There are essentially three ways of financing an ambitious Labour Government’s programme of public expenditure. These are through taxation, monetary credit creation, and the issue of debt securities. The sections below explain how each of these three methods works, and their respective limitations. Those limitations mean that, in the end, a Labour Government’s programme will have to be financed by some combination of these three methods. A final section suggests that financial stability should determine the degree to which any of these three methods should be used in financing a Labour programme.

Taxation

The first, and most obvious, way of paying for government expenditure, is through taxation. In most countries this covers the vast bulk of government expenditure. The remainder is the so-called ‘fiscal deficit’ that must be covered through monetary credit creation or the issue of debt securities. A programme of government expenditure in a given period that is covered by tax revenue, is called a balanced budget. Financing expenditure through taxation is a purely redistributive activity: the public in general are taxed and the money is paid back to the public that obtains incomes from government expenditure programmes (public services, health, education etc., and public investment). Business and property-owners then obtain the money as those incomes are spend on consumption goods, rents etc.

The idea of a balanced budget is very appealing to Conservatives, because it epitomises the virtues of thrift and ‘living within ones means’ that in their view makes for sustainable household budgeting. This is of course a public virtue that, on the whole, they themselves do not practice, because private means and the possession of wealth allow the rich to live beyond any earned income, and the home ownership so ardently promoted by Conservatives allows increasing numbers of the middle class to generate cash flow from the housing market by realising capital gains. Nevertheless, the government is, in this view, supposed to balance its budget. However, the balanced budget doctrine is inappropriate because it ignores the important part that government expenditure and financing play in maintaining the stability of the financial system, through the provision and absorption of liquidity and risk-free financial assets.

This balanced budget approach is often combined with two other doctrines that are founded on political prejudice rather than analysis of the way in which the economy works. The first is that taxation distorts prices, markets and incentives. If this argument is to be taken seriously, then its proponents should be advocating the abolition of the state, and all that that would entail. The possibility of getting rid of all these distortions is an anarchist dream. Even that would not be enough, since it would also be necessary to get rid of all monopolistic distortions of the price system, and that would be difficult, if not impossible, without a state to enforce competition. The policy issue is what distortions (such as free education or environmental protection) improve the functioning of society and the economy.

The other, related, doctrine is that taxation is an insupportable burden on business. But this need not necessarily be the case. This depends on the ‘incidence’ of taxation (who pays) and the programme of expenditure. A tax on wealth does not affect profits from production. In no way therefore does it reduce the incentives that profits provide to firms to invest. A tax on wealth that is used to build hospitals creates incomes for firms that build hospitals. Business circles on the whole actually like government expenditure, providing that someone else pays the taxes. The armaments industry is a particularly egregious example of this self-serving attitude towards public finance. Business too benefits from healthy, educated workers, whose capacities have been enhanced by public support, not to mention the subsidies given to employers in recent years through income support. Business also obtains revenues as welfare payments and public employees’ incomes are spent goods and services that the private sector provides.

Nevertheless, behind austerity lies the desire to reduce taxes on the rich. In combination with the doctrine of balanced budgets, this means reducing public expenditure. Fiscal austerity is therefore first and foremost a distributional argument. If this distributional argument could be ignored then a Labour Government would have no difficulty. However, the rich have power.

The other limitation of taxation is that the ability of a government to extract taxes from the economy (i.e., the ‘fiscal base’) is finite. Major expenditures, such as the war effort in the two world wars of the twentieth century, or financial operations, such as the nationalisations of the coal and steel industries and the railways by the Attlee government, were on a scale that was beyond being financed from taxation. Historically, balanced budgets have been rare. There is moreover a technical reason why government expenditure cannot be wholly covered from taxation, namely because tax revenue does not come in at exactly the same time as the government spends its (our) money. Tax revenues are usually bunched in the first quarter of each calendar year. Arrangements have to be made to finance public expenditure in the period before each New Year. These arrangements are the other two methods of financing public expenditure, monetary credit creation, and the issue of debt securities.

Monetary credit creation

Monetary credit creation is sometimes misleadingly called ‘printing money’. The term is misleading because governments on the whole do not pay in cash. Except for their remaining weekly-paid employees, who may receive a wage packet with banknotes and coins in it, virtually all government payments are by bank credit. What is called ‘printing money’ is, in today’s credit economy, the provision of loan or overdraft facilities by the central bank, the Bank of England. These come in the form of the creation of reserves at the central bank which are then transferred to commercial banks that receive government payments on behalf of their account-holders, teachers, pensioners, policemen, doctors, civil servants, and government contractors.

In recent years a view has emerged that such ‘monetisation’ of a fiscal deficit, through the creation of bank reserves, or even a parallel currency, is an effective way of financing that deficit. After all, the loan from the central bank may easily be made effectively non-repayable by being ‘rolled over’ or renewed on maturity, and any interest on the loan (minus the Bank’s costs) is added to the Bank’s profits which of course belong to the owner of the central bank, the government. In this way, monetisation costs the government and the tax-payer virtually nothing. This economical, apparently cost-free, method of financing government expenditure is of course attractive when public services, welfare and infrastructure are deteriorating in the face of austerity. But this low cost is only the case at the time of the expenditure. To understand the true efficiency of this kind of financing, it is necessary also to consider the consequences of such financing. In particular, it is necessary to understand how that money would be absorbed by the economy.

Supposing that a Labour government decided to raise expenditure on public services, the NHS and infrastructure by a total of 5% of GDP in each year of its five-year administration, and ‘monetised’ this extra expenditure. After five years, the total money stock of the country would have increased by 25% of GDP. Supposing that economic activity accelerated (in accordance with Keynesian multiplier principles) up to 3% per year, on average over the five year period. One could make the case that, with GDP 15% higher at the end of this Labour administration, ‘normal’ economic activity would absorb in the usual exchange and financing 15% out of the 25% of the increase in the money stock. But what would happen to the rest? Where would it go?

To answer this question it is necessary to look at how money circulates in the economy. The essence of a profit-making, capitalist economy, is that firms make profits and, in this way, accumulate monetary savings or reserves. Not all of course make the same rate of profit: many small businesses operate at a loss, or just break even. It is large corporations that have the highest rates of profit, due to their market power and their control over resources through their extraordinary ability to tap the whole range of financial markets. Through this economic activity, the extra money spent by the government will end up being accumulated by corporations, their shareholders, and the banking system that holds their accounts. If those corporations and banks are happy to hold onto this extra liquidity then there is no problem with the monetisation.

However, if the monetisation is done by a Labour government to finance a radical programme, then it is unlikely that big business and its allies in banking and finance will contentedly sit on their accumulations of bank deposits. To paraphrase Kalecki, the cry will go up that the situation is ‘manifestly unsound’ and they will find more than one economist to adjudicate that the increase in the money supply is inflationary. Even if there is no inflation, economists can be relied upon to provide models that will show inflation accelerating in the future. The alarm will be raised among corporations, banks and the rich, that their bank deposits are about to be devalued by inflation. In this situation there is only one thing they can do: convert their bank deposits into bank deposits in a currency deemed to be more secure (the US dollar is the traditional haven in inflationary times). The result will be a sterling crisis and the eventual devaluation of the currency. That devaluation of the currency will then cause the inflation that was the pretext for the alarm.

Monetisation of government expenditure may therefore be effective on an occasional limited basis. But a systematic policy of monetising public expenditure hands ammunition to the enemies of the Labour Party. The greater the monetisation, the greater is the mass of credit that can be mobilised by those enemies to bring about the financial crisis that its agents can blame on the ‘unsound’ expenditure, monetary practice and fiscal policies of a Labour government.

That said, it should also be pointed out there are ways in which a government can increase the ability of the financial markets to absorb larger amounts of money. This is through expanding the long-term debt financing of the government.

The issue of debt securities

With debt financing, no new money is created. Instead the existing money stock is used more efficiently in the sense that the velocity of its circulation is increased by the more frequent turnover of money in the financial markets. This may be illustrated as follows:

In the case of taxation, the government takes money from the public and then returns it to the public as the government spends the money. In the case of monetary credit creation, the government adds money to the stock already held by the public, in the hope that, for the sake of financial stability, that money will end up as private bank deposits that, the government hopes, will be spent in the economy (increasing the fiscal multiplier) or will remain idle in the bank. In the case of borrowing, the government takes idle bank deposits from the public and then returns those deposits to the public in the course of spending that borrowed money. Through taxation to pay the interest on the borrowing the government takes money again from the public, and then returns that money to that section of the public that holds the government bonds. When the time comes to repay the borrowing, the government may do this by again taking money from the public through taxation (or borrowing), and returning it to those members of the public who hold the bonds.

In effect, what the government has done in financing expenditure through borrowing, is to redistribute idle bank deposits through the economy. The procedure does not in itself increase the stock of money or bank deposits, but it accelerates the circulation of existing bank deposits through the economy and the financial system. In practice the amount of bank deposits in the economy will increase, because holders of government bonds may want to obtain their money back before the bonds mature. In that case, they can sell bonds to someone who has spare bank deposits. But they can also use the government bonds as security to borrow money from banks. In that case, the amount of bank deposit money increases. The new deposit money usually stays circulating in the financial system. However, the degree to which government bonds may be used as security for credit, i.e., the value or price of the bonds, does depend on how much confidence banks or holders of government bonds have in the future value of those bonds. If the prices of government bonds fall, then not only are their holders exposed to a capital loss, which would make them more reluctant to hold those bonds, but also the effective interest rate (the ‘market yield’) on the bonds rises, increasing the rate of interest that the government must offer if it wishes to issue any more bonds.

It is therefore vital for the stability of its financing, that the government keeps control of the prices of its bonds. If bond prices start to fall, then the government can raise them again by financial operations ‘along the yield curve’, for example through a procedure known as ‘operation twist’. In such an operation, the government issues short-term Treasury bills, usually with a three-month maturity. Since these are ready substitutes for central bank reserves, a government can issue such bills at more or less at the central bank rate of interest. The money borrowed with these bills is then used to buy long-term government bonds. Since the majority of British government bonds are held by the Bank of England, or long-term investors like pension funds and insurance companies, it does not take very much buying in the bond market to force up the price of the bonds. In this way, by operating along the yield curve (the curve showing the rate of interest payable on bonds of different maturities), the government can control the rate of interest on its borrowing. This operation was famously conducted at the end of 2011 by the US Federal  Reserve and the United States Treasury to bring down the rate of interest on US government bonds.

Needless to say, such operations increase still further the turnover of money in financial circulation or the liquidity of the financial system. This liquidity is the precondition for the ability of the financial markets to absorb new government securities and new securities issued by firms and banks. It also helps to absorb otherwise idle bank deposits that may too easily be turned to a run on sterling or a financial crisis.

Is there any limit to which government debt can be issued? In the first instance, the limit is provided by the distortions that a swelling and liquid financial system imposes on an economy, with the increased possibility that the liquidity in the system becomes unstable, leading to financial crisis. To prevent this it may be necessary to impose a wealth tax, targeting in particular holders of financial wealth, and using the proceeds of that tax to repay government debt. This would reverse the tendency of government debt to redistribute income in the economy towards wealthy bond-holders (but also pensioners). It would in effect mean a budget surplus for the government, a solution that cannot but appeal to fiscal conservatives. If the liquidity in the financial markets is regulated by government or central bank operations to maintain the stability of the financial system, the limit to government borrowing is the extent to which it is possible to tax the holders of government bonds in order to service those bonds. In this situation the limit is the scale of the political influence of bond-holders, who would resist such taxation, and the proportion of the bonds held by pension funds (whose capacity to pay taxes is not significant).

Conclusion

The balance between taxation, monetisation and debt issuance not only provides the means for financing an ambitious expenditure programme by a Labour Government, but also provides the instruments for financial control in an open economy in which financial regulation is difficult.

A future Labour government’s spending programme should be financed from taxation. However, it is unlikely that the scale of such a programme could be financed entirely from taxation. Any deficit should be covered by the issue of long-term bonds that can be risk-free assets for pension funds and insurance companies, and offer those funds a return that does not tax their solvency, as the recent programmes of quantitative easing have done. Such bonds, and government operations in their markets, can then be used to stabilise liquidity in the financial system, absorbing any monetisation to which the government may need to resort.

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Ten years ago I spent the summer after graduating waitressing in Cafe Uno in Cambridge. The most political campaign for me that summer was the fact that I was getting paid below minimum wage because they could top up my salary with tips. At the same time, the western world was on the verge of financial collapse that would not only change the course of my future work, but also deliver such a shock to the world order that nothing would ever be the same again.

So what has changed in ten years? I’m guilty of banging the angry drum that nothing has changed, and saying that finance is still totally self-serving. In absolute terms, this is true. The vast majority of new loans continue to pour into financial and property markets, and this hasn’t really changed since the crash. Lending to the productive economy, including SMEs, has not grown. It was the failure to reform the financial sector, and the vacuum of conversation about what must be done, that allowed the conversation to morph into the need for austerity, which was of course completely untrue.

But looking under the bonnet of the headline figures about our stagnating economy, rising food bank use and record high stock prices, there is some good news. We are building an army of voices who didn’t exist ten years ago. The public know that things are not fixed. Today we at Positive Money have released a poll showing 66% don’t think banks work in their interests, and 63% are worried about another crash. The conversation is changing.

Here are ten things that have changed over the past ten years, including some huge achievements, that should be cause for hope and celebration.

1. Occupy captured the public’s imagination

The Occupy movement struck a chord with many of us. It said that the system is unfair and broken, and we need something new. People camped outside St Paul’s, and there were book groups, workshops and lots of other activity that encouraged people to wake up and realise that we need something new. Importantly, it repeatedly made the news, and memes like ‘the 99%’ stuck and exploded across the world. The challenge of Occupy was always going to be ‘how do we take its passion, voice, energy, and impact and channel it into a self-sustaining movement?’. And now, in the years after Occupy, do we avoid saying the inevitable ‘we need another occupy’ whenever a meeting full of activists and campaigners get together?

2. A civil society movement exists

We now have an ecosystem of institutions, campaigners, organisers, thought leaders, and economists focused on reforming the banking and finance sector, and its growth is accelerating. Organisations that were set up before the crash, like Robin Hood Tax and Share Action, have grown in size, profile and impact. New organisations like my own, Positive Money, as well as the Finance Innovation Lab and Finance Watch have established themselves as key NGOs with expertise. Larger NGOs like Oxfam, Friends of the Earth, and WWF have allocated resources towards recruiting people dedicated to looking at the finance sector. Think tanks started work on finance and banking. The New Economics Foundation set up a banking and finance team and have done an awesome amount of research on issues ranging from financial system system resilience to stakeholder banks. IPPR, Demos, and Respublica have all looked at alternative banking models. Work focusing on how people at the sharp end of the finance sector are affected, such as from Responsible Finance and Toynbee Hall, continues to grow. Unions are finding their voice in criticising the financial sector. A coalition of organisations are organising a large event to mark ten years after the crash, which will be taking place on 15th September.

3. Women are leading the movement

Anna Laycock heads up Finance Innovation Lab, Catherine Howarth leads Share Action, Maeve Cohen is the Director of Rethinking Economics, Miatta Fianbullah leads the New Economics Foundation, Faiza Shaheen is the Director of CLASS, Sarah-Jayne Clifton heads up Jubilee Campaign, Jennifer Tankard is the Chief Executive of Responsible Finance, Sian Williams is the Director of Policy at Toynbee Hall, Grace Blakeley at IPPR has been doing some fantastic work on Financialisation and Tax, and the brilliant Christine Berry has been doing excellent work across the movement. This is a fantastic development, which is not totally unconnected to the next point.

4. There is a culture of collaboration and systems thinking

Civil society has always been victim to a human characteristic prevalent in modern society – competition. Starting essentially a new sector and movement, we knew we had to do things differently. Finance and civil society is clearly a David and Goliath situation. If we spend time competing with each other, we won’t be able to move fast enough. That’s why when I joined Positive Money at the end of 2012 I wanted to work with the movement and create a culture of support. So I partnered with Charlotte Millar and Chris Hewett, both then at the Finance Lab (which was set up by three amazing women and a great man) to set up the transforming finance network. An important aspect of creating this collaborative culture was that we have several ‘systems thinkers’ amongst us. Systems thinkers are able to hold uncertainty, hold tensions, have humility, and can adapt, innovate, and most importantly evolve. Donella Meadows’ paper ‘leverage points’ was a key text for us. Systems change attitudes results in less ‘my policy is bigger or better than yours’, and more ‘how can we work together to move our common agenda forward?’

5. The rethinking economics movement is growing strongly too

The crash also triggered a shaking up of the economics establishment. A close relative of the financial reform movement is the rethinking economics movement. As well as fantastic student and university focused organisations like Rethinking Economics, there is a growing number of thinkers writing about how we need to ditch neoclassical economics and be more pluralist in our approach. Even new institutes are being set up such as Mariana Mazzucato’s Institute for Innovation and Public Purpose at UCL.

6. The tax justice movement seized the opportunity to make gains

The shock of the crash, followed by hijacking of the narrative by austerity, presented an opportunity for the tax justice movement. In the UK we saw the flourishing of direct action groups like UKUncut and tax experts like John Christensen and Richard Murphy. Large NGOs also got on board, which allowed it to cut through the public consciousness. This hard work meant that even David Cameron picked up the baton to ensure tax avoidance was clamped down on. A key reason for the success of the tax justice movement was having some key bits of infrastructure in place before the crash, including experts, grassroots activists and large NGOs working on it.

7. More must be done to reform regulation 

It would be remiss to write about the last ten years without saying something about what has happened in the world of regulation. Whenever I go on panels to talk about regulation I generally complain about how regulation is a mess. It’s a tricky point of view, because obviously as civil society we all want banks to have greater regulation, but is more regulation good if the premise on which its developed is based on problematic first principles? For example, ring fencing will be in place by January 2019, but it has always been about a false logic that retail banking is safe, while investment banking is the risky side. But the 2007/8 crisis emanated from the retail arm in the first place, so ring fencing wouldn’t stop another crash. Basel III looks at risk-weighting of assets which categorises lending into the productive (or real) economy as high-risk, whilst mortgages are low risk, even though it was mortgage lending that was a key factor in causing the crash

8. The Bank of England is now a risk manager

After the crash the Treasury took positive steps to add financial stability to the Bank of England’s mandate. The Bank now understands that to predict a crash it must look at the system as a whole, rather than just individual banks balance sheets. Its regulatory approach since the crash has been focused on how to ensure a bank can fail without bringing down the whole system, and as such they have been looking at bank bail-in regimes. While it is an important step forward, it doesn’t go far enough to meet the Bank’s mission which is ‘to serve the good of the people of the UK’. If it was to take its mission seriously, it would look at how banking is failing to serve our domestic economy, and how monetary policy has nothing to offer in the event of another crash. Similar to regulation, this approach can be thought of like a ship sailing off a cliff and crashing, and then continuing in the same direction to sail off another cliff, but along the way making sure there is less mess this time. We might be calculating the risk of sailing off the next cliff in a more complex and rigorous way, but we are not thinking about changing direction.

9. Building the new

Buckminster Fuller famously said that ‘to change something, build a new model that makes the existing model obsolete.’ Several leaders from civil society’s financial reform movement are now also building the new. Tony Greenham, formerly Director of Banking and Finance at NEF, co-author of ‘Where Does Money Come From?’ and more recently Director of Economics at RSA, is now working full time on developing new co-operative banks in the South-West and London. The Finance Innovation Lab runs a Fellowship developing the leadership capacity and business skills of innovators building a new financial system – one that works for people and planet. Alongside Finance Watch, the Finance Innovation Lab is also sounding the alarm about fintech – which is not all cute and cuddly. We’ve also seen more interest in credit unions, as well as complementary currencies popping up, such as the Bristol Pound.

10. Changing the old

The story of RBS is probably the best example of the challenges associated with changing the old, and of the strong inertia inside the government and regulators. As a result of the emergency bail-out package in October 2008, the British public acquired a majority shareholding in RBS (almost 80%) at a total cost of £45.5 billion. Among the many examples of how RBS fails to serve the UK economy, including consumers and businesses alike, probably the worst is the Global Restructuring Group (GRG). It was found to be deliberately pushing SMEs towards insolvency in order to shore up RBS’ own capital position, in some cases then buying up their assets cheaply. Despite economists, campaigners, and researchers continuing to call on the government to think of alternatives for RBS, namely turning it into a network of regional banks, the government is fixed on selling it back to the private sector at a loss to the public.

