forecast a similar reduction in private debt.

The authors of this report test Fisher's theories using an econometric model. Their conclusions are striking: 'We find strong support for all four of Fisher’s claims, with the potential for much smoother business cycles, no possibility of bank runs, a large reduction of debt levels across the economy, and a replacement of that debt by debt-free government-issued money.' They suggest that banks would continue to exercise their role of allocating money between lenders and borrowers and providing high-street banking functions, but they would lose the role of creating money.

The authors write that 'We take it as self-evident that if these claims can be verified, the Chicago Plan would indeed represent a highly desirable policy'. Since their modelling suggests that the claims can be verified in terms of the current economic crisis we must await further policy moves from the IMF with interest, and the kind that doesn't bring debt crises in its wake.
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US Set to Buy up the Pyramids

When Keynes wanted to come up with an example of activity that enables an economy to flourish by requiring the investment of huge amounts of physical labour but without causing the failure of aggregate demand he suggested the Egyptian pyramids. Today, however, Egypt is providing a different kind of lesson that I hope the Egyptian people learn in time: that democracy and indebtedness are not compatible.

Egypt is in the midst of negotiations with the US over the debt of its former regime. Such debt, which enriched Mubarak and his cronies, was one of the causes of the revolution and should now be reupdiated as odious and no longer the responsiblity of the citizens of the newly democratic Egypt. The presence of Christine Lagarde in Cairo offering 'loans' and 'partnership' suggest that this is unlikely to happen, and that Egypt will, like so many countries before it, lose its freedom to an entanglement of foreign debt. The process was begun as soon as Mubarak fell, as reported by Egyptian economist Noha el Shoki in March.

As Nick Dearden of the Jubilee Debt Campaign notes in a recent Guardian blog, the media reports of 'turmoil' in the Middle East are being used to cover the next round of resource theft that will follow the negotiation of dollar loans:

'This allows the US and European governments to portray the $4.8bn IMF loan under negotiation, the "assistance" funds that will shortly start flowing into public-private "partnerships" and free trade zones being planned by the EU, as "gifts" to the Egyptian people. . . . However, many people remain sceptical about the IMF's agenda – privatisation, indirect taxation, removal of subsidies (many of which are corrupt, but some of which do genuinely support the poor) and an economy based around exports. As one government insider said last week: "In Egypt, we call privatisation what it is – stealing." A propaganda campaign aims to convince Egyptians that "there is no alternative".'

The brave Egyptians who spent night after night in Tahrir Square demonstrating for their independence should realise that the battle was only half won. Physical freedom and political freedom mean nothing without financial freedom. Just as we are being subjected to the decimation of our public services to pay off banks and investors whose money was created from thin air, so all the wealth of Egypt will be lost to its people unless they resist the attempt by the IMF and the US to 'lend' it money to finance its development. Tweet

Why is it easier to imagine the end of the world, than to imagine the end of capitalism?

This is the title of a new book published in Czech and it encapsulates an important thought given the extraordinary contortions we are witnessing at the G20 and amongst Eurozone leaders. It has been clear for several years that the money created during the banking boom was produced from thin air and could never be repaid, yet those amongst the elite who nominally hold this value are refusing to relinquish it now that their bubble has burst.

Initially, the extorted money from governments to pour into the debt black holes and maintain the value of their assets. This merely had the consequence of threatining the financial stability of the countries involved, in the case of Greece and possibly Portugal and Spain to the extent of bankrupting those countries. Now that more of the debts are coming home to roost the asset-holders are seeking another round of welfare payments from the 99% who are suffering the austerity cuts their profligacy has caused. No wonder that European capitals are filled with angry demonstrators.

The impasse is the result of a struggle amongst capitalist elites. On the one side we have the US, Christine Lagarde, the US puppet at the IMF, and the UK, the traditional US poodle. This group seeks to maintain the power of the dollar in the global financial system. On the other side the rising economies of China, Brazil, India and Russia are proposing a greater role for the IMF, which should no longer respond solely to US dictat.

Without a strengthening of the IMF bailout fund money must be found from the Eurozone countries to provide money to support European banks when their Greek assets are obliterated, some time later this month. Otherwise some, or perhaps all, the European banks and a large number of its countries, will become bankrupt. If European citizens cannot be persuaded to accept the use of public money in this way, then control of European and US financial institutions may have to be ceded to the sovereign wealth funds of the BRIC economies - the only group capable for finding additional money to invest.

