Sisterhood is Powerful

The most successful challenge to the global domination of neoliberalism has been slowly maturing in Latin America. The latest development is an interesting coalition between two women in powerful positions where you might least expect. In Argentina, where stereotypes suggest the men rides horses and the women are pushed around the dance-floor like shopping trollies, the female President and female head of the Central Bank are cooking up a distinctly different monetary policy.

The banker, Mercedes Marco del Pont, has recently achieved the rare accolade of being voted 'worst central banker in the world' by the lackeys of the financiers. Her sin appears to be balancing the needs of the Argentinian people with those of the finance sector. She is refusing to have the sole focus on inflation that the IMF demands and has annouced that financial stability, employment creation and economic development with social equity will also be objectives of monetary policy.

Somewhat predictably Christine Lagarde, Managing Director of the IMF threatened Argentina with a 'red card', to which President Cristina Fernandez de Kirchner responded 'My country is not a soccer team. It is a sovereign country and, as such, is not going to accept a threat.' Last time we caught up with Argentina on this blog, they were celebrating their liberation from debt-based financing, and  reclaiming their right to the value of the country's resources. Wray updates us: the recent poor weather has threatened both of Argentina's main exports: soya and beef. This helps to explain the inflation problem that the central bank is facing, but so far the political and monetary sisterhood in Argentina is holding firm.

This story is based on the account of Modern Monetary Theorist Randall Wray; he tells the story in greater detail on his Economonitor blog.
. Tweet

Spies, Cash and Conspiracy Theories

The similarities between the current global economic crisis and that of the 1930s has led many more thoughtful commentators to re-evaluate the importance of history to the development of policy. A striking recent example, which has been poorly trailed but is well worth watching, is Stephanie Flanders recent series Masters of Money. The link with the Open University shows, but isn't it time we all knew a little more about the variety of economic theories? Flanders makes a sterling effort to explain the thinking of three 20th-century giants - Keynes, Hayek, and Marx - none of whom, interestingly are being paid much heed by contemporary politicians.

I revealed my own interest in economic history in a recent article that was posted on the New Statesman economic blog Current Account. What perked my interest was the revelation that Harry Dexter White, Keynes's sparring partner at the Bretton Woods negotiations and effectively the architect of the post-war global financial settlement, was in fact a Soviet spy. As I point out in the article, in 1944 the US and Soviet Union were still allies, so this is not such a bizarre situation as it might have been by 1948, but none the less it does raise questions about exactly what the negotiators at Bretton Woods were seeking to achieve.

Perhaps the most touching lesson from history is that 100 or so years ago key figures in public life made it their life's work to understand the complexities of the economy. Their objective was not self-aggrandisement or self-enrichment but the impulse to make life better for their fellow citizens. While I find Hayek's idea that politicians should never intervene in markets to be utterly misguided, I can understand how he learned this lesson during the hyper-inflated Vienna where he was a young man, and that his scholarship was dedicated to preventing the same sort of suffering from occurring again. How distant and quaint such motivations seem today, when the highest aim of most authors is to be granted the accolade of a TV series.

As I conclude in my article about Bretton Woods, both the authors of the compact appear to have died of broken hearts: Keynes was dead within two years of the ending of the conference, worn out by his attempts to ensure peace in his time and ours. White outlasted him by two years but could not survive the pressure of the McCarthy era. He suffered a heart attack shortly after giving evidence to McCarthy’s House Unamerican Activities Committee in August 1948.
.


Tweet

Ineffective Government Breeds Ineffective Demand

The launch of the Bristol Pound on 19 September was the subject of international media attention, and rightly so.  The decision by a whole city to reject the pound sterling and take charge of its monetary affairs is an exciting and unique one.  However, the most important aspect of the Bristol Pound went widely unreported: the local council is prepared to accept it for payment of local taxes.  Once a political authority underwrites a local currency in this way it can become a viable alternative, and the Bristol Pound is the first currency that has been accepted in this way in the UK.

This week I published a report with the Green House thinktank called Local Liquidity where I discuss the implications of this change.  I frame the post-2008 financial crisis in terms of the failure of effective demand. Quantitative Easing has not only increased inequality, as indicated recently by the Bank of England, but has also created only ineffective demand.  If local authorities were to back their local currencies this could enable them to generate effective demand to replace the financial energy they have removed through successive years of spending cuts. A more immediate and effective alternative, of course, would be for the government to spend the QE money on building green infrastructure, but that is beyond the control of local communities.

The report includes an authoritative account of the different types of local money that are in circulation across the world from Germany's hugely successful Chiemgauer to the currency issued by Banco Palmas in Brazil and Rotterdam's Nu-Spaarpas.  It explains how the design and democratic control of local money can help to reverse the tendency of central bank money to favour elites and starve small businesses.

From a green perspective, the building of s sustainable society requires a transition towards a system of self-reliant local economies, where the majority of our needs are met from genuinely local production. Green economists see the lengthy supply chains of the global economy as wasteful of energy, as well as leaving us vulnerable in the face of rising fuel prices and more unpredictable weather resulting from climate change. Rather than increasing growth for the sake of it, local currencies can shift economic activity out of the globalised economy and into the local economies on which we will all come to rely.

The rapidly growing body of evidence about local currencies indicates that their popularity is counter-cyclical, that is to say that they flourish in times of liquidity crisis, when there is not enough conventional money to support necessary economic activity, and shrink again when the capitalist crisis passes and the economy revives. This is true of the non-circulating currencies such as LETS and time-banks but particularly notable in the case of the scrip currencies that supported local economies in the US Midwest during the Great Depression and more recently during Japan’s lost decade. In a globalised economy local authorities often feel powerless to act to support the economies which support their citizenry, but they are not. Local authorities across the world have the power to support local currencies and enable them to underpin struggling local economies of both production and distribution.