Where do we go next?

We must continue to work together by forming alliances and coalitions, increasing our expertise and skills, and building new infrastructure for the movement. We must appreciate our different tactics and theories of change, and tackle different parts of the system at the same time. We must bring down the old, while also building the new. We must challenge the neoclassical thinking that underpins the status quo, while also developing new policy prescriptions that can be implemented now. To do all this successfully at the same time, we need more people.

Brexit means finance is at a crossroads

The government, the City, Mark Carney and the Bank of England all want our financial services sector to be our ‘engine of growth’. Carney said he wants to see it double in size over the next ten years. We know that the bigger our finance sector is, the more detached it is from our domestic economy, and the more detached it is from real people, jobs, work and investment. What 2008 should have shown is that we can’t have it both ways. We can’t have a bloated financial sector in the City of London serving itself and global financial markets, because it will always undermine the kind of economy we are trying to build for most people here in the UK. As Michael Hudson’s book aptly puts it, the finance sector is ‘killing the host’.

The stakes are high, but if the last ten years have taught us anything, it is that if we aren’t in the game, we definitely can’t change things. So let’s get stuck in.

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Supporters of Jeremy Corbyn’s Labour Party have become used to diatribes on social media which predict that its policies will lead Britain’s economy into a Venezuela type scenario, with a collapse in the currency and hyperinflation. However, readers of three recent blogs by Richard Murphy on his Tax Research website may be surprised to learn that Labour is supposedly trapped in what Murphy describes as “deeply neoliberal and profoundly conventional thinking”. They might also be puzzled to discover that this denunciation was provoked not by a new policy statement from John McDonnell, but by a two-sentence comment on someone’s Facebook page by James Meadway, McDonnell’s “chief economic adviser”, on what’s known as ‘modern monetary theory’ (or MMT). According to Meadway:

“MMT is just plain old bad economics, unfortunately, and a regression of left economic thinking. An economy ‘with its own currency’ may never ‘run out of money’ but that money can become entirely worthless”

In his first response Murphy produced a series of what he claimed to be ‘entirely fair extrapolations’ from those two sentences alone. These concluded with the rather unfair claims that Meadway believes that “achieving full employment and growth will leave the currency valueless”; that under a Labour government “austerity will remain in place”; and even that we can “expect Labour to deliver more Tory economic policy”.

Murphy has a well-deserved reputation as a leading figure in the tax justice movement who, as a trained accountant, has expertly dissected the tax avoidance practices of multinational companies and the failures of successive British governments to crack down on them. He is also a vigorous advocate of MMT, which explains why he was so annoyed by Meadway’s somewhat dismissive Facebook comment. Sadly, however, he now seems to have descended into quite seriously misrepresenting Labour’s policy position, and this has much wider implications.

One curious aspect to this is that Murphy’s onslaught is almost entirely focused on just one strand of Labour’s current economic policy. This concerns the so-called ‘Fiscal Credibility Rule’ which was formulated by two Keynesian critics of Conservative austerity policies, Simon Wren-Lewis and Jonathon Portes. The rule commits Labour to balancing the budget for current (day-to-day) spending over the first five years and borrowing only to invest in reconstructing the economy.

In his first two blogs Murphy disregards all Labour’s proposals for public ownership, ‘democratisation’ of the economy including support for cooperatives and workers’ rights, financial regulation, a national investment bank, and even policies he himself has supported such as a financial transactions tax and cracking down on tax havens. In a third blog, responding to a defence of Labour policy by Jo Michell, Murphy is dismissive of what he terms unspecified ‘supply-side reforms’. This suggests that Murphy has paid less attention to the debate that has been taking place within McDonnell’s team than The Economist magazine, which devoted a critical but respectful three pages to those same reforms.

Equally problematic is Murphy’s failure to acknowledge what he must know to be the case. Borrowing to invest is very different in its consequences than borrowing to finance tax cuts for the rich and corporations, which is what the Conservatives have been doing since 2010. If Murphy wants ‘demand-side’ policies to generate full employment and growth, job-creating investment programmes, whether they be for housing or for renewable energy and sustainable transport, will be far more effective in achieving those goals. By comparison the ‘multiplier effects’ on aggregate demand of tax-cuts are much more limited, because corporations and the very wealthy are more likely to save the money or invest outside of the national economy.

A close reading of Murphy’s argument reveals, however, the critical implication of his reliance on MMT thinking. Murphy believes that governments do not need to borrow on the money markets at all because the Bank of England can simply create as much money as needed with a few keystrokes on a computer. MMT argues that this is what normally happens when Governments spend. It claims that taxes as well as bonds sold to the ‘public’ are only necessary to withdraw excess money from circulation and avoid inflation (an argument which is not that modern, as it harks back to what Keynes argued during the Second World War).

As Meadway acknowledged, MMT advocates are correct to insist that states with ‘sovereign currencies’ (which critically no longer includes any of the countries inside the eurozone) can never run out of money. Central banks can create as much of it as they want with a few strokes on a keyboard. Indeed, the so-called quantitative easing (QE) programmes pursued by all the major central banks since the financial crash of 2008 has provided the most spectacular possible confirmation of that. Trillions of dollars, euros, pounds, and yen have been pumped into the system’s money markets over the last decade which, while helping to restore bank balance sheets, has also fueled a boom in asset prices (bonds, shares and property prices) which has mainly boosted the wealth of the 1%.

Back in 2013, the fifth anniversary report of the Green New Deal Group, to which Murphy contributed, called for Green QE. This, along with measures to prevent tax dodging, was to finance a programme of spending on green infrastructure projects of around £50 billion a year. Creation of a Green (or National) Development Bank would bypass the private banking system by issuing bonds which the Bank of England could purchase along with all the other bonds it has been purchasing under its QE measures. The advocates of this plan argued persuasively that this would be a far better use of the additional QE money than feeding into property prices in cities such as London.

So what’s the problem? And why did Meadway follow up his initial Facebook comment with the rather cryptic observation that ‘Any country that isn’t the US trying to apply MMT’s prescriptions would find itself in the same position’ i.e. ‘close to catastrophe’? As one commentator quoted by Murphy asked: ‘Why is the US different?’. Meadway did not respond to this, but Wren-Lewis himself has replied to Murphy’s critique of the allegedly neoclassical economic assumptions behind his models. I am not concerned here with that rather technical debate. In my view the critical question, which neither Murphy nor Wren-Lewis address, is what happens to the exchange-rate if the Bank of England keeps on pumping out more money when other central banks have called a halt to QE?

The MMT school originated in the USA amidst a current of heterodox Keynesians who are understandably insouciant with respect to the strength of the dollar. They stress the willingness of foreigners who want to sell to the US to not only accept dollars in payment, but to hold onto those dollars for extended periods of time. Central banks in China and the rest of East Asia (especially since the region’s financial crisis in 1997/8) as well as the Gulf states of the Middle East continue to hold billions of dollars in their reserves. Indeed, any attempt to swap sizeable quantities of those reserves into another currency or gold would lead to a sharp fall in the dollar and reduce the value of their remaining assets. In summary: the US is different because it retains the ‘exorbitant privilege’ of controlling the only national currency which also functions as world money.

This of course is not true of the pound. But when the US Federal Reserve, the European Central Bank and the Bank of Japan were all engaged in pressing those keyboards and generating extra liquidity to compensate for the implosion of the global banking system, the Bank of England could join in without worrying about the exchange-rate. A future Labour Government cannot assume it will be in the same situation. If it was, and interest-rates fell again to very low levels, the fiscal rule would, as Jo Michell noted, be suspended and fiscal policy can be used “with all means necessary”.

Murphy sneeringly commented that in this case the rule would be “just a sham”. He also sneered at the very idea that “Labour thinks it has to live in fear of the money markets. And so bankers. And so their supposed ability to manipulate exchange rates”.

Unfortunately, the experience of other radical social democratic governments in Europe (France in the early 1980s, Sweden in the early 90s) as well as the not so radical Wilson/Callaghan government of the mid-1970s suggests that any future Labour government should be worried about the money-markets. Even if exchange-rates are not simply ‘manipulated’ by what in the 1930s was termed a ‘bankers’ ramp’, they are vulnerable to intense speculative pressure. A Corbyn-led government, with its commitments to all the other radical measures Murphy ignores, may well have to ride out a period of capital flight and a sharp fall in the pound. Being aware of this possibility is not “neoliberal”. The recent crash of the Turkish lira (by 45% at the time of writing) is an illustration of what can happen in the course of a few days.

Some might respond that a fall in the pound will make exports cheaper abroad and contribute to reducing the current account deficit and rebalancing the economy. But Britain’s economy is also far more dependent on imports than the US, and after decades of deindustrialisation rebalancing will take some time. Meanwhile, the higher prices of imported food, energy and manufactured goods will cut into living standards – as they did after Brexit – and potentially fuel an inflationary spiral. In an extreme case this process can, as in Venezuela in recent months, make the currency worthless. Of course, the British state remains in a far stronger financial position than Venezuela or Turkey, but regardless of Brexit we do not and will not inhabit an autonomous national economy. The wartime economy, sometimes referenced when MMTers quote the Keynes of the 1940s, was managed on the basis of tight controls over both prices and cross-border currency flows – as well as cheap raw materials from the Empire and dollar credits from the USA.

Today, we have a national economy inextricably enmeshed in both the European and the world market. Most of the major banks and corporations operating in Britain are multinationals capable of transferring funds from one currency to another with the stroke of a keyboard. Imposing effective controls over speculators and tax dodgers will require at a minimum cooperation with the European Union. The best thinkers in the Marxist tradition always understood that socialism in one country was not a sustainable option. One could say the same today for the unfettered demand-side Keynesianism advocated by Richard Murphy and the MMT school.

Does that mean we should abandon hope and reconcile ourselves to more austerity? Certainly not. A radical break with neoliberal policies of spending cuts, deregulation, privatisation, outsourcing, and anti-union legislation remains on the agenda. There is much that still needs to be thought through about how to manage the threat posed by the money markets which Murphy blithely wants to ignore. There are policy proposals which I disagree with, such as retaining Trident nuclear submarines and wasting more money on HS2, and I am skeptical about recent proposals for a universal basic income.

However, I also attended the daylong New Economics conference in London in May which was open to all Labour Party members. What most impressed me was not the lineup of headline speakers, but the diversity of contributions in workshops I attended on finance and housing, and the openness to debate on questions such as alternative forms of public ownership and the urgent challenge of climate change. If Richard Murphy wants to contribute to those discussions, I hope and suspect he would still be very welcome to join.

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The Universities Superannuation Scheme (USS) strikes are over – for now – after staff voted to accept a new offer from Universities UK. UUK has professed its commitment to maintaining a defined benefit (DB) scheme, and has agreed to reopen talks on the controversial scheme valuation. This is a victory for striking staff, and marks a significant shift from its belligerent insistence that DB was unaffordable. But the story is far from over: this is just a staging post on the way to finding a solution that meets the strikers’ concerns. As many have pointed out, it’s crucial that university staff don’t demobilise and that their supporters keep a watchful eye on proceedings.

As I’ve argued before, the USS strikes have shone a light on failings in our pension system which stretch far beyond our universities. I’m not going to rehearse these here (if you’re new to the world of pensions, it might be worth reading my previous piece for openDemocracy as a quick primer on how the system works at the moment). TL;DR: our pensions are highly financialised, highly privatised and highly marketized. The shunting of risk onto individuals which UCU members were fighting is already a reality for most of us. Unsurprisingly, this system is currently delivering pretty great outcomes for the City of London and pretty terrible outcomes for almost everyone else.

But this isn’t another piece about the problems with our pension system. This is about finding solutions. Whether we’re focussed on getting a good deal for USS members, on turning this dispute into the catalyst to demand bigger change, or on policy thinking for a radical government – it’s urgent that we start developing serious alternatives to business-as-usual. From public banking to municipal energy companies to community wealth building, there’s an exciting resurgence of new thinking on the economy which offers real alternatives to neoliberalism. But so far, pensions have been largely exempt from this. That needs to change, and fast.

I don’t pretend to have all the answers – there’s a dearth of creative thinking on this subject that will take time to fill, and I’d love to hear from people who are keen to work on it. But here’s a starter for ten, bringing together some of the best ideas I’ve come across – be they models we know work in other countries, or more radical ideas which fundamentally undercut the assumptions of today’s private pension systems, both here and abroad.

1. Stronger universal entitlements

The UK’s state pension is one of the least generous in the developed world – on some measures, the lowest in the OECD – yet is still the most important source of income for many households, especially those who can’t rely on a generous private pension. Historically, we’ve relied on employers acting out of their enlightened self-interest to provide employees with good pensions to plug this gap. This worked OK for a while, but in recent decades a toxic combination of growing workplace precarity and the explosion of financialisation has ripped the guts out of our workplace pension system. Auto-enrolment was designed to fix this mess, but has largely tried to do so with the same thinking that created it. We arguably need a more fundamental rethink, adjusting the balance between private saving and universal entitlements to something closer to that in, say, France and Germany.

Of course, raising the state pension is hugely expensive, particularly as the population ages. Strengthening universal entitlements through the existing state pension system would require significant tax raises. In this context it’s worth noting that tax relief on private pensions – which costs about £25bn a year – is widely acknowledged to be regressive, since it disproportionately benefits those who can afford to save a lot. Reforming pensions tax relief should definitely be on the table as part of a progressive fiscal policy – though it’s unlikely to be sufficient on its own.

Some argue that we need a more fundamental rethink of our approach to welfare. Pension systems are all about using the wealth generated by working people to support those who can no longer afford to work. But advocates of Universal Basic Income are questioning that logic at a deeper level, suggesting that it may not hold up in an age of increasing automation. UBI could in theory subsume the state pension – though it’s unclear whether it could be affordable at a level that would significantly improve on the current state of affairs (most models of UBI still have to be funded out of tax revenues).

But are there other ways we could fund universal entitlements (whether for pensioners or for everybody)? One promising idea is to create Social Wealth Funds, ideally capitalised using revenue generated by common resources – such as public land, the extraction of natural resources, or even intellectual property rights for advances which depend on publicly funded research. The Norwegian Oil Fund offers a precedent for using this approach to fund pensions (and also happens to be a global leader on socially responsible investment), while the Alaska Permanent Fund offers a precedent for a universal ‘citizen’s dividend’ (albeit at a much lower level).

2. Democratic, not-for-profit workplace pension provision

Of course, the USS dispute is about workplace pensions – and indicates a wider trend of employers increasingly wanting to offload their responsibility for pensions as deferred pay, and transition to ‘defined contribution’ (DC) arrangements which push risk onto the individual. For most of us, this is already a reality. Demanding a revival of genuine pension arrangements, which pool risk and share it more fairly, has to be a priority. There’s been a lot of interest lately in the Dutch model of ‘collective defined contribution’, a sort of half-way house between DB and DC. But I’d sound two notes of caution about this.

Firstly, without significant pressure from pension savers and social movements, this model is more likely to be used as a way to ‘level down’ existing DB provision than to ‘level up’ DC. As a way of creating counter-pressure on this, movements could demand that the government-backed NEST scheme be converted from DC to CDC, as Craig Berry has suggested. Secondly, CDC works in the context of a whole host of other features of the Dutch system – features it shares with other pension systems such as the Danish and Australian ones. Introduced as part of a wider package of reforms, it could help transform the UK landscape. Bolted on to our existing privatised and marketized model, it could simply serve to accelerate the erosion of what’s left of DB and create new opportunities for City capture.

So what are these features of other systems that the UK lacks? In essence, they involve a bigger role for large-scale, democratically owned and run, not-for-profit pension schemes which are directly accountable to their members – and a smaller role for shareholder-owned commercial insurance companies, which are fast becoming the norm in the UK. These schemes are generally organised at a sectoral level, and are tightly bound up with sectoral collective bargaining arrangements – for instance, trade unions play a key role in organising member voice within pension schemes. Emulating this model in the UK would therefore ideally need to be part of a wider shift in the economy and industrial relations, as many on the left are already advocating.

There’s good evidence that these models reduce opportunities for rent extraction by financial intermediaries and produce better outcomes for savers and society. In Australia, all workplace pensions must be run by a board of trustees, although not all must be non-profit. The Australian system as a whole appears to deliver better outcomes than the UK system, and within this, non-profit schemes (which combine a different business model with more equal representation for savers on their boards) appear to deliver better returns to savers than for-profit ones. The Dutch system produces vastly superior pension outcomes to the UK – a fact often attributed to the CDC model, but which can also plausibly be put down to its more democratic ownership and governance arrangements.

NEST is comparable to these schemes (although it is DC) – but its role in the new system of automatic enrolment was pared back from the original plans after insurance industry lobbying. Instead, many of our pensions will be nothing more than a contract between us and an insurance company. In the same way that we hand over our data to Facebook by ticking ‘I agree’, we become parties to contracts with our pension providers that we generally have no say over and no clue of the implications. Worse, unlike a trust-based pension scheme, the insurer has no strict legal duty to put our interests first (known as ‘fiduciary duties’) – indeed, it has a clearly conflicting legal duty to prioritise returns to its shareholders. This fiction of contractual consent, which enables abuse of power in broken markets, needs to be challenged in pensions just as much as it does in tech.

A recent Law Commission report concluded that “there are serious problems with the law relating to contract-based pensions, particularly in an auto-enrolment context” yet very little has been done. This is perhaps unsurprising: imposing strict fiduciary duties on insurance companies would completely trash their business models, probably requiring them to split their asset management arms from their pension provision, and perhaps even rendering the shareholder-owned model unsustainable. It would also be inconsistent with the idea of a contractual relationship between insurer and saver – even though this is little more than a legal fiction.

Yet this is precisely why the imposition of such duties is such a good, even necessary, idea. Contract-based pensions as currently designed are a dangerous racket that should have no place in a progressive pension system. If it is not possible to impose a more muscular legal and regulatory regime to protect savers, then they should be barred from providing auto-enrolment pension schemes altogether. In the UK context, this may sound radical – but as we’ve already seen, other countries have no qualms about specifying what kinds of institution are and are not fit to look after our pensions. By transitioning our workplace pension system to the kinds of democratic, not-for-profit model proven to work elsewhere, we would be leaving behind a disastrous neoliberal experiment and entering the mainstream.

Of course, as the USS debacle shows, these trust-based models are not a panacea. This recent analysis of the make-up of the USS board illustrates a wider problem: the people running our pensions tend to be selected for their investment expertise and are therefore deeply intertwined with the City establishment. They’re also barely accountable to the members they exist to serve. By contrast, evidence suggests that Dutch pension schemes have a culture of driving a harder bargain with asset managers – perhaps because trustee boards tend to be more representative of members’ interests and less dominated by City ‘experts’. Active steps therefore need to be taken to reverse the capture of our pension institutions by the City. Enhanced member representation and participation rights, as in the Danish system (along with better training), and an overhaul of senior personnel at the regulators, could be a good start.

It’s worth noting that this entire agenda will require huge amounts of political will and political capital, since the insurance and asset management industries will vigorously resist it. The current system is worth billions to them, and shifting from a marketized to a democratised workplace pension set-up would seriously hit both their power and their profits. They have kaiboshed much, much milder reforms in the past, and are very used to getting their way even at the cost of massive detriment to savers. Add to this the complexity of the pensions system, and the opportunities for regulatory capture this produces, and it’s clear that a radical incoming government will need a fully worked-through policy agenda on Day One – and a strong, well-informed movement behind it – if it’s to genuinely reset our pension system. 

3. New ways of investing: looking under the bonnet

All the models we’ve discussed so far (apart from state pensions funded directly from taxation) still depend on the global financial markets to produce returns. In DB pension funds, the aim is to keep assets and liabilities balanced as money comes in through returns on accrued contributions and goes out through pension payments. In DC, the aim is simply to maximise the returns on the individual saver’s pot, which is then converted into an annuity (a financial product giving an annual income) at retirement. In Social Wealth Funds, the aim is to fund citizen entitlements out of the investment returns without eating into the principle (the underlying cash pile). Though the details differ, in all three cases, the returns are being generated through investing in tradeable financial assets such as equities and bonds. In this sense, all of these models are dependent on the financial markets – and thus on the decisions of investment managers.