Meanwhile the people of the world are calling time on an economic system that maintains the value of the corrupt assets of a tiny elite while the vast majority of the world's people suffer. The inchoate mass of political opposition camped around the world's capitals is waiting for a political leadership with the courage to proposed a new economic system, and for a media prepared to break the strangledhold of its pro-capitalist owners.
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Strange Fruit

I think it was Arthur Scargill who said that if people start attacking you, you are obviously shaking the right tree. The interesting thing is that when you post a plan to stabilise the global financial system it is Austrians who fall out of the tree. They feel duty bound to contest the fact that politicians can have any kind of positive impact on the situation.

I have some time for the Austrians because at least they are intellectually consistent. Their position appears to be that banks should be free to make money in a money market system with no inteference from politicians. If the banks fail, those foolish enough to deposit money with them lose it. Similarly, those who in vest in duff businesses lose their investment. The market is ruthless but fair, as are the Austrian theorists themselves.

The problem with this view of the world is that it is ethically, socially and politically untenable. What Hayek learned from the financial chaos of the 20s and 30s was that politics and economics did not mix. What he failed to learn is that unmitigated market chaos generates extreme politics, of both right and left. The role of politicians in a democracy is to mediate that, and they cannot do this without involving themselves fundamentally in the economic framework within which market transactions take place.

My ten-point stabilisation plan is no doubt flawed - and I am grateful to initiate a debate to identify and remedy those flaws. For fear of being seen to be fools, politicians are singularly failing to rush in and sort out the financial crisis. At the risk of appearing a fool I have made a proposal for others to support or attack.

Lee the Austrian makes some points typical of his intellectual wordview. However, when he responds that 'Suspension of government bond trading would push lending costs through the roof, bankrupting all world governments and ending the welfare state for good' he seems to miss my point about suspending such trade in sovereign debt. Perhaps he cannot imagine a world without markets, but I see this as analogous to the situation when a company is going bankrupt and trade in its stock is suspended. So there is no market and hence no price - so there cannot be an increase in the price of lending.

Tim Worstall raises another point that is worth debate in his comment that 'If we stop trading currencies then we've got to stop trade'. This suggests that most of the trade in foreign exchange is directed to settle external trade balances, rather than for speculative reasons. I don't have the proportions to hand, but the residual quantity of exchange between, say, pounds and Ukrainian Grivnya that relates to exchange of goods could surely be suspended for the six-month period, held as an external trade debt? Alternatively, IMF special drawing rights could be used for the purposes of external commitments, until a new global reserve currency has been negotiated.

The tone of the Austrians' comments is harsh, to match their philosophy. I would invite those holding other positions to join the fray. Surely it is worth the risk of appearing a fool!
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Christine Lagarde: Is She the Man for the Job?

The extraordinary thing about Christine Lagarde is not that she is a woman, but that she is a lawyer. In spite of holding the second highest political office in France, and now the most important position in the global economy, she is not trained in economics and does not have any experience or training as a politician. This leads one to the inevitable question: how has Christine Lagarde reached this position of power?

Lagarde's appointment to the head of the world's bank was not an accountable or transparent process. There was no election, no selection process, no job description. Had there been, she would certainly not have been selected, since she is not qualified. But in the murky process by which the IMF is governed, political influence and having the right connections is far more important than understanding the problem.

The majority of Lagarde's career has been spent with the Chicago-based corporate law firm Baker & McKenzie. Presumably in a drive to undermine the French reputation for a protectionist approach to international economics and to bolster its globalist credentials, she was chosen as Trade Minister of France in 2005. By 2007 she was Minister for Economic Affairs. Her credentials have passed corporate scrutiny, but can she really be expected to carry authority without a proper understanding of how the economy functions?

Christine Lagarde has skilfully used her sex to deflect attention from her lack of suitability and her dubious politics. The titillating headlines about her as the bankers' dominatrix, her Chanel clothes and her synchronised swimming medal should not be allowed to divert us from the fact that, in spite of appearances, the choice of US financiers has determined who will head up the IMF.

As Jayati Ghosh questioned on the Guardian site,

'Would someone like Christine Lagarde be better? [than DSK] Unfortunately, she may even be worse, if her record as France's finance minister is any indication. The irony is that she would pursue, even more enthusiastically, the same self-defeating and economically damaging measures whose only beneficiaries are the German, French, Dutch and British banks.'