.

 

Tweet

More Links to Germany

As the parallels with the 1930s grow stronger, another commentator has written an article drawing attention to the way Germany was treated in the 1950s and the way the Eurozone, at Germany's behest, is treating the debtor nations of Europe's periphery. As Eric Toussaint notes, the 1953 London Agreement acknowledged that Germany was simply unable to pay its debts, and that failure to recognise this could cause social and political tensions within and between countries. With the second great European war still a vivid and personal memory for many this argument was heeded. Amongst our generation of politicians, sadly, the focus on punitive measures and judgemental attitudes is outweighing the good sense that says when countries can't bear, forcing them to do so will only break them and their populations.
. Tweet

Market is Slow Motion Train Wreck

At his valedictory address to the Trades Union Congress Brendan Barber used the Olympics as a proof of the way that community is stronger than markets. The fiasco of the G4S contract was spectacular evidence of the fact that in key strategic areas we cannot rely on the market: ‘Congress, it’s right to celebrate the Olympics, but it’s even more important to learn from them. For the central lessons of this summer – that private isn’t always best and the market doesn’t always deliver – surely need to shape future policy.’ Even the blogger at the Spectator had to admit that he had a point.

We now have similar evidence of market failure in the area of our key strategic transport network: the railways. It was a whole series of fatal crashes, caused by poor safety standards and inadequate oversight by managers with no railway expertise, that led the Labour government to take the track back into public control. Now the fiasco of the West Coast mainline franchise indicates that the train services themselves cannot be effectively run in the private sector. The three franchise contests currently underway, which will now be suspended with further costs to the taxpayer, and the 15 due before the next general election threaten an omnishambles on the railway.

The costs of the market obsession to the taxpayer are huge. Privatising the role of money creation has cost us the biggest bank bailout in history, caused the longest and deepest recession in the history of capitalism, and bankrupted the country. In comparison the mere £60 million we will shell out to refund the huge companies whose competitive bids could not be effectively compared seems small beer. The lesson is clear: the railway should come back under political control, as should other key strategic sectors. Who would bet against the energy sector being the next to expose the flaws in the market ideology.

But other wider lessons should also be drawn. In areas of key strategic importance, or which involve high levels of risk and uncertainty, the market simply cannot function well. This current problem will be blamed on mathemetical errors by civil servants but that is simply unfair. How are we to measure the risk that the Virgin brand will become tarnished, or that the cost of fuel will increase more than anticipated. How can a contract that includes a numerical measurement of uncertain variables over a period of 15 years possibly be concocted?  It is because vast and complex systems that we all rely on, whether financial or infrastructural, are so risky that accountabity for them should be political rather than financial. In such areas the market will always fail, and until this lesson is learned we will continue to pay the human and financial cost.
. Tweet

How to Solve the Eurozone Crisis

Inter-war Germany may not be the place you would look first for advice on tackling tricky financial issues, but on the other hand somebody did manage to move the country from the situation where you needed a wheelbarrow to buy a loaf of bread to the country that could afford to spend so much on arms that it could rapidly conquer the whole continent. That man was Hjalmar Schact: he was not a magician but rather a financial expert who was not in hock to financiers. That is a rare commodity and one we are in desperate need of just now.

What a coincidence, then, that I spent yesterday at a conference with Professor Richard Werner of Southampton University. A modest, self-effacing man, he has nonetheless managed to persuade the Telegraph's City correspondent to suggest something like the Schact Plan to solve the Eurozone crisis. The solution is simple: create enough money through quantitative easing to buy back the bad assets. According to Hurley, Werner then suggests that governments should stop selling bonds but rather 'fund themselves through loan contracts from banks in their countries', which strikes me as rather odd when the more obvious proposal would be simply to continue to issue money as public credit. 

What Richard does not tell us is what backed up the creation of vast amounts of new German money that Schact created. That is a point I covered in my book Market, Schmarket back in 2006. I like this better now, because it reminds us of the importance of land. Effectively, Schacht used the German land and its wealth as collateral:

‘Once confidence in a currency is so severely damaged the only feasible response is to create a new currency, which was a process managed by the Finance Minister Hjalmar Schacht. In November 1923 he created a new parallel currency called the Rentenmark; to create confidence it was backed by land, in this case the most solid asset of the German economy. The Rentenmarks allowed economic transactions to take place within the economy, although they were not legal tender, had no fixed relation to the Reichsmark they replaced, and could not be used for international payments. This made the Rentenmarks speculation proof. Bizarrely, much of the speculation against the currency that had destroyed it had actually been funded by loans from German banks. In The Magic of Money Schacht explains how the Reichsbank made loans to support the speculation against the German currency. Thus the government, which has always been blamed for economic mismanagement and for printing too much paper money, was not primarily responsible for the inflation. By 1924 the Rentenmark and Reichsmark were being treated equally and the Rentenmark could be withdrawn. The lessons of the German hyperinflation are twofold: first, that financial speculators’ only motive is to make profits and that they are unconcerned about the social and political consequences of their speculative activity; but, nonetheless, governments can use political power to control this speculation if they wish, exposing the myth of powerlessness.’

It just so happens that we are looking for an independent and skilful financial expert for a rather important job just now. I have suggested to Richard that he put together an application for the top job at the Bank of England. If he is agreeable we could start an interesting campaign, especially as the man who invented quantitative easing has much stronger credentials than most of the current front-runners.
.

Tweet

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