Pensions policymakers tend to avoid looking ‘under the bonnet’ at the engine that actually generates the returns we rely on. If they did, it probably wouldn’t pass its MOT. Capital markets remain hopelessly short-termist and are a formidable machine for producing instability and inequality. We’re still much less good at managing the risks they produce than the City would like us to think. And, whether for economic or ecological reasons, there are genuine questions over whether they can keep delivering the levels of growth seen in the past. It’s therefore worth asking whether there are better ways of investing our common capital that are more democratic and less market-based.

The least radical (though not necessarily the easiest) approach would be to regulate capital markets for more long-term and sustainable investment. Suggestions I’ve seen include minimum holding periods for shares; financial transaction taxes to discourage speculative trading or ‘churning’ of portfolios; and banning or restricting ‘financial WMDs’, like certain kinds of derivatives. These approaches would be market-wide, but we could also rethink the regulations that apply specifically for pension funds, for instance by introducing caps on the level of portfolio churning, requirements to take climate change into account, or restricting particular ‘toxic’ investments, such as fossil fuels.

More fundamentally, we could seek new ways for pension funds to invest directly in socially useful activity. Pension funds could become sources of direct investment in public infrastructure, such as social housing or renewable energy generation, that delivers a stable long-term return. IFM, an investment manager owned by Australia’s not-for-profit pension funds, has pioneered ‘unlisted’ investments in infrastructure. In the US, the Capital Institute has proposed Evergreen Direct Investment, a model based on legal partnerships between individual companies and investors that sidestep the equity markets. In the UK, local authority pension funds in places like Strathclyde and Manchester have pioneered investments in local social housing and small businesses.

One proposal for scaling up this kind of activity is through state-sponsored national and local ‘economic renewal funds’, with pensions tax relief made conditional on pension funds contributing a certain minimum allocation to these funds. Another approach would be for pension funds to buy bonds which help capitalise a National Investment Bank (like the recently announced Scottish National Investment Bank), which would then lend in the pursuit of social and environmental missions. These approaches have the advantage of making it easier to preserve public ownership of public infrastructure – a risk when it comes to encouraging private pension funds to invest in infrastructure on their own behalfs, rather than via public or quasi-public institutions.

Towards a democratic future for pensions

There’s a huge amount of work still to be done, but I hope this sketch shows that there are real alternatives to our broken pension system. In fleshing these out into an agenda for change, we need to continually ask the basic questions about how we want our pension system to work. Where should the money come from to provide us with an income in old age? What kind of institutions do we want looking after this money, and who should they be accountable to? What is the economic model by which this money gets translated into a pension payout? And how do these payouts get shared out so as to fairly share the risks of old age?

Pensions can be hard to man the barricades for, but the USS strikes have shown it can be done. And it must be done. Our pension system touches on so many things that are central to the transformation we need in our economy and society. It’s about the future of welfare, how we provide for each other and how we pool risks and resources. It’s about our common capital, and whether we can imagine ways of owning, managing and investing it which don’t depend on markets and give us all an equal voice. It’s about taking on a financial elite which has its tentacles in far too many of our basic needs. If we want a democratic economy, we need to be fighting for more democratic pensions.

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Last week, much of the economic and business community were left scratching their heads. Billy Bragg – renowned songwriter, musician and campaigner – was delivering his debut lecture at the Bank of England.

The topic of his speech? UK monetary policy, of course.

One of Bragg’s arguments – that quantitative easing (QE) should have been “directed to schools, to hospitals and to a national investment bank” – has been hastily brandished as ‘misguided and dangerous’ by some commentators.

It’s true that Bragg’s case was not articulated in the language of mainstream economics or orthodox policy making. But might his fundamental point have been right nonetheless?

In the latest policy paper for the IPPR Commission on Economic Justice, ‘Just about managing demand’, I argue that it is.

The basic argument goes like this. Since the global financial crisis, policymakers in control of the UK’s two main macroeconomic policy levers have essentially been engaged in a tug of war – pulling simultaneously in opposing directions.

On the one hand, the Bank of England has been testing the limits of monetary policy to get people to increase spending. UK monetary policy has essentially been set to ‘recession mode’ for the best part of a decade – with record low interest rates and vast sums of money pumped into the experimental policy of QE.

On the other hand, governmental fiscal policy has seemingly been set as if to dampen a non-existent economic boom, by deliberately drawing demand out of the economy in the policy generally known as ‘austerity’. In the effort to cut the budget deficit and overall national debt, government spending and borrowing has been cut back by more than 7 per cent of GDP since 2010.

To have the two major macroeconomic policy instruments working in direct opposition to one another for such a prolonged period represents a structural weakness in the way the UK manages its economy.

In fact, there are two structural weaknesses.

First, conventional monetary policy loses its effectiveness when interest rates are very low. Nominal interest rates have an ‘effective lower bound’, a minimum beyond which further reductions have little or no positive effect on spending in the economy – and interest rates in the UK have been at this lower bound for the past eight years.

Second, politicians do not in fact always act as policy makers and academics thought they would. A key assumption underpinning the Bank of England’s independence in 1997 was that governments tend towards overspending – they exhibit what’s known as ‘deficit bias’. But since 2010, governments in the UK have in fact done the opposite, favouring excessive underspending, or ‘surplus bias’.

Neither of these problems would be insuperable on their own.  But taken together, they have left macroeconomic policy dangerously ill-equipped to tackle the next recession.

The costs are non-trivial. The government’s Office for Budget Responsibility estimates that the isolated impact of government cuts was to suppress the level of GDP by around 4.5% in 2017/18 alone. That’s more than £1,400 per person.

This is only assumed away if monetary policy is thought to be working properly. But at the lower bound of interest rates we know that it isn’t. Eight years of painfully slow growth – by both international standards and the UK’s own historical record – shows how ineffective policy has been.

Since 2009, the attempted solution to unstick this policy gridlock has been QE. QE represents an attempt to get around the lower bound by creating new money out of nothing, which is then invested in financial markets to reduce interest rates on debt – thereby simulating some of the effect that would have been achieved by an interest cut in the first place.

But as even the chief economist of the Bank of England has conceded, the effects of QE are inherently uncertain and unreliable. QE has also contributed directly to growing wealth inequality, with research at the Bank of England estimating that the isolated effects of the policy have increased stocks of wealth for the richest 10% of households by tens of thousands of pounds compared with the poorest 10%. This has happened with little democratic or public accountability.

As the economist Simon Wren-Lewis has argued, monetary policy makers should regard QE just as the medical profession would regard a new drug where the correct dosage is inherently unknowable, but the side effects are powerful and dangerous. Every possible effort should be made to find a better alternative.

On average, the UK experiences a recession every 10 to 15 years. Now, almost 10 years on from the last crisis – and partly because an effective alternative to QE has not been found – the UK finds itself dangerously unprepared to combat the next downturn.

New fiscal rules, which encourage increased flexibility and investment during recessions, would help. So too would new monetary policy targets. If the Bank of England could be guided by the level of unemployment or nominal GDP as well as the existing inflation target, this would help interest rates rise above the lower bound more sustainably during recoveries.

But neither of these will be sufficient if, when the next recession hits, the UK finds itself with ultra-low interest rates and a surplus biased government, as it does today.

What is needed is a way of getting around the lower bound of interest rates in a way that is both more effective, less regressive (in a redistributive sense) and more democratically accountable than QE – but at the same time shielded from government surplus bias.

Part of the answer borrows from long standing recommendations of other organisations such as the New Economics Foundation. The first step is the creation of a National Investment Bank (NIB), independent of government but mandated to support its industrial strategy and societal ‘missions’. Such a Bank could use a mixture of public and private finance to ‘crowd-in’ further private investment in business growth, innovation, housing and social and physical infrastructure.

But the creation of such a public investment bank would also allow for a further structural innovation in the UK’s macroeconomic framework: the provision for the Bank of England to ‘delegate’ a stimulus to the NIB in the form of increased lending to new and existing projects, when interest rates are at their lower bound.

The Bank of England could calculate the value of a ‘missing’ stimulus, perhaps in terms of the size of an interest rate cut that would otherwise have taken place (such as has been argued by economists such as Tony Yates), and then ask the NIB to deliver all or part of an equivalent stimulus through increased lending.

European law prevents the Bank of England from creating new money to fund a public corporation like the NIB directly, and in any case the NIB would normally be able to fund any delegated stimulus itself by raising capital from private markets (just as similar state investment banks from Germany to Brazil already do today).

But as a backstop to ensure that any required stimulus could always be funded independently from government, the Bank of England could also choose to buy up the NIB’s corporate debts from other financial actors – just as it does through existing QE programmes.

In effect, this would follow a very similar financing mechanism to QE, only the Bank of England would know exactly where the stimulus had gone and how it was benefiting the non-financial economy.

This mechanism would also be preferable to QE on democratic grounds. The Bank of England would be able to determine the size and timing of a stimulus independently from politicians, but the investment targets and public ‘missions’ will have already been specified by elected government.

So was Billy Bragg right after all? Time may still tell. Bragg may not want to change the world, or indeed be looking for a New England – but in his own way, he may yet help the UK prepare itself for the next recession.

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Laurie Macfarlane speaks to Finance Watch about how addressing today’s major challenges such as climate change and inequalities means not only challenging the power of finance, but also tackling the ideology that underpins it.

Watch the full video:

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It might come as a surprise – but something innovative is happening in Hull.

Hull is one of those cities, like Swindon and Slough, that’s long been the butt of jokes – like the one about the guy that typed ‘Hell’ instead of ‘Hull’ into his Sat-Nav, but still got there – it’s not that funny, or even really justified.

In the 2003 book of Crap Towns Hull came in at number one but so did London in 2013 whilst Hull dropped out of the top 50. This year, though, Hull is the UK City of Culture but it still has some major needs: a 2015 survey by the City Council found that over half the population lived in the most deprived areas of the country.

“Most deprived areas” don’t normally spawn innovation and the City Council’s main solution was to throw £100 million of its capital reserves into civic improvements to overhaul Hull’s image, and to cosy up to Siemens in an attempt to secure more jobs. Meanwhile, while other people poke fun about #CityofCulture2017, a small group of truly community minded ‘hactivists’ have set to work at the real cutting edge of social development to “unlock the hidden value in Hull’s economy”.

Enter David Shepherdson and Lisa Bovill, from Kaini Industries, an initiative which sprang out of a 2014 piece of research, funded by Hull City Council, that explored how the disruptive technology underpinning bitcoin could be facilitate a local currency to support communities in Hull affected by poverty. After a few years of development and community outreach they launched Hullcoin which enables people who engage with charities and community groups across the city of Hull to earn digital coins by volunteering and undertaking activities that benefit themselves. Hullcoins can then be redeemed as discounts against all sorts of things at over 140 participating retailers across the City. Hull City Council and the NHS are both supporting the project, as is the University, Hull College group and the Department of Work & Pensions.

How does the Hullcoin economy work?

Kanini Industries ‘mined’ 10 million Hullcoins – a quick non-energy-intensive process that took about 30 minutes (because it did not requires the competitive ‘proof of work’ process associated with Bitcoin). Kaini Industries then run due diligence on any local community groups that wish to issue coins, to ensure they promote activities which “create a better community”, and allocate them “bundles” of coins – normally in batches of 500. These community organisations, health and employment services then issue individual coins to people for volunteering or helping themselves or others to “create a better community”. People with Hullcoins can then redeem them at participating retailers across the City in return for discounts on goods and services of between 5 and 50%. The retailers can then choose what to do with the coins, either re-issuing them as employee rewards, to loyal customers as discounts on future purchases, or they can donate them back to a community group or charity to help stimulate the local economy even more. Kiani industries monitor the amount of coins in circulation and have an agreement with the council to take some offline, if required, to help manage supply and demand.

It’s a truly novel idea which uses the blockchain to empower Hull’s real assets, it’s people, by placing a direct and tangible value on community support, self betterment and volunteering – the key aspects of mutual aid which are so critical to community development but so often ignored or undervalued in modern society.

Hullcoin is the first initiative of its kind to utilise blockchain in this way. The project is still only in private beta at the moment and the developers are keen to “iron out the glitches” which will prevent the system from scaling. But if their forthcoming crowdfunder, scheduled for April 1st 2018 (hopefully the date won’t be too off-putting!) is a success they have plans to white-label the system for other cities at which point it could really provide a pathway out of poverty for millions of people.

The concept of Hullcoin has many similarities to ‘Covestment‘, a term coined by Jordan Bober and Michael Linton, the inventor of LETS, to describe a means of “financing the future and creating economic resilience by weaving innovations in network currencies, crowdfunding and community microlending”. In Covestment, companies issue currency (or ‘discount vouchers’ if you like) to a Community Covestment Fund from which members of the community can buy the local currency with regular money. The Covestment fund uses the cash to provide loans to local entrepreneurs and businesses, and people use their local currency to obtain discounts when they shop at the businesses which backed the currency at the start (see diagram below). In exactly the same way as Hullcoin the result is a stimulation of the money supply and hence local economy.

The recent surge in interest in new forms of money makes experiments like Hullcoin and ideas like Covestment highly topical and what’s most exciting is that we don’t need to wait for the government to wake up to the possibilities. These are ideas which we can start experimenting with right now – to take control of our local economies and make them work for the benefit of everyone.

Lisa Bovill, one of the developers at Hullcoin will be speaking at the OPEN 2018 conference on “collaborative technology for the cooperative economy” in July and it will be fascinating to hear how the project is progressing and the impact it is having for the people of Hull. If our hunch is right it has probably already had a more direct impact on less privileged people’s lives than a single cent of the £100million the City Council “invested” in beautifying the city. Watch the 3 min video featuring Bob Clark from the BBC to see how chuffed Bob is to get 15% off his brisket pie – that’s the real “hidden value” – right there.

Find out more about Hullcoin or listen to a 23 min podcast on Hullcoin from World Hacks on the BBC.

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The aim of openDemocracy’s ‘New Thinking for the British Economy’ project is to present a debate on how to build a more just, sustainable, and resilient economy. In the project so far we’ve debated policy areas ranging from trade policy and universal basic income, to childcare policy and housing .

But across Britain, hundreds of people are working tirelessly to build a new economy on a daily basis, putting new economic ideas into practice from the ground up. In a new video series, we will be showcasing some of the most exciting initiatives that are already working to replace different aspects of our failing systems with fairer and more resilient alternatives — from housing and finance to food and energy.

This week, Anna Laycock and Marloes Nicholls from the Finance Innovation Lab speak to us about the work the Lab is doing to incubate the people and ideas that can transform the financial system to make it serve people and planet. Watch the full video below:

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This week, university staff have been on strike against devastating changes to their pensions, braving the freezing weather to stand on picket lines waving placards with brilliantly dweeby slogans (personal faves: “Geertz ya dirty hands off our pensions” and “The provost is an ontological turn off”). Universities UK have finally agreed to talks with the union, UCU, about the future of the Universities Superannuation Scheme (USS), but with staff wary of falling into the same trap as junior doctors, the strikes are set to continue for the next two weeks.

As a current postgraduate student, I’m supporting my striking lecturers all the way. But I also think it’s crucial that we use these strikes as a wakeup call. What’s being proposed for USS members is no worse than what faces millions of us when we retire – and probably better than many of us. The difference is that, like the frog slowly boiling in a pot of water, we don’t realise it. Unlike USS members, we probably never had a guaranteed pension to lose in the first place. Unlike USS members, we haven’t had the sudden shock of being told it’s going to be taken away to galvanise us into action. But there’s a quiet crisis brewing in the UK pensions system – one that will affect us all unless we stand up and demand change.

To understand this better, let’s look at three of the key things striking university staff are angry about, and explore how they play out across the rest of the pensions system.

1. Members’ pensions will be at the mercy of the capital markets

At the heart of the dispute about USS is a proposal by management to turn it from a ‘defined benefit’ (DB) scheme, where the level of members’ pensions is guaranteed (i.e. the benefits the plan pays out are fixed), to a ‘defined contribution’ (DC) scheme, where your pension depends entirely on how your individual investment portfolio performs (i.e. the contributions into the scheme are fixed, but the benefits it pays out are not). There are two key things to understand here.

Thing One: You probably have a DC pension

The first is that DC pensions are the norm across the UK: there are very few DB schemes left in existence, and many of those that do exist are struggling with massive deficits, or are already closed to new members. For most workers outside the public sector and formerly nationalised industries, a guaranteed pension is a thing of the past.

Of course, the whole point of a pension is to provide a secure income in retirement. In a very real sense, a DC pension is not a pension at all: it’s just an investment plan, a tax efficient way for individuals to save towards their retirement. No risk sharing, no social insurance: just you and the financial markets. DC pensions fly in the face of the whole notion that it’s fairer and more efficient to pool our risks and resources than to leave each other to sink or swim. But this is the model that now dominates in the UK.

The rationale of DC is based on a classic neoliberal story about individual choice: individuals take responsibility for their own retirement savings, individuals choose who they want to manage their money, individuals decide how much risk they want to take on. This is also how the proposed DC scheme has been sold to USS members. But the reality is very different. Like railways and other public utilities, this is one area of life where reality simply refuses to conform to the free market utopia of neoliberal theory.

The reality is that, right now, most people in permanent jobs are being ‘automatically enrolled’ into pension schemes chosen by their employer – most likely schemes of baffling complexity designed by an army of investment consultants and asset managers, which neither they nor their employers really understand. They will not make an active choice about how much to save. They will not make an active choice about who to entrust with their money. They will not make an active choice about where to invest or how much risk to take. Most of us don’t have the time or expertise to be making those kind of decisions anyway. And yet the whole system is based on the fiction that we are making those decisions – that the consumer is king, when really the saver is being shafted (more on that later).

To give him his dues, Lib Dem Pensions Minister Steve Webb understood what a disaster in the making this situation could be. He tried to change the law to make it possible to run ‘collective defined contribution’ schemes – a sort of half-way house between DB and DC, with flexible ‘targets’ instead of hard guarantees. The Royal Mail and its union have recently agreed to try this approach, and UCU have suggested it as a possible way forward for USS. These schemes are the bedrock of the Dutch pension system – often held up as a model the UK could learn from – but are not accommodated by UK rules, which are designed only for DB and DC. But Webb’s Tory successor Ros Altmann scrapped the plans, saying it was ‘not the time’ to ask the pensions industry to absorb more regulatory changes.

Yes, you read that right: the government introduced laws requiring millions of us to be automatically signed up to pensions we didn’t choose, creating a multi-billion dollar new market for the industry. It failed to do any serious thinking about how to make sure those pensions represented good value for savers or society. And when proposals came forward to fix the mess, they rejected them on the basis that the industry couldn’t cope with the extra changes. This is entirely symptomatic of an approach to pensions regulation that has consistently put the interests of powerful City firms ahead of the needs of ordinary savers. The Tories are now saying that CDC could be back on the agenda, but there are no concrete commitments, and they may well cave to the industry again without popular pressure.

Thing Two: Your pension is definitely at the mercy of the capital markets

The second thing to understand about all this is that, in a sense, even traditional DB schemes are already at the mercy of capital markets. Both DB and DC schemes function on the basis that members’ contributions are invested in financial markets and pensions are paid out based on the returns. The only difference is who bears the risk if returns don’t match up to the pensions people want and expect. In both cases, the financial markets are the goose that lays the golden eggs, and when the goose stops laying, the scheme can hit the buffers.

Since the financial crisis, the recession and prolonged period of exceptionally low interest rates have caused problems for many pension schemes, making it hard for them to get the high returns their projections depend on. This either causes deficits to yawn open, or prompts funds to look further afield for more risky and exotic investments to push up yields (such as developing country corporate bonds, flirtations with expensive private equity, and other ‘alternative’ investments). At a system level, this could be inflating speculative asset price bubbles and storing up future financial crises.

Of course, investing pension contributions to produce a return isn’t a bad thing in itself. Pension funds have huge potential for social good, to act as vehicles which mobilise the capital of millions of small savers and invest it in the things society needs, from housing and renewable energy to small businesses. But, as the landmark Kay Review concluded in 2012, today’s pension funds are increasingly not acting as long-term, productive investors in the real economy, but as more or less speculative participants in global financial markets – employing armies of asset managers who try and ‘beat the market’ by buying low and selling high, across thousands upon thousands of different stocks, bonds and other financial assets.

DB, DC or CDC, our pension funds are not only at the mercy of financialised capitalism – they are key players in financialised capitalism, fuelling rather than counteracting its cycles of boom and bust. Regardless of the type of pension we have, we all need to be worrying more about how our money is being invested on our behalf. This is the engine on which our retirement savings depend, and it’s long overdue an MOT.