Just at the time when radical change is necessary, the world can only expect more of the same from Christine Lagarde.
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Something rotten?

To the plethora of three-letter acronyms that infest the discussion of finance has been added another. Alongside the CDO and the CDS we now have to contend with the DSK. Like the others the outward power and appeal of the DSK has given way to doubts about its inherent quality. We are led to question whether, behind the impressive facade, it may be toxic.

We must, of course, respect the presumption of innocence, but even if Strauss-Kahn is eventually cleared over the sexually aggressive charges against him now, the scandal has brought into the open his past sexual conduct, which I am old-fashioned enough, and perhaps Anglo-Saxon enough, to consider undermines his suitability to hold the most powerful office in the world of global finance.

It has been clear for some time that what is happening in the world's banking system has passed beyond the stage where we might consider that there is merely something rotten. The whole system is corrupt, dishonest and socially destructive. The fact that its figurehead personifies these qualities, while revelling in the sort of lifestyle that is an insult to the working people in countries the IMF is supposed to be aiding, just reinforces the sense of hypocrisy. There is no glee at this scandal but a growing sense of disgust that we have been betrayed by those in whom we have entrusted power.

The process of ‘financialisation’, a term coined by social scientists to describe the way that relationships mediated through finance have penetrated more and more areas of life, is the hallmark of contemporary capitalism. Money is exalted until social and economic institutions are hollowed out of other values, with finance taking up all the space. Whether we are thinking of pensions and mortgages, or football and the music industry, the greed and immorality of the world of finance has spilled over into most areas of modern life.

The fall of Strauss-Kahn has left two huge voids: at the IMF and in French politics. It is an indication of how desperate the stakes are that I am rather hoping that Gordon Brown may finally be given the chance to achieve his life's hopes by taking over at the world's central bank. I have long since given up hope that he would then reveal his colours as a former communist and have the courage to take political control over the disaster that an the private operation of capital has engendered, but at least he seems to have maintained a sense of moral purpose rather than being dazzled by wealth.

In French politics there may be another interesting outcome. Because of the double ballot system used for French presidential elections, the left must coalesce around one candidate, who need not necessarily come from the socialist party. Eva Joly, who has already proved herself capable of standing up to the might of the oil and finance industries, is likely to be the candidate from the Green Party. Given the disarray that DSK's fall has created in the socialist party, perhaps Joly will be the beneficiary, giving her the chance to compete directly with Sarkozy to lead the country.
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Markets Beware Greeks Bearing Gilts

As Greece stumbles its way towards the humiliation of an IMF loan it is the way this latest economic tragedy is being reported that causes most concern. The hegemony of market domination is complete as journalists report on the need for the country to rapidly cut public spending with no voice given to those in the country who need public spending to continue.

The flight from Greek national debt is a demonstration of the growing power of the market makers, as they attempt to sideline and denigrate the more vulnerable of the European economies. Far from reducing their power, the financial crisis has emboldened the finance traders, since it proved that no government had the courage to make politics and public interest count for more than market profit. With a few exceptions, commentators who might defend the interests of the citizen against those of the speculators are excluded from the media so that the public debate is framed entirely in terms of what Greek politicians must do to please the markets. There is no sense of irony that, even in the home of democracy, the wishes of the people have become an irrelevance.

The speculative attacks on Greece and the lining up of the countries that are to follow - Portugal and Spain are in the firing line first, since Ireland kowtowed and put its credit-rating before the needs of its people - is reminiscent of the 1997 Asian financial crisis. The movements in value of national economies and their debt enables the gaining of arbitrage profit for the speculators, whose room for manoeuvre always expands during a crisis. Hence the credit-rating agencies and the media are working together to create opportunities for profit.

The case for a new international financial system, negotiated on a democratic basis, grows ever stronger. The original role of the IMF was to intervene in just this sort of situation, and in its early days its facilities were used mostly by the European economies who were taking the rocky road to reconstruction following the Second World War. The Greek crisis is a clear demonstration of the need for a democratic and accountable lender of last resort for the world economy to replace the disaster of a financial system dominated by private speculative interests. Tweet

The Tripartite Hegemony

It is clear that the problems facing the world economy have their origin in the financial system and that the curbs on bank powers proposed by Obama, significant as they are in a country where financial interests are so powerful, are insufficient and misdirected. What we need is not a behaviour management programme but a democratised system that serves the interests of all the world's people. Since the problems of the post-war period have resulted from too much US power - especially in global finance - it is unlikely that a solution is going to emerge from the President of the United States.