2. Unaccountable middlemen are getting rich while members’ benefits are cut

This brings us to the second way in which the anger of USS members shines a light on the bigger problems with our pension system. One of the targets of UCU members’ ire in recent weeks has been the pay packets of USS’ executive committee (reportedly paid an average of £488,000 each), and in particular of its Chief Executive Bill Galvin, previously head of the Pensions Regulator.

When it comes to rent extraction in the pensions system, this isn’t even half the story. Most of us will be separated from our money not just by the management of our pension fund itself, but more crucially by an elaborate chain of asset managers, fund-of-fund managers and investment consultants, all of whom take a cut out of our savings. In fact, USS is an interesting exception to the rule, in that it recently ‘in-sourced’ its asset management (although whether this team is doing a good job or delivering value for money for its members is still contested).

Because they tend to be paid based on funds’ relative performance against other funds, rather than their absolute performance, the fees extracted by this City circus have continued to grow even as our pensions do worse. From 2002-2007, pension funds’ payments to intermediaries rose by an estimated 50%, while real returns to savers actually declined. This also incentivises the merry-go-round of financial trading which adds no value to the economy – as fund managers ‘churn’ portfolios at ever greater speeds, extracting hidden transaction fees every time.

Often this happens without the full awareness of the pension fund itself, let alone the members who ultimately pay the price. It’s only now, after years of tireless campaigning by organisations like ShareAction, that we’re finally going to get the right to know where our money is invested and to see the full picture on fees and charges being extracted. That’s right – in this brave new world of competition and choice, we don’t yet have access to basic information about what we’re ‘choosing’. And even when we do get this right, how many of us will have the power or expertise to do anything with that information?

Economists like John Kay and Paul Woolley, and pensions experts like David Pitt-Watson, have long been sounding the alarm about the level of rent City middlemen are siphoning out of the pensions system – yet politicians have seemed paralysed to do anything about it, in thrall to the powerful interests of the City. If anything, the system as a whole is becoming less rather than more accountable to pension savers.

USS is an example of a trust-based scheme, overseen by a board of trustees which includes member representatives. At least in theory, these trustee boards exist to protect members’ interests, and have strict legal duties to do so. But, like DB schemes, trust-based pensions are a declining part of the picture. Under auto-enrolment, more and more people are being enrolled into what’s known as ‘contract-based’ schemes – as the name suggests, essentially just a contract between you and an insurance company – which are even further away from the ideal of collective provision which should characterise a true pension.

I myself have three of these ‘pensions’, accrued during stints with different employers (incidentally, a proposal to have pensions follow you from job to job to prevent this kind of situation – another Steve Webb initiative – was kaiboshed by the Tories after industry lobbying.) I can barely manage to make sure they all have my current postal address: the idea that I’m in any meaningful sense keeping an eye on what they do for me is a farce. And I worked on pensions policy for four years: if I’m not the ‘informed consumer’ of economic theory, then who is?

Unlike trust-based schemes, insurance companies do not have an overriding legal duty to protect the interests of savers, and savers do not have to be represented in their governance. Again, this problem has been pointed out for many years, but so far all that has been done about it is the introduction of toothless ‘independent governance committees’. The saga of RBS’ Global Restructuring Group, which destroyed small businesses it was supposed to be helping, shows us all too clearly what happens when vulnerable borrowers and savers are thrown to the wolves of Wall Street and the Square Mile with nobody to look out for their interests. Yet that’s exactly what is being done with our pensions.

3. Members stand to lose up to 50% of their pensions

Of course, what all this ultimately comes down to is that USS members now stand to get a significantly lower pension than they did before the proposed changes. And again, this is indicative of a wider trend.

All the problems discussed above – excessive rent seeking, speculative churning of portfolios, long chains of middle men – have been chipping away the value of UK pensions for decades now. Because of the effect of compounding, fees that eat 1% out of your pension annually can erode it by up to 30% by the time you retire. It’s hardly surprising that UK net retirement income ‘replacement rates’ (your take-home pension as a proportion of your final salary before retirement) are the lowest in the OECD, with only Mexico coming close to being as bad.

Until recently, policymakers’ only response to the looming crisis of pensioner poverty has been to ‘nudge’ people into saving more. As with broken energy and banking markets, it’s easier to point the finger at citizens and tell them to be ‘better’ consumers than it is to take on vested interests. In practice, all this means is that millions of us are now automatically opted into a broken and destructive system – handing even more power to those who run and benefit from that system.

But it should now be crystal clear that we’re not going to retire poor just because we’re insufficiently thrifty. Instead, stagnant wages mean we’re paid too little to save enough, and too much of what we do save gets sucked into the black hole of speculative rentier capitalism. David Pitt-Watson has argued that cracking down on rent extraction and embracing CDC could boost UK pensions by as much as 33%, “perhaps ending the pensions crisis at a stroke”. Whether you believe this or not, it’s clear that something has to give.

Our pensions system simply isn’t working – not for savers and certainly not for society. In fact, it increasingly seems like the only people it’s working for are the City firms who manage it. Policymakers who don’t really understand capital markets have seen them as a magical black box that can resolve deep-seated problems with our economy – like an increasingly precarious and poorly paid working population having to support a growing population of retired people. They’re banking on the City’s ability to transform the lead of inadequate wages and savings into the gold of a decent pension. If this sounds familiar, that’s probably because it is: a similar mindset underpinned the mortgage bubble that led to the financial crisis. This folly is slowly but surely brewing up a crisis of old-age poverty and financial instability – one that could reach epic proportions unless something is done about it.

What that something should be is beyond the scope of this article – and will probably require deeper and more imaginative thinking than has been done on this subject to date. But in broad terms, we need to see the same shift in the parameters of debate that Labour has achieved in relation to public ownership of things like energy and the railways. Instead of taking our broken, rent-extracting privatised system as a given and seeking to apply sticking plasters, we should be exploring democratic and not-for-profit models which put power back in the hands of the people. Instead of assuming there is no alternative to the UK system, we should be learning from other countries who do it better. And instead of kowtowing to the demands of the City elites who run our pension system, we should be ready to pass regulations that force them to do right by savers.

It’s to be hoped that Universities UK are coming back to the negotiating table in good faith and that an end to the USS dispute is in sight. But if we want a decent retirement for everyone, we need these strikes to be just the beginning.

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On 1 December I attended SOAS University for a screening of the film ‘The Spider’s Web: Britain’s Second Empire’, co-produced by film maker Michael Oswald and John Christensen of the Tax Justice Network, and hosted by the SOAS Open Economics Forum and Dr. Ourania Dimakou.

The Spider’s Web offers unique insight into the British Empire, both past and present, and its colonies and far flung outposts. This is a story which, if known at all, is often understood through a rose tinted view of what that British Empire actually represented. The Spider’s Web details how the former Empire was transformed after World War 2 into a new financial empire of offshore tax havens and secrecy jurisdictions.

Nicholas Shaxson, author of ‘Treasure Islands’, notes that the historians Cain and Hopkins called the City of London the “Governor of the Imperial engine”, so it is perhaps no surprise to learn that ‘the City’ still controls the reigns of Britain’s second-run financial services empire, with as much as 25%  of the global offshore market controlled by Britain and its satellites. As City University’s Ronan Palan observes:

“The City of London is a truly unique and interesting phenomenon, which should have attracted the attention of political scientists and economists, but I don’t know of anyone, who has systematically studied the Corporation of London and its impacts on policy and economic policy.”

The City of London and the Bank of England, experiencing a crisis of legitimacy marked by Britain’s declining global influence following World War 2 and the Suez crisis, facilitated the transformation of former British territories and dependencies such as the Cayman Islands and British Virgin Islands into tax havens and secrecy jurisdictions, taking a relaxed view of increasing corruption risk provided that the monetary flows benefited the UK. As the Bank of England noted:

“There is no objection to their providing boltholes for non-residents, but we do need to be quite sure that in doing so, opportunities are not created for the transfer of UK capital to the non-Sterling area outside UK rules.”

The growth of the so-called “Eurodollar” market — an unregulated form of lending, based in London but conducted in US Dollars via a separate set of books and thus considered “offshore” (elsewhere for regulatory purposes) — helped enable the bypass of cross-border capital controls put in place under the post-war Bretton Woods agreement.

Alex Cobham, Director of the Tax Justice Network, explains how the Eurodollar market was ultimately about taking economic activity conducted in one country, and pretending it occurs elsewhere:

“It’s about creating a legal space where you pretend activity is taking place. You’re taking activity from a place where it is regulated and taxed, and pretending its happening elsewhere. Now where, doesn’t really matter. It’s just elsewhere.”

The Eurodollar market expanded rapidly, reaching $500 billion by 1980 and by 1988 $4.8 trillion. By 1998, nearly 90% of all international loans were made via the unregulated offshore markets.

This diagram via Haberly & Wojcik illustrates the geography of Foreign Direct Investment (FDI) and the relative dominance of Britain and the territories of its former Empire.

The City of London, Bank of England and Eurodollar markets deliberately allowed banks, corporations and wealthy elites to bypass the rules of the capitalist game — shifting wealth offshore and thus undermining the social contract and the post-war welfare state now visibly in collapse around us.

Clement Atlee, the post-war Labour Prime Minister remarked:

“Over and over again, we have seen that there is a power in this Country, other than that which has its seat at Westminster. The City of London, a convenient term for a collection of financial interests is able to assert itself against the Government of the Country. Those who control money, are able to pursue a policy, at home, and abroad, contrary to that which is decided by the people.”

One of the criminal banks which grew out of the deregulated City of London was BCCI – which quickly became the bank of choice for drug runners, mafia bosses and intelligence agencies, much like the role HSBC performs today.

BCCI, which collapsed in 1991 following US enforcement action related to money laundering, was at the time the 7th largest bank in the world. A young Fred Goodwin who would go on to run RBS (at the time working for Deloitte Touche) ‘led’ the complex insolvency of BCCI bank.

Much of what we know about Britain’s Second Empire can be attributed to the tireless work of the Tax Justice Network, including Nicholas Shaxson, John Christensen (a former Deloitte Touche economist and advisor to the Government of Jersey) and leading academics including Prem Sikka and Ronan Palan who feature prominently throughout the film.

The film provides viewers with both a technical and a moral analysis of what tax havens and secrecy jurisdictions do — creating opportunities for tax, legal and political arbitrage — and lays the blame at the door of the real perpetrators, the Big 4 accountancy firms (EY, Deloitte, KPMG, PwC).

The cancerous effects of the ‘Revolving Door’ are documented in the film through the lens of highly effective direct actions by UK Uncut who targeted former HMRC boss Dave Hartnett and his tax “sweetheart deals” with Vodafone, BT and Goldman Sachs.

A highlight is the disruption of a private tax planning dinner hosted by Harnett, who is presented with a “golden handshake award” by the intruders for services to tax avoidance in front of a group of suited, booted and visibly confused paying guests.

The Spider’s Web gives an excellent overview of the scale of the global tax dodging problem and its corrosive effects on democracy. As John Christensen observes:

“People think the National Rifle Association (NRA) is a powerful lobby, but to be honest they’re amateurs next to the City of London. The City UK uses its power in so many discreet ways, they don’t need to be that upfront about it, they’ve got MPs and Ministers in their pockets going in and out via the revolving door.”

The City UK was created by Chancellor Alastair Darling after the 2008 financial crisis, precisely to establish a stronger financial lobby in Westminster and Brussels. It is from the unelected, unaccountable City of London that, we should really be having the conversation about “taking back control.”

Discussion on solutions is left to five concrete proposals in the final scenes, which was followed by a lively Q&A session which spilled over into discussion over wine & nibbles.

SOAS host Dr Dimakou reflected on the fact there were not more critical UK academics interviewed on tax justice issues in the film. Perhaps this is because, as John Christensen observed, leading economics journals tend to avoid featuring critical academic work on tax justice issues.

Lack of widespread academic engagement with tax avoidance could also be due to other factors, such as a lack of academic grant funding for research on tax dodging, the increasing reliance of the UK third sector and NGOs on grant funding from tax avoiding donors. Or the the fact critical academics such as Prem Sikka often find themselves isolated within professional accounting bodies such as the ICAEW.

It turns out that critical voices being ignored is not restricted to the academic and accounting professions. During the Q&A, Director Michael Oswald said that The Spider’s Web had been entered into over 50 film festivals, receiving warm feedback, but curiously not being selected to feature. The response from the Atlanta Docufest selection panel is typical:

“We just wanted you to know that you made it to the final round of judging, but since we only have three days of screenings, we had to cut so many great films. Although we can not include your project this year, please keep in mind, you scored the second highest scores from our panel.”

The subtext of The Spider’s Web is that Britain is yet to face its own history. In a desperate attempt to cling to empire, The City of London threw open its arms to criminal dark money from all over the globe. This is why mafia expert and author Roberto Saviano labels London “the heart of global corruption”.

Until Britain is forced to confront the realities of its Empires, both colonial and financial, there is little prospect of real change. It’s no coincidence state broadcaster the BBC refuses to air the film.

Thankfully, with a fracture in the neoliberal order sparked by the election of Jeremy Corbyn there is now a growing thirst for radical political change and transformational economic ideas. It is now incumbent upon all of us who desire change to work together to tame the power of the City of London and its offshore satellites, and to free democracy from the shackles of neoliberalism.

As Tax Justice Network Director Alex Cobham observes:

“We have country after country around the world where the lack of financial transparency, about taxation, about ownership, about corruption, has undermined the extent to which governments deliver representative policy making for their citizens.”

Why not get involved and help put an end to corporate capture, censorship, and corruption by hosting a screening of The Spider’s Web in your local community. Discuss what action can be taken locally to help transform our broken economic model which sees wealth plundered from the four corners of the globe, laundered and stashed in London’s dysfunctional property market.

To host a screening: contact info@queuepolitely.com
Twitter: @spiderswebfilm
Facebook: www.facebook.com/Spiderswebfilm
Vimeo: https://vimeo.com/ondemand/spiderswebfilm

Disclaimer: Joel Benjamin was interviewed for the film on issues of PFI and tax avoidance. 

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One of the basic claims of capitalism is that people are rewarded in line with their effort and productivity. Another is that the economy is not a zero sum game. The beauty of a capitalist economy, we are told, is that people who work hard can get rich without making others poorer.

But how does this stack up in modern Britain, the birthplace of capitalism and many of its early theorists? Last week, the Office for National Statistics (ONS) released new data tracking how wealth has evolved over time. On paper, the UK has indeed become much wealthier in recent decades. Net wealth has more than tripled since 1995, increasing by over £7 trillion. This is equivalent to an average increase of nearly £100,000 per person. Impressive stuff. But where has all this wealth come from, and who has it benefitted?

Just over £5 trillion, or three quarters of the total increase, is accounted for by increase in the value of dwellings – another name for the UK housing stock. The Office for National Statistics explains that this is “largely due to increases in house prices rather than a change in the volume of dwellings.” This alone is not particularly surprising. We are forever told about the importance of ‘getting a foot on the property ladder’. The housing market has long been viewed as a perennial source of wealth.

But the price of a property is made up of two distinct components: the price of the building itself, and the price of the land that the structure is built upon. This year the ONS has separated out these two components for the first time, and the results are quite astounding.

In just two decades the market value of land has quadrupled, increasing recorded wealth by over £4 trillion. The driving force behind rising house prices — and the UK’s growing wealth — has been rapidly escalating land prices.

For those who own property, this has provided enormous benefits. According to the Resolution Foundation, homeowners born in the 1940s and 1950s gained an unearned windfall of £80,000 between 1993 and 2014 alone. In the early 2000s, house price growth was so great that 17% of working-age adults earned more from their house than from their job.

Last week The Times reported that during the past three months alone, baby boomers converted £850 million of housing wealth into cash using equity release products – the highest number since records began. A third used the money to buy cars, while more than a quarter used it to fund holidays. Others are choosing to buy more property: the Chartered Institute of Housing has described how the buy-to-let market is being fuelled by older households using their housing wealth to buy more property, renting it out to those who are unable to get a foot on the property ladder. And it is here that we find the dark side of the housing boom.

As house prices have continued to increase and the gap between house prices and earnings has grown larger, the cost of homeownership has become increasingly prohibitive. Whereas in the mid-1990s low and middle income households could afford a first time buyer deposit after saving for around 3 years, today it takes the same households 20 years to save for a deposit. Many have increasingly found themselves with little choice but to rent privately. For those stuck in the private rental market, the proportion of income spent on housing costs has risen from around 10% in 1980 to 36% today. Unlike homeowners, there is no asset wealth to draw on to fund new cars or holidays.

In Britain, we have yet to confront the truth about the trillions of pounds of wealth amassed through the housing market in recent decades: this wealth has come straight out of the pockets of those who don’t own property.

When the value of a house goes up, the total productive capacity of the economy is unchanged because nothing new has been produced: it merely constitutes an increase in the value of the land underneath. We have known since the days of Adam Smith and David Ricardo that land is not a source of wealth but of economic rent — a means of extracting wealth from others. Or as Joseph Stiglitz puts it “getting a larger share of the pie rather than increasing the size of the pie”. The truth is that much of the wealth accumulated in recent decades has been gained at the expense of those who will see more of their incomes eaten up by higher rents and larger mortgage payments. This wealth hasn’t been ‘created’ – it has been stolen from future generations.

House prices are now on average nearly eight times that of incomes, more than double the figure of 20 years ago. It’s unlikely that house prices will be able to outpace incomes at the same rate for the next 20 years. The past few decades have spawned a one-off transfer of wealth that is unlikely to be repeated. While the main beneficiaries of this have been the older generations, eventually this will be passed on to the next generation via inheritance or transfer. Already the ‘Bank of Mum and Dad’ has become the ninth biggest mortgage lender. The ultimate result is not just a growing intergenerational divide, but an entrenched class divide between those who own property (or have a claim to it), and those who do not.

Misleading accounting and irresponsible economics have provided cover for this heist. The government’s national accounts record house price growth as new wealth, ignoring the cost it imposes on others in society – particularly young people and those yet to be born. Economists still hail house price inflation as a sign of economic strength.

The result is a world which is rather different to that described in economics textbooks. Most of today’s ‘wealth’ isn’t the result of entrepreneurialism and hard work – it has been accumulated by being idle and unproductive. Far from the positive sum game capitalism is supposed to be, we have a system where most wealth is gained at the expense of others. As John Stuart Mill wrote back in 1848:

“If some of us grow rich in our sleep, where do we think this wealth is coming from?  It doesn’t materialise out of thin air. It doesn’t come without costing someone, another human being. It comes from the fruits of others’ labours, which they don’t receive.”

Britain’s housing crisis is complicated mess. Fixing it requires a long-term plan and a bold new approach to policy. But in the meantime let’s start calling it what it really is: the largest transfer of wealth in living memory.

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We know what banks do, don’t we? They manage people’s savings, help them to buy houses, and provide finance for businesses. The old 3-6-3 model of banking says it all: “borrow at 3 percent, lend at 6 percent, be on the golf course by 3 pm”.  If we could only strip away all the froth and bubble created by investment banks, we could restore banking as it used to be: a bank in every town and village, each headed by a responsible bank manager trusted to make his own lending decisions. People’s savings would be safe, businesses would be able to obtain finance, and house price bubbles driven by excessively risky mortgage lending would become a thing of the past. And above all, there would no longer be any risk of a financial crisis on the scale of 2008.

Since the financial crisis, ideas for bank reform have been dominated by the idea that this “golden age of retail banking” can be restored. People campaign for the return of 1930s legislation separating retail and investment banking, the breakup of too-big-to-fail banks, and the creation of a network of small banks with a mandate to focus on business lending. Some go further, calling for the introduction of what is variously known as “full reserve banking”, “narrow banking” and “sovereign money”.

But in the last half-century or so, banking has fundamentally changed. Taking in static savings and investing them to deliver a return to savers is no longer a primary function for banks: that has become the job of asset managers. And lending to households and businesses, while still important, has been eclipsed by a third function that banks have acquired in the last half-century – a function so crucial that if it fails, even for a few hours, the entire economy suffers a heart attack. I refer, of course, to payments.

Back in the 1950s – that “golden age” of retail banking – ordinary people didn’t use banks much. Blue-collar workers were paid in cash on a Friday night (the famous “pay packet”). They spent some of it in the pub and gave the rest to their wives, who paid the rent and bills, bought food and gave the children their pocket money, all of it in cash. Neither the men nor their wives had bank accounts from which they could make payments, though they might have building society savings accounts. In fact, as late as the 1970s, most women didn’t have bank accounts of any kind.

Lending, too, was very different then. Mortgages were hard to get, often taking six months or more to approve: only about 30% of adults owned their own home. If you needed money for an exceptional purchase, you had to save for it, or – from 1954 onwards – obtain your goods on hire purchase. British banks didn’t provide unsecured loans to ordinary people until 1958. Credit cards didn’t appear until the mid-1960s.

In fact, during this “golden age” of retail banking, the economy ran mainly on cash – and even that wasn’t easy to obtain. Cash could only be obtained over the counter in a bank branch, and bank branches closed at 3 or 3.30 pm. If you didn’t get your cash out by closing time on Friday, you had to do without until Monday morning. You could write a cheque, but before cheque guarantee cards were introduced in 1969, many retailers would not accept cheques.

Banks handled payments for larger businesses and richer households. But the millions of transactions between ordinary people and smaller businesses that are the lifeblood of any economy – those were in cash.

But these days, most of those transactions are no longer in cash. They are electronic payments. Wages are no longer paid in cash, but directly into bank accounts. Pensioners no longer have to queue at the Post Office for their pensions: pensions are paid directly into their bank accounts. People no longer pay household bills in cash, but directly from bank accounts with direct debits, online and telephone banking, and debit and credit cards. People buy goods and services using cards and – increasingly – mobile phones: for small transactions, contactless technology makes using cards and phones even easier than cash. Payment can even be made by text message. And the system is fast, too. The UK’s Faster Payments clearing system transfers money from one bank account to another within two hours.

Of course, some people prefer to use cash. But they no longer have to queue up to get their weekend money by 3 pm. With today’s extensive network of ATMs, they can obtain cash at any hour of the day or night. For those still using cheques, new digital technology promises to speed up cheque clearing so that money reaches the recipient within hours instead of days.

Payments have never been so easy or so fast, and cash has never been used so little. But as a result, our dependence on large banks has never been so great. We expect a 24/7, failsafe payments service. If a bank’s payments technology fails, even for an hour or two, its customers can’t pay bills or buy food, wages don’t arrive on time, business-to-business payments fail. Because the system never stops, IT glitches like this are difficult to fix: it can take weeks or months to ensure that payments have reached the right people and account balances are correct.

We’ve heard a lot about how interconnectedness between banks increases the riskiness of the financial system. But banks must be interconnected for our fast, efficient payments network to work. The problem is that if a large bank fails, the entire payments network can seize up, doing untold damage to the economy. This doesn’t just affect electronic payments: even cash can fail, because if ATMs stop working, no-one can obtain cash out of banking hours.

Moving money to a small bank or a credit union, as some have advocated, does not reduce dependence on larger banks. Larger banks clear payments for small ones – for example, Barclays might clear payments for London Credit Union. All moving money does is reduce large banks’ stable funding, which makes it more likely that they will have difficulty finding the money to clear the payments on which we all rely. Without radical reform of the payments network, breaking up the large banks or encouraging people to move to small banks is unwise.

The truth is that we have allowed a crucial public service to become deeply embedded in a system which is by nature risky. The folly of this beggars belief.

Proposals for full reserve banking at least recognise the problem. The payments network cannot be allowed to fail, so let’s prevent banks from taking risks. But risky lending is the business of banks: their job is to provide finance to people and businesses that need money, and that means accepting the risk that some people and businesses will fail to repay. It is inevitable that some banks will manage their risks disastrously badly. They need to be allowed to fail – but if the payments network cannot cope with bank failure, they can never be allowed to fail. This is the “too-big-to-fail” corner that we have boxed ourselves into.

To be sure, we now have a payments system regulator dedicated to ensuring that the system always meets the needs of customers. This is its mandate, according to its website:

• to ensure that payment systems are operated and developed in a way that considers and promotes the interests of all the businesses and consumers that use them
• to promote effective competition in the markets for payment systems and services – between operators, PSPs and infrastructure providers
• to promote the development of and innovation in payment systems, in particular the infrastructure used to operate those systems

There is nothing there about protecting the payments system and its customers from major bank failure. And as this regulator is an arm of the FCA not the PRA, there is no direct connection between regulating the payments system and regulating the banks that are its principal gateway. The payments system regulator may keep the payments systems themselves going, but it cannot address the inherent fragility of a payments system that uses risk-taking banks as gateways.

So how can the payments network be protected from the risky but essential activities of commercial banks? Perhaps commercial banks should be required to ring-fence current accounts and back them with cash and liquid assets. The ring-fencing that will come into force in the UK in 2019 is not fit for purpose, since included within the ring fence are various forms of highly risky lending, such as mortgages. With deposit insurance for static savings, and higher capital requirements for banks, ordinary savers do not need this ring fence. But current account holders can’t wait for deposit insurance to pay out, and locking people out of current accounts because a bank is experiencing IT glitches or temporary liquidity problems is socially and economically destructive. Ring-fencing current accounts and backing them with cash would protect ordinary people and businesses while still allowing banks to do risk lending.

A more radical solution would be a public utility for payments. Currently, all electronic payments are finally settled through the central bank’s real-time gross settlement (RTGS) system (in the UK this is the CHAPS system, in the EU it is Target2, in the US it is Fedwire). Commercial banks control the gateways to this system, because they hold the transaction accounts that are the start point and destination of all payments. But suppose the central bank – which cannot fail – provided transaction accounts for people and businesses, and a digital currency as a primary means of exchange? The gateways would need to be redirected, of course, though this is not an insoluble problem. Perhaps more difficult to solve might be the need for unsecured overdraft facilities (currently, central banks only provide overdrafts if securities are pledged as collateral). And the implications for monetary policy would need to be considered.

There may be other solutions, too. But until we recognise the payments system for the crucial public service that it is, people will continue to propose banking reforms that could do more harm than good.

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The annual Lord Mayor’s Show on November 11^th will instal Charles Bowman as Lord Mayor of London. He officially represents the Worshipful Company of Grocers and he will find a lot on his plate as he starts his 12 months in office.

In everyday life Alderman Bowman is a topline accountant at the multinational firm PWC, and his job as Lord Mayor will be tricky as Britain negotiates its way out of the European Union (EU) – and the City of London finds out if it can sustain its longstanding ambition of turning London into the world’s economic hub.  This goes back to the Bank of England’s lobbying of the Macmillan government in the 1950s to let dollar-denominated (‘eurodollar’) loans be issued in Britain.

One consequence of the globalisation of the City is that international lobbying organisations, or trade associations, are an established part of its ecology.  It hosts several of them, and a large umbrella organisation, the Transatlantic Coalition on Financial Regulation – based at the former Futures and Options Association in Botolph Street – persuaded the EU to push to include finance in the planned TTIP trade agreement with the US.

Meanwhile the City of London Corporation (CLC) has taken on more of the work done by the public sector in promoting financial business.  The Lord Mayor is described first and foremost as ‘an international ambassador’ for the sector, with a status which the CLC claims to be ‘on a par with that of a cabinet minister.’

This article will examine the central role played by the CLC in the curious business of official support for these private-sector lobbying activities – and how it is threatened by Brexit.

The CLC’s task amounts to coordinating many lobbying activities of the bankers and brokers, on behalf of Her Majesty’s Government.  The coordination is active, wide-ranging and well-organised.  After half a century of evolution, it took on its present form linked with the Corporation’s Guildhall under the pre-2010 Labour governments.

The public face of the set-up is TheCityUK, a membership organisation which calls itself ‘the representative body for the UK-based financial and related professional services industry.’ Operating from Finsbury Square, it arranges briefings and round tables with political figures from Britain and abroad, publishes reports on topics ranging from Islamic finance to a ‘general election manifesto’ last May, and will hold a national conference in Manchester on November 28^th.

TheCityUK boasts that it is ‘where senior government ministers, policymakers and key stakeholders from the UK, Europe and the rest of the world come to engage with and address the wider [financial] industry.’  Its 19-member Board is chaired by John McFarlane, Chairman of Barclays Bank, but also includes senior representatives of the CLC and the Greater London Authority.

TheCityUK descends in a direct line from the Committee on Invisible Exports, which the Wilson government set up under the Bank of England’s auspices in 1968.  It took its present form in June 2010 in a joint initiative of Chancellor of the Exchequer Alistair Darling and Sir Winfried Bischoff, a senior banker at Schroders and Citigroup.

In the shadows, the same initiative also created a little publicised but arguably more important sister body, the International Regulatory Strategy Group.  The IRSG’s mandate is explicitly to lobby for ‘an international regulatory framework that will facilitate open, competitive capital markets’, and it reports jointly to the public-sector CLC and the ostensibly private-sector TheCityUK.  It insists on the fact that it is ‘practitioner-led.’

It is tempting to see the IRSG as the engine room of the whole set-up.  Its policy is directed by TheCityUK’s Head of Policy in London, and its facilities by the CLC’s European Regional Manager in London and, critically, the head of the Corporation’s own lobbying office in Brussels.

The ambiguous ‘public or private?’ nature of this operation is seen in the fact that the IRSG’s Board is chaired by Mark Hoban, a Treasury minister in David Cameron’s government who now has an impressive array of City jobs in his bag.  He also sits on TheCityUK’s Board.  The compliment is returned with the presence of Miles Celic, TheCityUK’s Chief Executive, as one of two IRSG co-chairs – the other being Daniel Nussbaum, ​CLC Director of Economic Development.

The IRSG is characterised by international representativeness and a strong ideological thrust.  It works on technical issues such as capital markets, ‘coherence’ between regulatory regimes, corporate taxation and EU proposals for a financial transaction tax (which it opposes, even though the UK’s Stamp Duty on stock market trades is one of the oldest FTTs in existence).

Recently there has been an inevitable focus on Brexit.  In September 2017 the IRSG published a report, ‘A New Basis for Access,’ simultaneously in French, German, Italian, Polish and Spanish as well as English.

TheCityUK and the IRSG have similar structures, with a Board running operations and a large advisory Council directing strategy.  But there are differences.  The IRSG’s Council explicitly ‘seeks to reflect the international, cross-sectoral nature of the City of London’ and at Board level, the IRSG is rigorously international.  Besides the three who chair it, only four of the Board’s 17 members represent British organisations – accountants Deloitte, the London Stock Exchange, Prudential Insurance and Standard Chartered Bank.  Six are from the US, including Citi and JPMorgan banks and Moody’s rating agency, and three from other European countries.  Finally – remarkably – there is the Canadian media conglomerate, Thomson Reuters.

Thus, the strategy of the IRSG, which comes under the wing of what is essentially a jumped up local council, is determined largely by banks and financial firms from other countries.  There are witnesses to this multinational lobbying effort in the form of observers from the British government itself.  They represent the Treasury, the Foreign Office, the Department for Exiting the EU, the BIS Department, the Bank of England and three financial regulatory authorities.

Think about this for a moment.  Whitehall works hand-in-glove with British and foreign private ‘practitioners’ as they work out their research and lobbying plans on new financial regulations, in a body that was set up by a Labour government in the wake of a calamitous failure of the financial system.

It actually fits well with the CLC’s own electoral mandate, in which a small number of residents is overwhelmed by the ‘business vote’ of the City’s commercial residents, such as banks, insurance firms and financial exchanges. Abolished in the rest of the UK in 1969, the number of business votes in the City was greatly increased by the Blair government in 2002.

Under these arcane rules, the likes of Goldman Sachs, the Bank of China and Deutsche Bank have corporate votes in the City’s elections.  Institutionally, the Corporation actually does represent international finance, and not a specifically British interest at all.  For foreign banks and insurance companies to be determinant on the IRSG Council and Board truly reflects the Guildhall’s own ‘democratic’ mandate.

Of the IRSG Council’s 50 members, 21 represent non-UK organisations, 14 of them from the US.  However, only one is from Asia: the Japanese bank, Nomura.  There used to be more.  So is the global role steadfastly built up by the City’s patriarchs already receding?  This is not the only sign, and it may be that, without or without the Brexit vote, the high tide of that role already passed three or four years ago.

Thus, since 2015 officials of the Bank of China and Bank of Tokyo-Mitsubishi UFJ – Japan’s largest bank – have left the IRSG Council, without any Asian bodies replacing them.  And the City’s central role in financial lobbying over TTIP was prised apart when, in June 2016, a new alliance on financial regulations under TTIP was formed: the Transatlantic Financial Regulatory Coherence Coalition.  This one is based less narrowly on banking, capital markets and derivatives trading, and its office is at the European Banking Federation in Brussels.

Even before Brexit, these could be straws in the wind for a wider retreat from the City’s 60-year dream of a dominant global role.  In reality, most of TheCityUK’s and IRSG’s actual work has always been lobbying on regulations in the EU, where their influence is anyway bound to diminish with the loss of membership.  It is still unclear whether the City can even remain Europe’s largest financial centre.  As I finished writing this, a neighbour knocked on my door.  In conversation he told me he is currently helping a major US bank with plans to transfer some of its activities from London to Ireland, against the risk of a ‘hard’ Brexit.

With the UK moving outside what is now the core of the global system – the United States, the European Union and China – it is hard to see how the implicit goal of making global financial regulations converge in a network centred on London can be achieved.  But many opponents of Brexit might heave a big sigh of relief if one consequence is to cut global finance down from the high perch it occupies in British life.

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The basic income movement is growing in the UK, with Labour, the SNP and Green Party all showing significant interest. It has received a lot of discussion, but to date there has been little attention paid to the human rights aspects of it.

Though human rights are not unproblematic, examining basic income through the lens of human rights moves us into discussions about the type of society and economy we want to have, instead of hiding these real questions behind broad economic approaches and traditional cultural values.

The human rights framework can be used for discussing the impacts that basic income policies might have. Instead of simply looking at GDP growth and inflation, we can look at whether it gives more people an adequate standard of living, access to housing and education, and to work of their free choice or acceptance. Additionally, and perhaps more importantly, human rights values can help overcome cultural resistance to money which is not ‘earned’ as such.

Basic income is an idea that is both radical and simple: everyone in a society receives an income sufficient to provide for their basic needs. It is given unconditionally, with no need to qualify for it. This is unlike other welfare payments: Jobseeker’s Allowance requires someone to search for a job, and a pension recipient must be a certain age and have contributed enough over their lifetime. Most basic income proposals are also ‘universal’: for everyone in the society, including those who do not need the money, much like Child Benefit is.

Interestingly, basic income finds support (and opposition) across the breadth of the political spectrum, from communists to free market capitalists to centrist liberals. We can see the increasing popularity of basic income as a response to current circumstances, such as increasing automation and jobs being moved abroad, worsening working conditions, stagnant wage levels, precarious work, and the amount of environmental destruction we require for our current way of living.

Yet it is more than about just economics: it goes to the heart of cultural and political values about how society should be, challenging deeply held cultural notions that money must be earned and the traditional ‘work ethic’ – that hard work is morally valuable. Basic income proposals differ, but they almost all include a positive vision for how society could be. It could be part of a more just economy, enable more people to engage in politics, and give each individual a stable foundation so they need not fear falling into poverty and are better empowered to make choices about what to do with their lives and what work they do take on.

What are human rights?

Human rights are the array of rights which humans should have simply for being human, covering the breadth of our experience such as housing, education and cultural involvement. They are moral claims for things which ought to be achieved, or ‘realised’. Individual humans have these rights, and other actors – typically states – have obligations to help realise them.

They are listed in the Universal Declaration of Human Rights (UDHR), though there are also separate conventions for particularly disadvantaged groups. Despite the initial attempt to make them indivisible, international politics divided human rights into two different sets and two different international conventions. Civil and political rights, such as fair trials, free expression and privacy, have been heavily favoured by liberal democracies. Social and economic rights, such as housing, education, healthcare and food, have been favoured by socialist and communist governments.

The European Convention on Human Rights – incorporated into UK law by the Human Rights Act 1998 – only contains civil and political rights, and this reflects our cultural and political understanding. Though the UK has signed up to the Convention on Economic, Social and Cultural Rights, it does not do much more than submit reports to the international committee. So, although we have laws and provide education, housing and healthcare, these are not protected or seen in the framework of human rights.

How a human rights approach can advance the basic income debate

There are three ways in which a human rights approach helps us to discuss basic income proposals and policies.

The first is that we can see it as realising particular human rights and fulfilling obligations that states have. One is the right to social security (Article 22 UDHR), which a basic income provides. Another is the right to an adequate standard of living (Article 25 UDHR), which a basic income seeks to ensure, though a basic income would not necessarily be adequate. The right to work (Article 23 UDHR), which includes ‘free choice of employment’ and ‘just and favourable conditions’, is also very useful and will be returned to shortly.

However, although a basic income would realise these rights, it is not the only way of doing so. The traditional human rights approach is that people earn money by working. The role of the state is to support and ensure this, by providing a floor of social security and ensuring that working conditions, such as pay and unemployment levels, allow individuals to afford healthcare, education and so on. If work does not provide people with an adequate standard of living, the state must do something about this. So, although basic income is not the only way to realise these rights, it can be part of the argument as to whether states are meeting their obligations and how they ought do so.

The second way in which a human rights approach helps is in framing the discussion about the effects of basic income proposals. Instead of using crude economic measures such as GDP, unemployment and inflation, we can use international human rights standards to measure positive or negative impacts of policies.

Of course, it is not clear what the impacts would be, or whether they would be positive. Basic income is not a magic solution, nor does it exist in the abstract: outcomes also depend on what other policies there are. For example, though it may help people afford rent, basic income alone will not create a fair housing market without challenging free market approaches to housing. The same is true with healthcare, education and other public services, which is why some discussions are more focused on Universal Basic Services instead of income, though the two are not incompatible.

As most human rights are linked to resources, basic income is likely to have generally positive impacts. It could help people spend more time in education, such as working less to do part-time courses. As for the right to health, it may help people to afford healthy food. Less directly, if people choose to do less paid work, they can use this time to exercise, relax more, and partake in cultural activities, or with their children, which would benefit their development and education. Although the most obvious impacts are on social and economic rights which need money (and time), there would also be benefits for civil and political rights. It is difficult for people to engage in broader political issues when they are struggling to earn enough money to survive.

Lastly, human rights are also useful for discussing cultural values, such as the notion of work, the ‘work ethic’ and that people ought not receive money for nothing.

The Right to Work (Article 23 UDHR) is useful for reframing cultural notions of work, which focus on whether workers are working and how much they are contributing to GDP in a capitalist economy. The Right to Work is clear that what is important is not their contribution to the economy via their labour, but what work they do, and whether someone has ‘freely chosen or accepted’ the work. It could be that basic income empowers people to negotiate for better working conditions and supports people to be more creative and retrain, as they are no longer forced to work at risk of becoming homeless or starving. As an example of this, the union Unite passed a motion at its 2016 Policy Conference supporting basic income. It could also be that it subsidises corporate profits and results in lower wages. Either way, the Right to Work is useful for helping frame this discussion.

What counts as work can also be challenged: it is far more than what someone else can derive a profit from. A basic income would help support people to do work which is not economically recognised, such as caring for someone or volunteering, and which contributes to society in a different way. It would also support people to do creative work, which is often quite poorly paid, or to try out new careers or start their own business.

As well as challenging notions of work, a human rights approach can also support arguments about whether a basic income is deserved. It strives towards a society in which the inherent moral worth of all humans is recognised and realised, aiming for every individual to have a life worthy of human dignity. Human rights do not value people by their economic contribution to society via wage labour, instead recognising their existence itself as valuable. Basic income matches these values, giving people more freedom to lead their own lives and supporting people who contribute in ways beyond wage labour, such as caring for others, political engagement, artistic and creative endeavours.

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Greenhouse gas emissions are deeply woven into our economy. We burn fossil fuels to produce energy, we use nitrous oxide to fertilize our fields, our trash generates methane – all of which contribute to climate change. Reducing this dependency will involve shifting a vast array of practices, throughout our economic and personal lives. And yet climate campaigners and lawmakers alike are paying alarmingly little attention to the financial system that makes these unsustainable practices not only possible but profitable.

Addressing climate change is, at its core, an issue of finance: whether one is fighting against entrenched economic interests tied to the status-quo, or pushing for the development and implementation of new technologies, much of the fight against climate change revolves around money. For example, in order to prevent catastrophic climate change the energy sector would have to invest nearly $17 trillion (US) in energy efficiency and low-carbon technologies from 2015 to 2030. Yet much of the world may be unable to access the finance required.