This is made heart-warmingly clear in a lucid and congent book that I have been enjoying recently: Unholy Trinity: The IMF, World Bank and WTO by Richard Peet. Like others I have been waffling on about the need for a new Bretton Woods without feeling entirely confident about the workings of the system that has proved itself to be so wrong. Professor Peet has been spending his time cutting through the verbiage and obfuscation of the financiers and has now presented his understanding in this excellent book.

From the travails of the 1930s that led to the conviction that politicians must take control of finance, through the weary Bretton Woods negotiations and the even wearier surrender by the war-ravaged European to US domination, Peet maps out the path we trod to arrive at a system where capital is supreme as never before - in spite of its clearly demonstrated incompetence and destructiveness. For those with a taste for abstract concepts like securitization and who thirst to fully understand the workings of a special drawing right, I can promise that you too will be satisfied by the thorough research and clarity of writing. Peet has no interest in demonstrating how smart he has been to work all of this out: his intention is to help us all to follow his lead so that our proposals for change will be better informed and more powerful as a result.

As with many books that arise from the left, this one is weak on prescriptions. But perhaps that itself is appropriate. We are clear about the need for the reclaiming of power over capital for the world's citizens, and the need for a new international negotiation to establish a world economic framework based on the twin principles of sustainability and equity. Beyond this we surely need the humility to listen to those of the world's people who are not responsible for the spectacular mess the smart guys in the west have gotten us into. Tweet

Plus ca change . . .

Now the dust has settled, what are we to make of the G20 conference? Such high hopes; so little real achievement. When the whole process began the discussion was around a new global financial architecture, then it moved to a major financial stimulus, but what we got was a strategy of inventing money to boost the coffers of the world's disaster management bank, the IMF.

I'm not surprised the architecture went nowhere. It took more than two years and some of the best brains in the world to pull Bretton Woods together. The media circus that was G20 shows how the world has moved from substance to superficiality since then and no amount of clever graphics or smart clothes can conceal this.

We might draw our own conclusions about why no fiscal stimulus was agreed. Presumably a combination of warnings from bankers that they would tolerate no more public debt and a reluctance from some of the countries in Europe that do not control reserve currencies pushed this off the table.

So we are left with the controllers of powerful currencies using this power to make money from thin air which they then deposit with the IMF. The poorer and less powerful countries that we have economically destroyed are then forced to beg our humble permission to borrow this money, which they then pay back to us. The inequity of personal banking writ large.

We wait to see what conditions the IMF will put on these loans but we may expect that they will be the sorts of conditions that allow the globalising sharks to take control of the resources of the poor countries as they have in the past, first through colonialism and then through trade. It leaves me wondering how much difference the expansion from G7 to G20 has really made. Tweet

Banking on each other

No wonder that Venezuelan president Chavez is public enemy no. 1 for the Bush administration. Not only is he smart enough to have figured out how the international financial system repeatedly stymies the poorer countries' attempts at economic progress, but he has the resources to do something about it. As news agencies and media outlets are increasingly coming under the power of corporations some reading between the lines is necessary, but the stories about the Latin American regional development bank are fairly clear to discern.



The proposed Banco del Sur is being discussed by a group of Latin American countries including Argentina, Brazil, Bolivia, Ecuador and Paraguay as well as Venezuela, a pretty comprehensive list of the countries that lost out most spectacularly as a result of their debts to the IMF. Paying interest to rich bankers in the West swallowed up the huge income they were earning from exports, preventing it from benefiting their own citizens.



The leaders of these countries, the majority now broadly on the left and including the highly colourful characters of Evo Morales of Bolivia (who meets visiting dignatories dressed in an alpaca jumper) and former union leader Lula of Brazil, as well as Chavez himself, have learned the lessons of the 1980s and 1990s. The proposed new bank will hold reserves made up of the currencies of the countries of the region and could make development loans. It could also operate as a clearing-house for regional trade, avoiding the need to use dollars and hence support the US.

The high price of petroleum enables Venezuela to step outside the exploitative international institutions that have kept the South poor since the Bretton Woods agreement. The countries of Latin America can create an internal import-export market based on parity and fair representation, rather than the one-sided system of the WTO.



I wonder if this is the little joke that Chavez was sharing with his friend and inspiration Fidel Castro in those pictures from the Havana hospital! No wonder they laughed so much! Tweet