In order to meet these targets, public spending will have to play a critical role. And indeed, some governments are beginning to step up to this challenge. A great example is the German program on renewable energy, which played a key role in making solar and wind competitive. Governments are also working to provide finance through development banks and funds such as the Green Climate Fund. Meanwhile, projects such as the Global Innovation Lab for Climate Finance aim to create an enabling environment for private sector investment.

Yet while these developments may be encouraging, estimates suggest that public sector finance will fall woefully short of the finance flows required to address climate change. Given the glacial speed of public regulatory action and provision of finance, it is imperative that the financial and corporate sectors contribute to the shift towards sustainable development. The potential is enormous: the banking sector manages financial assets of almost $140 trillion; institutional investors, such as pension funds, manage over $100 trillion; and capital markets, including bonds and equities, exceed $170 trillion.

Important shifts have taken place in the financial and corporate sectors – even as the scale remains far too limited. Investors and managers, for example, are beginning to understand the importance of sustainability as a means of ensuring long-term profitability. Private commercial finance for sustainable businesses increased from $22 billion in 2012 to an annual average of $37 billion over 2013 and 2014, reflecting investors’ growing comfort with renewable energy technologies. Green bonds, which are bonds issued for projects with a positive environmental impact, are another good example. In 2016, nearly $100 billion in green bonds were issued, nearly surpassing the total for all previous years combined. 2017 looks set to beat this record. Greenwash remains a problem, as projects strive to claim ‘green’ status for themselves; yet as the market grows, labelling standards have begun to become stricter and more harmonized, helping concentrate attention on those projects with genuine impact.

More broadly, the pressures of a warming world change the risks we all face. Within the financial world, investors are increasingly looking towards innovative forms of finance that recognise the inherent risk posed to everyone by short-termist approaches to business. These new approaches to investment strive to account for global risks such as climate change in how they select and price shares. This is a slow process, but one gaining momentum.

Yet an increase in private-sector momentum is only possible within a broader policy environment defined by strong, long-term public policies that guide investment and provide credibility to climate action. An example here is the EU long-term mitigation goal of “cutting its GHG emissions, by 2050, by 80-95% compared to 1990 levels.”. The commitments made within the Paris Agreement also go in this direction. Yet there’s still further to go.

For one, there is increasing consensus that a strong carbon price is essential. By making polluters pay for the damage they cause, carbon prices can direct investments towards low-carbon technologies and provide for economic efficiency in climate action. They also provide for a level playing field for corporations, allowing them to compete fairly and encouraging broad buy-in. National and sub-national carbon pricing instruments currently cover 15% of global GHG emissions and their use is on the rise. China, for example, is on track to launch the world’s largest emissions trading scheme.

Beyond this, however, we need to address the failures of our current system, including dismantling the over $500 billion in subsidies given to the fossil fuel industry every year, and regulating the financial sector to re-align it with the needs of the societies it is supposed to serve. This includes increasing regulation that ensures prudential investments, more transparency and disclosure, and more liability, among many others. This would help close the climate finance gap; prevent abuses such as those that led to the 2008/2009 global financial crisis; and make the financial system resilient to the threats that climate change is shaping on the horizon.

Given the need for strong policies to guide both the public and private sector, none of this can happen if we, as citizens, simply stand by and let events take their course. Fighting for smarter climate policy can seem an uphill battle – not least since US has recently installed a ‘denier in chief’. Yet even in the US, 68% of the public now supports the view that humans are the primary cause of climate change, and only 9% believe climate change ‘will never happen’. In other words, the potential for popular pressure remains strong. And, encouragingly, there’s plenty we can do as citizens to bring the urgencies of climate and the financial system in line.

For starters we can each put our money where our mouths are and be willing to pay for the real cost of things: this means paying more for electricity, transport, and sustainable produce. As Dr Kim Nicholas explains, citizens are far from powerless in the face of climate change, and can often have significant impact through their choices as consumers. This should be coupled with strong demands to our government representatives to commit to ambitious climate action, put a high price on carbon, and shape regulation to favour prudential investments. Voters will need to push for this at the ballot box, but also make sure they keep the conversation going, holding politicians to account.

Regulators and investors alike must push companies to ensure that they take interest in sustainable business models and practices. Companies do not develop business strategies in a vacuum, but are shaped by their perception of the options available to them, as well as their perception of what shareholders want. And as David Pitt Watson argued earlier in this series, anyone with a pension is an investor. Financial decisions are taken daily in the name of shareholder interests, yet beyond the super-wealthy, very few shareholders bother to voice their interests at all. As Pitt-Watson notes, shareholder engagement is so rare that even just a few letters from ‘ordinary’ shareholders can change fund managers’ perception of their clients’ interests. Climate change, then, calls for us to be both more invested citizens and citizen investors.

The window of opportunity to halt the catastrophic threats of climate change is very small. We are fast exhausting our planet’s carbon budget, and we risk locking-in carbon-intensive investments that will shape our planet years into the future. In this context, it is imperative not only to be aware of our own power as citizens, but also its scope. The world of finance has long been out of focus for climate change campaigners. Now is the time to change that.

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If I were to use my money to invest in part of a company I would be a shareholder. This term does not only apply to large players. As David Pitt Watson has noted,  if you hold a pension, or if you invest your savings in any way, you are a shareholder. This means that a wide swathe of the public are, in fact, shareholders. Being a shareholder of a company also gives you ownership of it to an extent, but with this ownership comes responsibility.

An owner of a company should be able to steer company policy? But what if there are thousands or even millions of owners? How does policy get decided? On a day to day basis, most of this is the job of executives, who are hired and paid for this purpose. But companies ultimately operate by majority vote, at executives and their actions are scrutinized at Annual General Meetings (AGMs). It is in such meetings that board members and company directors – those who set the policy – are appointed. Though the extent of this varies across states, shareholders also possess the power to submit motions of their own, setting out their expectations for corporate strategy in the upcoming year.  Here, shareholders can influence company policy by grouping together to vote in a certain way, putting forward resolutions to be voted on or even just standing up and speaking at these meetings.

Shareholders can also exert influence without even being in the room, by signing up to ‘proxy voting services’, such as ISS and Glass Lewis, which seek to influence companies by gathering large groups of votes, and using them to vote in line with certain principles and goals. Other, more specialised firms such as Hermes EOS, not only vote client’s’ shares, but meet with executives on behalf of their clients as a whole, in order to promote their interests. And in recent years, many firms such as Hermes have been championing sustainability on behalf of clients, insisting that generating long-term value means tackling questions of sustainability head-on.

This is how shareholders can make a difference, so why should they? As members of the public these shareholders have an interest in ensuring their company’s policy is sustainable in the long term. Typically, the interests of an individual with a pension or savings  are very different from those of high-frequency traders. They want assurance that their money will be around for the future, and are more averse to strategies that do not benefit the long-term bottom line. They therefore have an interest in stopping high-risk, short-terminist projects. Projects ranging from the the tar sands, to drilling in the Arctic to explore new oil reserves, which are widely-condemned by environmentalists and financial experts alike, may represent gambits by executives to make a quick buck, over ensuring long-term financial sustainability.

However responsibility can extend beyond ensuring long term investment returns. Natasha Landell-Mills, (Sarasin and Partners, a specialist asset management firm with a commitment to stewardship principles), comments that she personally thinks owners also have a responsibility to monitor their companies, and ought to challenge  behaviour they consider irresponsible or likely to cause harm. This responsibility not only applies to environmental issues, but also social and governance ones (ESG issues). Dr Michael Viehs, (Hermes EOS) argues that the application of ESG issues by shareholders in company policy “ultimately benefits the wider society and economy as a whole”.

In effect, the fact that we are all shareholders gives us a status akin to the voting rights we have as citizens. And when it seems as if major corporations, rather than solely governments, are the key players in so much of today’s globalized world, it’s perhaps time we started taking our position as corporate citizens more seriously.Catherine Howarth of Shareaction, an advocacy group which works to ensure the ethical and financial concerns of shareholders get heard, adds a further requirement to citizenship: “citizenship is a technical category (i.e. some people are formally citizens and some are not), it’s also a mind-set involving a commitment to being engaged and active”. Therefore all shareholders have the potential to be citizens, but not all act as such.

Landell-Mills personally thinks “perhaps the single most important power” shareholders possess is being able to vote directors off a Board. The system of company governance is democratic and can be used by voters providing they do not sell their shares. Such actions can have knock-on effects, as the firing of a director can have a major impact on share price, and is thus something companies often fight hard to avoid. So voting can become both a way of influencing broader policy as well as share price – without even having to sell shares.

Yet aspiring citizen shareholders often find themselves running into obstacles. For some businesses the governance system is not democratic enough for shareholders to have a say in policy. Additionally in certain markets shareholder rights are more limited. In these cases shareholder engagement would not be as effective, because it relies on the governance structure giving shareholders power. For example, in the US, shareholders can’t nominate directors onto boards unless the company explicitly permits it. Meanwhile in many instances shareholder votes are not treated as binding.

Moreover Howarth, Landell-Mills and Viehs all emphasise that dialogue between a company and its shareholders is key. “Shareholder engagement with a tobacco company to encourage the company to become a candyfloss company will fail” writes Howarth, “engagement works when it involves a discussion between shareholders and directors/executives about meaningful choices a company has”.

Overall Viehs personally views engagement as an important tool in the activist’s toolbox, because “constructive shareholder engagement through dialogue is perceived very well by companies”. Again, the reference to dialogue is key. Getting companies to support environmentally friendly policies and practices could be a crucial part of the future transition to a green economy.

The 2015 Paris Climate Agreement represents a significant step on the way to this, because it pushes climate change into corporate agendas. Viehs comments that Paris has made companies realise that there might be “future climate legislation likely to be introduced which might adversely affect the financial situation of companies”. New realities, like the possibility of a carbon tax, or a shift to renewable energy, become a part of how corporations budget and plan for the future.

Landell-Mills similarly thinks the Paris Agreement changes the dialogue surrounding climate risk, as government action looks more likely than ever. Decarbonisation has moved from being “a far-fetched risk”, to “a foreseeable outcome that they must comment on and prepare for”.

Thus, even in the financial world, the Paris Agreement was therefore a game-changer.Take for example the 2016 AGMs of ExxonMobil and Chevron, two of the biggest US oil giants. At both companies, around 40% of shareholders defied the advice of management to back resolutions telling the companies to assess whether or not their business models are in line with the prospect of keeping below a 2-degree temperature rise. “The US system of corporate governance is less shareholder-friendly than in the UK” comments Landell-Mills, “given this context, the very material votes in favour of the shareholder resolutions on climate resilience reporting at Exxon and Chevron were significant victories”. As Viehs noted, even though both votes fell short of a majority, the idea of shareholders taking companies to task over climate is relatively new, and these votes represented  “maybe even the most successful climate change proposals in history”.

On the other hand, Howarth is less optimistic, because votes were not given to some excellent resolutions. Howarth names Blackrock, Vanguard, Fidelity as some of the larger investors, whose vote could have swayed the decision, but did not. She suggests that such large institutional investors therefore need to be targeted with some tough questions about the way they voted.

Viehs is however confident that climate-related proposals will gain even more support in the future, because “shareholders are becoming more aware of environmental issues that companies are exposed to”. Landell-Mills emphasises that these changes take time, but is also hopeful, even suggesting; “perhaps shareholder democracy is beginning to take shape in one of the world’s largest democracies?”

In 2017 shareholders again brought resolutions to Exxon and Chevron, demanding that they account for the impacts of climate change in their business models. This time around, however, they passed with a majority of votes, showing that shareholders are indeed willing to defy corporate boards. Shareholders are waking up to climate change and realising they can use their position to shape the companies that shape our world.

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For as long as we live in a capitalist financial system, someone is going to profit while someone else is going to pay. Is it not better that they profit from financing lung cancer breakthroughs rather than tobacco outfitters; from investing in low carbon engines rather than a 3rd Heathrow runway; from buy up solar power rather than arctic oil reserves? Is it not better that they profit from improving lives rather than destroying them?  

Climate change may ultimately be a crisis of the capitalist system. The naturally omnipotent financial structures that have, without grace, risen to the top of such a system have been fuelled by one source: investment. But as far as the crisis of climate goes, we are in too deep and we have not enough time to shift our political or financial paradigm. If we are to pivot on our path in time to make a real difference, great and global in scale, we must harness the forces that drive our markets today. In this, socially responsible investment practices are a crucial tool in bringing our financial system in line with our own social goals. Together, allocation of capital and changing public attitude could be highly influential in our fight to mitigate climate change.

To set the scene, imagine you are managing money on the stock market. This money is spread across a portfolio of carefully selected assets: listed companies (like Apple or Facebook), bonds, derivatives and private companies or property. Actively making money above and beyond the benchmark (the market average) is no small feat and, aside from creating your own, there are plenty of different strategies to choose from: Active or passive; defensive or aggressive; value or growth. More recently, socially responsible investing, known as SRI, has taken a strong hold. At COP21 auxiliary events, the number of investment firms advocating this strategy, and those encompassed by the term under different names – such as green or sustainable investment – astonished me: socially responsible investment is growing and here to stay^[1].

Broadly speaking, SRI involves selecting assets which take responsibility for financially material factors, such as the social and environmental issues important for tackling key global problems^[2]. The strategy is based on this assumption: companies which currently seek to protect their natural and social resources are more likely to weather tough times and gain competitive advantage in the future^[3]. SRI has evolved out of the concept of an ethical investment fund, which is run with negative screens, automatically excluding certain companies. Ethical investment funds date back to the emergence of the value-laden investment demands from Quakers groups and church officials^[4], who could not condone portfolios of slavery, weaponry, or porn. Modern institutions are similarly not keen to be associated with particular endeavours: For example, educational institutions would be foolish to invest in child labour; health services would be hypocritical to invest in tobacco and it might seem morally wrong for conservation organisations to be invested in oil companies. As the public began to hold various institutions to what they preached, an ethical fund market sprung up in response.

However, problems arise when portfolios are limited by exclusion screens. For one, a single screen for carbon would not address problems of pollution, health or women’s rights. Furthermore, calculating the carbon footprint of a portfolio is complex and expensive in labour (modern standards calculate the total embedded carbon, including the carbon emitted from design, manufacture, use and disposal). Operating with a restricted investment universe can also mean that funds suffer badly when the market drops because it means leaving out many of the largest, most defensive stocks, which pay good dividends even when times are hard – such as British American Tobacco, BP and Shell etc. SRI, which instead picks investments based on positive qualities, is an attempt to take a more robust approach both to ethics and economics, by trying to reconcile the two.

The power of SRI lies in the way it combines disinvestment (divestment) with the next, crucial step: reinvestment. Managers are not sending money directly to companies when they buy up shares (unless it is an initial public offering (IPO)). Rather, they are paying the previous investor who has sold out, or an intermediary who handles such transactions. Importantly, this means that withdrawing money out of a socially or environmentally irresponsible company by selling shares may not damage said company’s finances as there is generally someone less scrupulous ready to buy. This means that managers acting alone, who are unlikely to own large proportions of any one stock, will barely cause a ripple on that stock’s share price.

This question of  divesting and reinvesting in publicly-traded stocks is closely debated. Some research does show that when institutions band together in they can trigger cascading changes in social norms, affect company reputations and challenge their subsequent debt financing^[5], making it more difficult for irresponsible companies to fund new projects. The financial case for such divestment and reinvestment is likely to increase further with green-tech/clean-tech advances^[6], so we should hope to see greater reallocation of capital to SRI-like funds. Less controversial, however, is the idea that investing in privately owned sustainable companies can help to support changemaking entrepreneurs in their pursuit of a better world (and/or riches). Venture capitalists, for example, are considered the “gate keepers” to new business: lending expertise and making high risk investments^[7], with a key role to play in the development of sustainable start-ups.

Whether private or public, socially responsible companies can be selected for SRI portfolios by asking the right questions, before looking thoroughly at the financial returns: How sustainable is the product that the company provides? Are management well incentivised for a long-term outcome? Is the employee turnover low? Is employee diversity high? Do people enjoy their jobs? Are health and safety standards good? Have externalities, such as pollution, been internalised? Would they suffer from future carbon tax legislation? Could their reputation be damaged by poor environmental, social or governance practices? (According to research by Cone Communications^[8], 90% of people surveyed would boycott a company if they learned of irresponsible business practices.) Asking these questions is not only about being morally responsible citizens, rather it can be about doing good business. For example, if a company’s operations rely on labour force based in country with a high HIV rate, investing in HIV awareness education and employee testing facilities could make economic sense. The health of employees is essential to the success of the business: if more workers take sick days, then less work is done and company costs increase. From an investment point of view, offering this type of social service is not so much morally right as it is smart business. Financial performance and strength of balance sheets always remain important metrics but are no longer the first things an analyst looks for. Endorsing SRI is not the end of our plight, but it could certainly help to promote some of our most important ethical and societal goals.

Integrating social and environmental analysis into an investment strategy can help managers reach beyond ‘good’ companies to highlight solution companies, those whose core aim involves making the future safer, healthier and more sustainable. An example would be a battery company, whose product can be incorporated into renewable power sources and electric cars. Not all stocks in a sustainable portfolio must provide a solution to climate change however. Low diversification translates to higher risk, meaning fewer clients are attracted and resulting in smaller shifts in capital (meaning the fund is less influential more likely to fail). Funds can diversify by investing in best-in-class companies as well as “pure” sustainability. For example, a well run environmentally conscious platinum mine could be considered part of our sustainable future because platinum is currently essential for reducing pollution from car engines. Of course, it must be addressed that what is classed as “solution” or “best-in-class” can be subjective, opening the door for ‘greenwashing’ marketing campaigns. Clients should speak to potential fund managers and understand what drives their investments, selecting managers based on value-alignment and transparency.

So how do we ask for change and from who do we ask it? The reality is that when it comes to their own money, many people are likely to choose higher returns over better environmental practices. To shift the investments of these people we need to prove that SRI is equally or more profitable relative to traditional investing, over the long-term. Although there are skeptics and, realistically, failures, the generally consistent answers from research literature suggest there is not a performance penalty for investing sustainably^[9] – Generation, Impax, Jupiter and Alliance Trust Investments are individual success stories. As well as making demands of investors and their money-managers, we also need to demand changes in government policy. The financial sector may be largely private but if it is the broader system we seek to change we should look beyond individual investment houses. Pressure from government agencies is gaining and there is evidence that a confluence between organisational and policy responses is beginning to emerge^[10]. For example, the latest Intergovernmental Panel on Climate Change (IPCC) report contains an entirely novel section on projections and recommendations for Investment and Finance^[11].) Together, these actors must remould the system so it becomes realistic and more profitable for individuals within it to act virtuously.

That same unsavoury feeling you get upon realising you are indirectly supporting the tobacco industry via your pension and inconspicuously advocating for deforestation through your public bank is exactly the feeling that will drive investment decisions over the coming decades. Younger generations are growing up with climate change as a defining issue and there is an increasingly urgent demand for action and value-expression. In North America alone, $30tn of wealth will be transferred from baby boomers to millennials over the next 10 years,^[12] presenting an immense opportunity to redirect and inject capital into a more sustainable financial model. As this generation inherits a rapidly-warming Earth, socially responsible investment has the potential to play a major role in securing our planet’s future.

^[1] For example, the 2015 New York Times “Energy for Tomorrow” International Conference where I worked as a microphone runner.

^[2] N. Bocken, S. Short, P. Rana, S. Evans. A value mapping tool for sustainable business modelling Corp. Gov., 13 (5) (2013), pp. 482–497

^[3] M. Russo The emergence of sustainable industries: building on natural capital Strategy. Manag. J., 24 (2003), pp. 317–331

^[4] Sparkes, R. (2001). Ethical investment: Whose ethics, which investment? Business Ethics: A European Review, 10(3), 194–205.

^[5] Ansar A, Caldecott B, Tilbury J (2013) Stranded Assets and the Fossil Fuel Divestment Campaign: What Does Divestment Mean for the Valuation of Fossil Fuel Assets? Oxford: University of Oxford.

^[6] Linnenluecke, M. K., Meath, C., Rekker, S., Sidhu, B. K., & Smith, T. (2015). Divestment from fossil fuel companies: Confluence between policy and strategic viewpoints. Australian Journal of Management, 40(3), 478–487.

^[7] Bocken, N. M. P. (2015). Sustainable venture capital – catalyst for sustainable start-up success? Journal of Cleaner Production, 108, 647–658. http://doi.org/10.1016/j.jclepro.2015.05.079

^[8]http://www.conecomm.com/research-blog/2015-cone-communications-ebiquity-global-csr-study

^[9] Sparkes, R. (2001). Ethical investment: Whose ethics, which investment? Business Ethics: A European Review, 10(3), 194–205.

^[10] Linnenluecke, M. K., Meath, C., Rekker, S., Sidhu, B. K., & Smith, T. (2015). Divestment from fossil fuel companies: Confluence between policy and strategic viewpoints. Australian Journal of Management, 40(3), 478–487. http://doi.org/10.1177/0312896215569794

^[11] http://www.ipcc.ch/pdf/assessment-report/ar5/wg3/ipcc_wg3_ar5_full.pdf

^[12]https://www.accenture.com/us-en/insight-capitalizing-intergenerational-shift-wealth-capital-markets-summary

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Public debt is bad. We all know it. So we can surely breathe a collective sigh of relief at the news that the UK’s borrowing figures for September 2017 are the lowest for a decade. This is according to the latest numbers published by the Office for National Statistics. Finally, after seven years of spending cuts, wage caps and privatisation, the Conservatives are finally starting to get a handle on all that dangerous public debt.

Let’s ignore the fact that they originally planned to eliminate the deficit entirely by 2015. And let’s ignore the fact that George Osborne quietly dropped his target of achieving a budget surplus by 2020 after the Brexit vote. And let’s definitely forget that the Office for Budget Responsibility has drastically reduced its growth forecasts for the next five years, rendering any reduction in borrowing completely irrelevant.

What’s surely important is that borrowing is coming down. It’s been a long, hard seven years of austerity but it will all be worth it in the end. Because high levels of public debt are bad for the economy, which means getting the debt down is sensible, prudent and necessary.

Except that isn’t quite true.

The publicly entrenched perception of national debt being an essentially bad thing stems from two parallel and flawed beliefs.

The first more forgivable belief is that high levels of public debt impede economic growth. This belief stems from a dangerous cocktail of hasty empirical conclusions and economic zealotry. The fact is that, at worst, the jury is still out on this issue. There is little evidence to show that public debt has any serious impact on growth, and even compelling evidence to suggest that healthy growth can occur at high debt levels. Even just a casual glance at the history of the UK tells us that high public debt doesn’t always stymie growth. The average growth rate across the 1950s was a healthy 3.1% of GDP, despite a colossal post-war public debt averaging 145% of GDP. Whereas much lower public debt in the 1970s preceded an economic crash. This is not to claim any sort of inverse causal relationship but merely to point out that the exact nature of the relationship between public debt and growth is far from established.

The second belief, and far less forgivable, is the fallacy that it was high levels of public debt that actually caused the economic crash of 2007. The dissemination of this myth has caused the Labour party to be cast as careless spendthrifts who ‘got out the credit card’ in order to fund frivolous public services and, in doing so, plunged the country into economic meltdown.

The truth of the matter is that public debt under Labour immediately before the financial crash of 2007 was around 40% of GDP. This yet again serves to illustrate that a low public debt is no guarantee of a strong economy.

This is not to say we shouldn’t be entirely unconcerned with rising debt, however. There is one kind of debt that we should be very concerned with because, when it gets high, it’s usually bad news for the economy. This is private debt.

Earlier this year it was reported that, for the first time, levels of unsecured private debt had hit pre-crash levels. And this should worry us because it was precisely unsecured private debt that caused the economic crash of 2008. In fact, it is such worrying news that Andrew Bailey, head of the Financial Conduct Authority, has spoken of the need to take measures to tackle the issue. What’s more, credit rating agencies, Moody’s and Standard & Poor’s, have both issued a statement warning about the potential dangers of such high levels of private debt, and the Bank of England’s Financial Policy Committee has acknowledged the dangers of growing consumer credit in its September 2017 meeting statement.

So where are the cries of indignity? Where are the heated exhortations to ‘get the private debt down’? Where is the insistence that we must live within our means?

If we are so convinced as a society that public debt, which doesn’t cause economic meltdowns, is bad, then why are we so relaxed about private debt, which does cause economic meltdowns?

It all boils down to one simple thing. It benefits the political and business elites of the UK for the public to have this skewed view of debt. This works in two distinct, yet interdependent ways.

Firstly, If the public have a negative view of public debt, however unjustified, this gives government a pretext to both cut public services, creating more opportunities for private business, and to privatise. At the same time, if the public has a relaxed attitude to private debt, however dangerous that might be, it means that people have something to spend, even in a time of savage wage repression which should rob many consumers of their spending power.

There is in fact a direct causal link between public and private debt. As public spending comes down, as it has done drastically over the past 7 years, then private spending must go up to compensate. In an economy with such a preponderance of low-paying, insecure jobs, this inevitably means people need to borrow more. To give a concrete example, if a person’s wage rise has been capped at 1% for the last seven years, it is entirely likely they will be forced to make up that shortfall by borrowing. This is exactly what’s been happening.

The fact is that the government can borrow much more money, at far cheaper rates of interest, over much longer periods of time, in a much more manageable way than private individuals can. Ironically, the people who are most likely to be forced into borrowing to survive are those who will receive the worst interest rates, and be more likely unable to repay.  This is exactly the phenomenon that debt charity, Step Change, have observed in their mid-year report.

So given this context, the latest public borrowing figures make for pretty grim reading. Essentially we have, as a nation, swapped a load of safe and sustainable public debt for a mountain of dangerous private debt which could, if left unchecked, be the catalyst for the UK’s next economic downturn.

If the Government really wants to ensure the UK economy can grow in a safe and sustainable way, then it needs to tone down its obsession with public-debt, and focus on helping people survive and prosper without having to turn to unstable private borrowing. If the government can’t do this, then no amount of austerity will save the UK economy from another serious crisis.

Connor Devine tweets at @CDivinio. 

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Since the financial crisis of 2008 there have been hundreds of films, documentaries and features on the causes and the possible solutions to the economic malaise that followed. Who is to blame and how did it happen are the questions that have been hotly debated by experts and politicians. The film ‘When Bubbles Burst’, first released under its Norwegian title Når boblene brister in 2012, looks at the fallout from the 2008 crash through the stories of Vik – a small town in Norway that, along with seven other towns in the country, sued the Citigroup banking conglomerate for investment losses, demanding over $200 million in reparations.

The film, aired at this week’s Festival for New Economic Thinking, attempts to link the overarching reasons for systemic market crashes to the intimate tales of a town laid low by reckless speculation and an inherently unstable financial system designed to fail. Through the testimonies of local campaigners, financial experts and academics, we are taken into a network of links and a narrative that show how mortgage lending in the US could impact a tiny town in Scandinavia.

Around 2001 the Vik municipality found a loophole in the Municipality Act, and proceeded to invest borrowed money from Oslo funds and US Citigroup in the stock market. The trick was a law allowing borrowed money to be invested before seeking local or regulatory permission. Despite Vik borrowing 70 million krona, the Norwegian Ministry of Local Government and Regional Development certified the investments because in its view any debt payments would be secured in future income.

Rooting the story in Vik and then branching out to Detroit, the ultimate symbol of American decline, sharpened the focus on the ordinary people affected and the way in which grand technological advances and political decisions impact on our lives. The narrative of the film focuses on three main themes: firstly on the question of debt, second on technological revolution and finally on what needs to happen to the ‘real economy’.

Visitors from Vik to the US are used as useful commentary threading together the two countries and their joint experiences of pain. As viewers, the journey becomes one of learning of the ability of markets to not in fact be free but to be “designed specifically to fail”, as described by economist Erik Reinert. In his words: “If the system you design is destined to fail then there is in effect no risk. For you.” The film dwells on the notion of the separation of risk for investors, managers, elites and ordinary workers, small businesses and homeowners.

Debt may be utterly necessary to the system, and in fact can be good if leveraged in a smart manner. We are taken to ancient civilisations such as Mesopotamia and the Levant where the use of debt was a necessary evil that added value rather than a tool for coercion and short-term gain. Debt jubilees are touted as a solution to financial servitude for the citizen and economic inequality. In short, when debt stifles growth and opportunity for the majority of citizens, it serves no purpose.

Perhaps the most fascinating part of the film is dedicated to the power of technological revolution in financial markets and the modern economy. Bubbles are to be expected, but speculation increases when there is an advance in a new technology. The 2008 crisis is traced back to the 1971 innovation of the microprocessor which kick started a computer revolution in how data was collected, stored and modelled. The market was now truly global, an epic casino which allowed greater scope for leverage. This suggestion flies in the face of the idea that bursting of bubbles or bubbles themselves can be stopped. In fact, the film suggests the only way to do this would be to cease technological advancement and therefore leans closer to Schumpeter’s idea of creative destruction.

What are we left with? The ‘real’ economy according to Nomi Prins, former Goldman Sachs manager, was something “very close to the 1930s”. When the financial economy and the real economy are so decoupled that you realise that lots profit and wealth aren’t real. Her answer? “We need to address the fraud. They got away with it and are still in charge. It was fraud – plain and simple.”

Curiously, given the city’s decades long decline, the film provides a counterpoint of optimism where Detroit is shown to have a possible answer to the crisis. “After every crash there has been a boom but governments have to be bold enough and intelligent enough to create new chances for equity and growth.” Detroit was the site of huge technological growth in the automotive industry following the 1930s due to government action and investment in infrastructure. Petros Christodoulou, Greek economist and Joseph Stiglitz, nobel prize economist, use the FDR years in the 30s as an obvious example of planning and spending which has been overlooked for ideological reasons.

We begin with the economic and end with the political. The political will to imagine a new way of organising labour and capital and a new way to regulate and ensure the real economy is served by technological advancement. The question unanswered by the feature is whether that will exists in a majority of the Western world.

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Two or three times a year, I drive back and forth between London and Valencia – a family responsibility that is no less pleasurable for being tiring.  Whenever possible on these three-day journeys I try to spend at least one night at a remote inn I chanced upon some time ago in rural France. Perched on a hilltop in the mountainous  Auvergne region, the inn offers spectacular views of the landscape, plus hosts who are unusual not just for the warmth of their welcome but also for their 100 per cent organic cuisine and their dedication to environmental conservation.  Minimising waste and non-renewable sources of energy, and maximising the use of local produce are their operational guidelines.

Vegetables come fresh from the garden, meat and cheese from nearby farms, wild mushrooms from adjacent meadows. Breakfast includes home-made yoghurt, and bread baked at dawn by the hostess using wheat from the valley below. The inn is small – a work in progress emerging slowly from what was, a few years ago, a ramshackle assembly of ruined farm buildings. Guests are never more numerous than can fit comfortably round the rustic dining table in the main house, and since the inn lies at the end of a steep, narrow road and requires persistence to find, these often turn out to have an exploratory turn of mind and to be interesting conversationalists – as indeed are the hosts.  I have dined there in the company of university professors, journalists, musicians, architects, archeologists and even a couple of aid workers on leave from French West Africa.

During one of my stopovers there about a year ago, a friend of the proprietors dropped in for an after-dinner drink. He lived some distance away in another part of the Auvergne and was on his way home from a lecture he had delivered to a group of small business owners and members of the public. Aware that the guests round the table would necessarily be from elsewhere, he launched unprompted into a summary of his talk, and of what clearly was also his passion, namely the Doume.  Being the only foreigner present, and seeing the other guests nod sagely on hearing the word, I hesitated to interrupt our lecturer’s flow by asking what the word meant. Context eventually led me to grasp that the Doume is a form of local currency; but because the hour was late and I had to leave at dawn the following day, there was no time to learn more.

On my most recent visit, however, my hosts – who are Doume enthusiasts – were happy to describe what it is and how it works.

The Doume is a medium of exchange for use solely in the Département du Puy-de-Dôme. A Doume Bank established by the local cooperative – the ADM63 (Association pour le Développement de Monnaies Locales dans le  Puy-de-Dôme) – is responsible for issuing notes of various denominations whose value is fixed at parity with the Euro. In order to trade in Doumes, businesses join ADM63 for a nominal fee. They can then purchase Doumes and use them to trade with other businesses and customers. Every Doume issued is backed by a Euro kept in reserve at the “Bank” and businesses can reconvert their Doumes into Euros, although they are encouraged not to do so except in emergencies or if they find themselves with more Doumes than they can use, or they need Euros to pay tax. Consumers can buy Doumes but not reconvert them.

Why would anyone want to deal with a parallel currency, I asked. Because our Doume is only used for trade, came the answer. When you buy from a supermarket or chain store the profits go elsewhere – and maybe even end up in tax havens. In the world of national and international finance, currencies themselves are objects of trade and speculation.  With the Doume, by contrast, there is no leakage: the currency, the trades, and the proceeds remain local. Logically, the benefits both for buyers and sellers are also local, and all that is required to produce them is that the Doume should circulate among businesses and customers.  Its very existence favours local producers and discourages predation by multinationals, thereby reducing shipments from elsewhere and the environmental damage associated with large-scale movements of goods within and between nations. In Puy-de-Dôme, hundreds of businesses are signed up to the Doume. Moreover, it is only one of several dozen similar currencies in other parts of the country.

What about the UK? My well-informed hosts assured me that the UK is definitely in on the act. They mentioned the Totnes Pound, the Brixton Pound, and the Bristol Pound, and told me that in Bristol the mayor receives his entire salary in the local currency. In Totnes citizens have a choice of ways to spend Totnes Pounds: in addition to printed notes, they can pay by text message via an electronic account, or use a custom-designed mobile phone app.

Local currencies of the kind described here are more revolutionary than may first appear, not least because they amount to a rejection of the most fundamental neoliberal principles – the primacy of the market and the monetisation of human values. They subvert a basic tenet of free trade in that they favour local producers not through special discounts or protective tariffs but because they constitute a medium of exchange centred on and exclusive to the locality. Customers can spend the Doumes in their purse solely with signed-up Puy-de-Dôme organisations all of which, without exception, are locally-owned.

Perhaps local currencies represent a step towards the vision suggested by Ernst Schumacher in his groundbreaking but now sadly neglected Small is Beautiful.

“What is the meaning of democracy, freedom, human dignity, standard of living, self-realization, fulfillment?,” Schumacher asked, “Is it a matter of goods, or of people? Of course it is a matter of people. But people can be themselves only in small comprehensible groups.”

Local currencies may be one way of helping to loosen the link that has existed, ever since the industrial revolution, between socio-economic development and environmental degradation, between human welfare and human survival, between a livable planet and a dying one.

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A great deal has been written in recent years on the topic of inequality. The books of Thomas Piketty and the late Tony Atkinson are just two recent examples. It is hard to believe that anyone can be unaware of the issues and the possible explanations of why there has been such a massive shift in income and wealth distribution in both rich and poor countries. And yet it is still possible to be surprised at what is going on at the highest echelons of business. Here is just one example, as reported in the Guardian earlier this month:

Burberry is to hand Christopher Bailey shares worth £10.5m next month when day-to-day management of the luxury goods retailer switches to a newly recruited chief executive. Bailey is to receive 600,000 of the 1m shares he was awarded in 2013, at a time when the company was concerned he might be poached by a rival. Bailey will receive the rest of the 1m shares at a later date and at the current share price of £17.65 the 600,000 that he will receive are worth about £10.5m.

 

The annual report published on Tuesday shows that Bailey was paid £3.5m last year – up from the £1.9m the previous year. While he waived his entitlement to any annual bonus for the year, his total was boosted by a £1.4m payout from a further award of shares in 2014. ….In 2014 the company had endured a bruising annual meeting with its shareholders, who voted against its remuneration report to protest about Bailey’s pay. His pay deals also include a £440,000 allowance to cover clothes and other items.

 

Bailey’s salary will remain at £1.1m when he becomes president next month, following a year in which underlying profits fell by 21%.

Burberry isn’t exactly at the forefront of technical innovation and nor is it a company supplying a product that most of us would consider essential to life and limb. It caters of course to the global rich and its success until recently in expanding sales has depended on precisely the shift in income and wealth that has been measured by Piketty and others. But relative to average wages in the same company and to median household income in the UK, the scale of the payments to Bailey seem unreasonable. This is someone who has presided over a 21% fall in profits, and yet is still rewarded by a huge set of payments. What does this say about corporate governance and any supposed relationship between payment and performance?

It is perhaps unsurprising that in the land of Thatcherism the UK comes out very unfavourably in international comparisons of income and wealth distribution. In the UK the top 10% of households have disposable income 9 times that of the bottom 10%. But the level of inequality is much higher for original pre-tax incomes where the top 10% is 24 times higher than the bottom 10%. It is even worse than this within the top 10% where the level of inequality is greater; the top 1% of households on average had an income of £253,927 and the top 0.1% had an average income of £919,882 in 2012. The UK is the 7th most unequal country in the OECD, and the 4th most unequal country in Europe.

In the case of wealth, inequality is even greater. The richest 10% of households hold 45% of all wealth and the poorest 50% have 8.7%. Within the OECD countries the UK has a gini coefficient for wealth inequality a little higher than the rest of the members [73.2 compared to 72.8].

In an interesting paper in 2012 the Bank of England argues that more or less every citizen gained to some degree from the fact that monetary expansion after the 2008 crisis generated additional demand and growth in GDP of 1.5 to 2.0%. Perhaps, but more importantly quantitative easing (QE) both directly and indirectly increases asset prices, and since ownership of financial assets is skewed most of the capital gain accrues to those with the largest holdings. Thus it is the top 5% of households in the UK hold 40% of financial assets who gained the most.

This is equivalent to the top 5% each receiving £128,000 as a result of QE in the years prior to 2012. Since QE has continued to be central to monetary policy in the UK since then, the richest have continued to be the main beneficiaries. It is reasonable to assume that in the 5 years since the Bank made its estimates that another £130,000 or so has been added to the wealth of each of the top 5%.

It is also worth noting that the UK has had massive property price inflation in part as a result of the liquidity generated by QE. Again, the greatest benefit will have accrued to the richest segment of the population. This gain is an additional transfer to the top 5% since real gains on property were excluded from the Bank’s estimates. The scale of the rise in house prices both has been enormous. Nominal house prices on average increased between 1975 to 2016 by more than 800%, while real house price growth (after inflation is considered) was 333%. The following chart from Nationwide the biggest UK lender for housing finance maps the trend over the whole period since 1975.

What we face in the UK and elsewhere in the EU is a situation of deep and growing income and wealth inequality which in part has its origins in globalised trade but also in trends in technological development that substituted precarious work for previously well paid and secure employment. But we also witness governments both in the UK and across the EU following tax policies that are increasingly regressive in their impact, with greater dependence on indirect taxes and reductions in the degree of tax progressivism in income taxes.

In practice corporate taxes are increasingly easily to avoid, which also raises the returns to owners of capital. Meanwhile, the power of labour organisations has weakened which has enabled capital to grab a larger share of net product and hence a higher share of national income and wealth. To these forces we have also identified the actions of central banks who through their activities have directly and indirectly caused further income and wealth inequality.

Present levels of inequality threaten social, economic and political stability. It is now generally agreed as to what to do, but the problem is that years of increasing inequality have embedded the interests of the rich and powerful such that governments more or less everywhere have been captured and are no longer representative of their populations. But the structural forces at work will make it difficult for governments to continue with present policies, and they will have little option but to change direction. Populism and the rise of extreme parties of the left and right will inevitably lead to change, but why wait for this to happen?

The broad outlines of policy reform are clear:

1. Monetary policy needs to revert to its more traditional role with a much reduced level of dependence on QE. Savers need to be offered higher real rates of interest and credit needs to be brought under more effective control. Banks and other financial intermediaries need to be effectively regulated and their stability should be the focus of the monetary authorities. Where QE is continued it should be used to serve the interests of the country and not the rich few, and this would mean using monetary expansion for financing public investment in a sustainable way – both social and economic investment.
2. Fiscal policy needs to be given a much greater weight and needs to become much more progressive in terms of tax structure. The current regressive nature of the tax system needs to be reversed with much greater reliance on income taxes and much less on indirect taxes. Corporate taxes need to be increased and loopholes closed so that the effective tax rate is moved closer to historical levels. In particular corporate taxes should be based on where revenue is received rather than on profits so as to make it much more difficult for companies to avoid taxation. Wealth taxes need to be made more effective and loopholes closed especially in relation to the passing of wealth between generations which is presently a major avenue for processes of inequality to persist and deepen over time.
3. Political reform is essential so that the role of money and corporate power is removed from the political process. This has become even more critical now that it is evident that social media such as Facebook have been infiltrated by organisations that manipulate data and information in the interests of the rich and powerful. Political systems have become corrupted and urgently need reform.
4. Wages are too low and this threatens economic stability. It is critical that real wages be increased in part through changes in wage policy in respect of public sector employees where there has been wage restraint, and in part through policies to strengthen organisations representing the interests of labour. The insecurity of work especially in the so called ‘gig’ economy needs to be addressed via regulations which require workers to be treated as employees and not as self-employed. The weakening of the bargaining power of unions should be reversed through public policy since this is an effective way to raise wages and reduce the dependence of workers on debt and fiscal transfers from government. The shift in the shares of national income to capital has to be reversed so that employment incomes can be raised and with it increased consumer expenditure. Economic growth nearer to long term trends is essential if employment and income levels are to be restored.

Will the above reforms happen? Time will tell, but the clock is ticking. If structural reforms are not undertaken by government then we will all reap the consequences – and these will not be pleasant.

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World leaders have come out fighting in response to Donald Trump’s decision to pull the United States out of the Paris Climate Change agreement. The threat posed to all of us by climate change and environmental catastrophe requires urgent action – so will Trump’s decision derail the world’s ongoing efforts to keep global warming below 2 degrees this century?

The decision has powerful symbolic impacts. The U.S. is the world’s largest polluter after China as well as a major funder of efforts in developing countries to mitigate and adapt to the catastrophic impact of climate change. A recent estimate put the cost of the investment needed to meet the 2 degree target at $5-6 trillion per annum, or around 1/3^rd of the European Union’s GDP.

All of this paints a bleak picture – with great powers making reckless decisions which could have a devastating impact on our lives. But while Trump’s intransigence might be an obstacle impossible to overcome, are there other levers of power available for us to influence?

We need fresh ideas. We must stop thinking of ‘green’ finance as a separate entity and begin to consider the role of ‘mainstream’ finance and money flows in seriously tackling climate change. Central banks and financial regulators hold considerable power in steering existing financial flows and creating new ones. So what impact is that currently having upon our environment?

Not so green Quantitative Easing

An example is the European Central Bank, which is currently creating €60bn a month in new money under its ‘Quantitative Easing’ program, which is being used to purchase a range of public and commercial assets across Eurozone member states. They have so far bought £82 billion worth of corporate bonds. The Bank of England, meanwhile, completed its £10bn corporate bond programme in May.

Environmental sustainability and climate change are absent from the criteria central banks use to choose the types of corporate bonds to purchase. Rather they are ‘market-neutral’, basing their decisions on much the same criteria as any other large commercial investor: they purchase high quality, ‘investment grade’ assets. But new research by the London School of Economics’ Grantham Institute released last week suggests that when it comes to carbon-intensity, corporate QE purchases are favouring high carbon sectors.

The researchers found that 62% of ECB corporate bond purchases were from manufacturing, electricity and gas production which are responsible for almost 60% of Eurozone area greenhouse gas emissions but only 18% of Gross Value Added (GVA).  Almost 50% of the Bank of England’s purchases were from manufacturing and electricity production, which produces 52% of emissions but contributes just 11.8% GVA (figure 1).

Figure 1: Contribution of ECB corporate sector purchases programme to the economy (GVA) and greenhouse gas emissions (size of circle)

Source: Maitikainen et al, (2017)The Climate impact of quantitative easing, LSE Grantham Institute, page 16

The research found that the most carbon-intensive sector by emissions, utilities, made up the largest share of purchases for both the ECB and the Bank of England. Meanwhile, renewable energy companies are not represented at all in either Banks’ purchases  or the fast growing ‘Green Bonds’ Market. This is despite the existence of the British Green Investment Bank, recently privatised, and the European Investment Bank which has a strong focus on green investment. None of these types of asset have a sufficient credit rating to be eligible for central bank purchases.

Similar to the symbolic impact of the decision of the American President, a central bank has huge ‘signalling’ power because of its unlimited ability to create new money. When Mario Draghi, the ECB’s president, announced that he would do ‘whatever it takes’ to prevent any Eurozone country suffering a banking crisis, speculative attacks against weaker Eurozone finally stopped.  By supporting big utility companies, central banks may be unwittingly supporting a ‘carbon bubble’ in sectors that otherwise might have seen faster price falls.

Unlike Trump, a number of central banks clearly recognise the risks to financial stability posed by climate change, as Mark Carney’s “Tragedy of the Horizon” speech made clear.

This provides a glimmer of optimism for change. So far central banks’ focus has been confined to encouraging greater ‘disclosure’ by financial market participants in the hope that better information will lead to a natural shift away from carbon sectors, rather than central banks examining their own market activities.

But central banks must go further. Institutional investors are already accounting for environmental and social governance criteria in to their investment decisions. With the world rocked by Trump’s decisions, it is more urgent than ever for us to call upon central banks to do the same and take a step towards mainstreaming ‘green’ finance – for the sake of all of our futures.

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Few aspects of our economy are as poorly understood among politicians and the general public as our monetary system. This becomes particularly obvious – and dangerous – during general election campaigns.

Last night Theresa May responded to a nurse’s concerns over pay in the NHS by saying “there is no magic money tree” to provide “everything that people want”. Other Conservative politicians have used the same line to attack Labour’s plans to increase public spending.

It’s an old trope. The argument goes like this: the UK has lived beyond its means for too long. The national debt now stands at an eye watering £1.7 trillion, meaning that we have saddled future generations with unsustainable debt and interest payments. We simply can’t go on spending money that we don’t have. Money doesn’t grow on trees – duh!

The only responsible course of action, the story goes, is to rein in spending and make “difficult choices”. Free school meals? Not anymore. Those new homes that we were promised? Forget about them. Investing in the technologies of the future? Don’t be so irresponsible. Upgrading creaking infrastructure? Come off it.

This narrative is incredibly powerful, as it chimes with peoples’ experience of managing a household budget. But in the context of a national government, it is almost entirely wrong.

It is true that the national debt stands at £1.7 trillion, or around 87% of GDP. But this is not particularly high by historical standards – after the Second World War the national debt stood at 243%. Imagine if Clement Attlee had listened to those who insisted that this meant Britain had to cut back public services. There would be no NHS, and no welfare state. Britain would be a very different place.

But despite its ominous reputation, the national debt is not all that it seems. The national debt is simply the sum total of all the government’s IOUs – the promises it has made to pay money back in future, plus an agreed amount of interest. Unlike a household, the UK government has its own central bank and its own sovereign currency. This means that the government borrows and spends in a currency that it controls. Here’s where things get interesting.

Since 2009 the Bank of England has purchased £453 billion of government debt from the private sector through a process called ‘quantitative easing’ (QE). Put simply, QE is the technical name for what happens when a central bank creates new electronic money and uses it to purchase assets from financial institutions.

Yes, that’s right – newly created money. Alas, the magic money tree does exist!

As a result, over a quarter of the total national debt is now owed to the Bank of England. But hold on, who owns the Bank of England? Well, the UK government does.

To put it another way, the UK government owes £453 billion to itself. This raises the obvious question of whether it really exists at all. As Jim Leaviss, a bond investor for M&G Investments recently remarked to the Financial Times: “Is there any difference in it being in a musty old drawer in the Bank of England, or saying it doesn’t really exist?”

Confused? Bear with me – things get a little more confusing yet. When a government borrows money it has to repay the principal amount that it borrowed plus interest. In the UK, around £50 billion of the annual government budget currently goes towards interest payments. Because of QE, the government has to pay interest to the Bank of England on the £453 billion of government bonds that it holds.

But in late 2012 George Osborne announced that the interest payments that the Bank of England receives from the government will be remitted back to HM Treasury to help pay off the national debt. Since then the Bank of England has transferred £62 billion – money that it received as interest on bonds purchased with newly created money – back to the government. So thanks to QE, the government isn’t paying any interest at all on over a quarter of the national debt. Talk about funny money!

The result is that today the government spends less on interest payments than at any point in history. The national debt has never been so affordable.

You may have noticed that issues of “affordability” never arise when the proposed spending relates to activities like going to war or bailing out the banks. That’s because for a country like the UK which has its own central bank and borrows in its own currency, financing government spending is never a problem. The “magic money tree” attack is simply a convenient way to mask an ideological crusade to shrink the state.

This does not mean that governments can spend without limit, or that governments should spend money unwisely. Government spending has consequences for inflation, employment, capital formation and many other things. Sustained over-spending can have serious consequences.

But right now the UK economy is crying out for public investment. From addressing climate and demographic change, to tackling inequality and the housing crisis, the UK’s long-term prosperity depends on having a government that is willing to direct investment into the areas of the economy most in need.

Don’t let politicians tell you otherwise.

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The latest spike in the price of bitcoin has all the hallmarks of investor mania.

Kristoffer Koch is the hapless hero in the cryptocurrency version of the classic get rich quick fable. He bought some bitcoin in 2009 for $26.60 when researching an academic paper on encryption. Bitcoin fans know what follows.

Kristoffer noticed Bitcoin was becoming something of a sensation in the media. After a few nervous attempts he remembered his password and discovered he had more than 5,000 bitcoin hidden away. The Guardian reported in October 2013 that this was worth a staggering $886,000.

This treasure trove will have continued to appreciate at quite astonishing levels since then. On January 1 this year Bitcoin passed the psychologically significant $1,000 price – meaning Kristoffer would be celebrating the new year with $5m in the bank. And since then the value has more than doubled. He can sell 5,000 Bitcoin right now for $11,973,450.

‘Bitcoin is a classic mania’

Criminals selling drugs on the darknet will see the currency delivering the same kinds of profits today as the sale of cocaine. But will it deliver the same rush, and the same addiction – and will it end with cardiac arrest?

There is no doubt that bitcoin is right now exhibiting all the signs of being a bubble. Indeed, this appears to be part of the attraction. Joshua Rosenblatt, a US based lawyer and bitcoin investor, said: “The returns have been unreal and there’s an aspect of not wanting to miss out on a bubble.”

Adam Button, a currency analyst with ForexLive.com, is clear. “Bitcoin is a classic mania. There is no fundamental underpinning for it, other than it’s a compelling technological story. But the only people using bitcoin are nerds and criminals, and far more the second category than the first category.”

The south sea bubble

Charles Haytar, the CEO of market analysis platform CryptoCompare, agrees. “Lots of inexperienced investors are surging into the market, and it’s causing a bit of a bubble” he said, before making a comparison to the South Sea Company.

Investment bubbles are indeed as old as capitalism itself. They have been a recognised menace since the Dutch Tulip Bubble ruined the foolhardy of Holland in 1637. The price of a tulip grew 20-fold and eclipsed the price of a grand manor house before suddenly collapsing and losing 99 percent of its value.

Then followed the South Sea Bubble when a single firm was granted a monopoly in trade with South America by the British state. Shares in the South Sea Company lept from £128 in January 1720 to £1050 by the following June, before suddenly collapsing and causing an economic crisis.

The value of an ounce of gold

In living memory we have also experienced the dotcom bubble. The NASAQ Composite rocketed from 500 in early 1990 to 5,000 in March 2000. And then the index crashed in October 2002, causing a recession. And then of course the 2007 collapse of the housing bubble.

The question for investors, large and small, is, where are we in the Bitcoin bubble cycle? Can money still be made? The question for the rest of us is, how important is bitcoin and how might all this affect us?

The growth of Bitcoin in the last few months is phenomenal. In March, the price of a single coin exceeded the value of an ounce of gold, according to the BBC. Since then it has nearly doubled.

Inbound institutional interest

Can this growth be sustained? There are some arguments being made that it can. Bitcoin, it is suggested, is only now coming of age. Get in while you can.

Adam White, vice-president of GDAX, believes the latest spike is because institutional investors are increasingly involved because trade is about to get a lot easier. The hike is “really correlated very tightly with a lot of new inbound institutional interest.”

There has been a rush of investment from Japan following the announcement by the government that the currency was now a legal payment method. Haytar notes that the “Japanese have given bitcoin the green light as a currency and are looking to increase the rigour that their exchanges are subject to.” Ulmart, the largest online store in Russia, will also begin accepting Bitcoin.

Our industry is up for disruption

Even the Financial Times is reporting on adopters of the Bitcoin craze. The paper reported this week that Abigail Johnson, the chief executive of Fidelity, a 71-year-old firm holding $2.2tn in managed assets, was accepting Bitcoin in its canteen. “I am in a traditional financial services business, but” – she said – “the evolution of technology is setting our industry up for disruption.”

Further, it seems Bitcoin may be about to solve a problem which is slowly leading to a potential crisis. 56 firms from 21 different countries have reached an agreement on how they will use the Bitcoin blockchain in future. This is apparently hugely significant.

These factors suggest that the Bitcoin journey is only at the beginning, that we are all early adopters and pioneers and like Kristoffer we can throw a disposable amount of cash and then in a few years buy a luxury home in the South of France and a yacht.

Collapsing all the way to zero

But. Abigail is elsewhere reported setting out the problems with Bitcoin. It has some technical problems – ledgers can and have been hacked. It could be made illegal, rival currencies are illegal in most countries. No overall authority is in control. And it’s not as useful as it might seem. “We need to come up with use cases for this technology,” she says.

The main problem, clearly, is the price can drop. And it does. As CBS Money Watch reported: “The bitcoin market crashed three times between 2011 and 2014, plunging more than 50 percent each time.” In January, after passing the $1,000 line it almost immediately fell by $200.

There are other very serious reasons to be concerned. Firstly, there is nothing to prevent the value of Bitcoin collapsing all the way to zero. There is no central bank ready to pump billions buying up currency when the market turns, as the Bank of England has done on many occasions to prop up the pound.

A simple transfer of wealth

There is no regulation of the currency, no rules. Added to this, it is possible to trade the currency with almost total anonymity. Nobody knows who owns how much.

This may be fine for the time being. But the introduction of larger investors changes everything: someone could short Bitcoin and then sell enough to cause a drop in price. What if a major investor like George Soros –  “the man who broke the Bank of England” – went to war with bitcoin?

The other issue is bitcoin does not and cannot create value: so value must be coming from somewhere else. In effect, every time the price of bitcoin rises the worth of all the currencies being sold falls. Your pound is worth ever so slightly less. The early investors have make their fortunes, but this is ultimately a simple transfer of wealth from everyone else.

Will bitcoin be Myspace?

Does this matter? The current spike means that the digital currencies combined are now worth a total of $79 billion. Bitcoin is worth $35 billion – reaching the same market capitalisation of Ford, at $45 billion, and Tesla, at $50 billion. A drop in the ocean in terms of currency. Where will it be in a decade’s time?

And then there is the rise of rival currencies. The rise in price suggests there is more demand for bitcoin than there is supply – the magic of Bitcoin is the level of supply is more or less known (something that historically proved not to be the case with gold). But other companies can make the same gold, and that is an unknown.

So how big is the cryptocurrency market, and will this market be saturated by other newer, better versions? Rival currency Ethereum has now reached $17 billion and Ripple has surged to $13 billion in recent weeks. Will Bitcoin be the MySpace of digital money, with its value collapsing when a Facebook finally arrives.

These blistering surges

Wolf Richter, an analyst, raises serious concerns about new versions of bitcoin, rings the alarm bell. He said: “After these blistering surges of thousands of percentage points in the shortest time, no one is even trying to pretend that these are usable currencies.”

And when the price does fall, who are you going to sell to? It is likely that the fact bitcoin is used as a currency to buy drugs and illegal services on the darknet has provided something of a buffer. If you fear a drop in value, you can always get onto the latest version of Silk Road and “liquify your assets”. But if the price collapses by half in a day, will dealers still deal?

These are all factors that suggest that Bitcoin is a very risky investment. But the most significant indicator is simply the rise in price itself. This is mania pure and simple.

The Dotcom bubble as appetizer

Haytar is very clear: “I would not advise anyone to buy right now. I’m worried that the lack of rationality at this point might hurt the market.” Richter goes even further. He claims that the coming crash “will make the dotcom bubble look like an appetizer.”

So where does this leave us? I want to end with our old friend Kristoffer. He cashed out most of his bitcoin to put a deposit down on a flat. Clearly the sensible move. So, is he one of the luckiest people alive, landing almost a million dollars in free cash? Or is he the biggest loser, staring at the loss of a potential $10m jackpot?

It’s a modern fable. And there is a moral. The problem with investment, as with all forms of gambling, is unless you know exactly when to jump on and when to jump off it always feels like you have lost out to someone else.

The post BitMania: why cryptocurrencies are having a bubble. appeared first on New thinking for the British economy.

The economist Steve Keen was one of the few to predict the 2007/8 collapse. We interviewed him about how to avoid the next one.

The post Podcast: Steve Keen’s manifesto appeared first on New thinking for the British economy.

How has divestment emerged as the leading response to the financial dimension of climate change, and why is there a need for a more critical and varied response?

Climate change campaigners continue to have a monumental task ahead of them. The threats posed by climate change are wide ranging and diverse, and the behaviours that continue to drive it are complex and thorny. In the face of such a problem, campaigners have to become polymaths, thinking simultaneously about education and policy change, about financial reform and about how we can change our daily habits. Yet when it comes to thinking about the financial dimensions of climate change, one approach has largely dominated amongst activists – that of divestment.

Fossil fuel divestment makes a simple demand – that shareholders sell all their shares in any fossil-fuel related industry. Led by charismatic environmentalists like Bill McKibben and Naomi Klein, a global campaign for divestment has rocketed to prominence since it first emerged in American university campuses in 2011. Indeed, it remains particularly popular within universities, although other major financial players, from the Gates Foundation to large pension funds, have been met with demands to divest. Prominent global players, including the Guardian Media Group and the Rockefeller Fund, have committed to divestment. Fossil Free, a project of 350.org, lists on their website a total of 701 institutions committed to divesting, representing over 5.2 trillion in assets (though, with some sleight of hand, this number represents their total holdings, not the fossil-fuel based shares they’ve pledged to divest).

There are a few reasons for the popularity of divestment as a tactic. For one, it’s eminently achievable – fossil fuels only represent a small proportion of any portfolio, and many investors are already moving away from the highest-carbon investments, simply because these have ceased to make financial sense. Divestment is also a clear, simple ask, with a compelling narrative. It’s got good guys, bad guys, and a clear way to fight back, all of which makes for good headlines and an easy, intuitive appeal. It also appeals to our sense of moral righteousness. If there are people doing bad things – recklessly trashing the climate in the name of profit – we ought to condemn and distance ourselves from them in no uncertain terms. Finally, given the range of actions one can champion with regards to climate, divestment is relatively easy. It’s a lot simpler to campaign for your institution’s fund managers to shift their portfolio than it is to go vegan, stop flying, or pursue engagement strategies.

But all of this begs a bigger question: does divestment work? Here things are less clear. For one, divestment involves selling shares at a discount, in order to unload them. This almost inevitably means they’ll be snapped up by someone else, and that the new owner is unlikely to share the same scruples over investing in a fossil fuel company.

This becomes a question of balance: on the one hand, divestment can be used to delegitimize those seen as propagating the climate crisis, by generating negative press and challenging their social legitimacy to operate. On the other hand, divesting is unlikely to harm these companies’ bottom lines, and by giving up one’s position as a shareholder, one loses the ability to claim that the company ought to work for you. Simply put, divestment can generate a lot of attention in the short-term, but it may mean giving up the sort of long term influence in corporate governance granted to shareholders.

The larger problem, however, may be in defining what comes after divestment. Prominent pro-divestment groups, such as 350.org and People and Planet, have only recently begun to give considered thought as to where to sustainably re-invest freed up funds. At present only a few basic resources on re-investment exist, as against the reams of material on how to run a divestment campaign.

Looking at things in terms of carbon, this may be the wrong way around. Because divested shares are likely to be snapped up quickly, and because there is only a loose relationship between a firm’s share price and their ability to raise the capital they need to operate (most of which comes from banks) divestment is unlikely to cut emissions by driving fossil fuel firms out of business. Whether such creates sufficient stigma and pressure to lead to strong regulation is a different question. But meanwhile it’s clear that we need to move a lot of money into sustainable solutions, and fast. The IEA, for instance, estimates that we need to put $44 trillion into renewable energy technology, and an additional $23 trillion into energy efficiency to have any hope at a two-degree warming limit. This suggests that pulling money from fossil-fuel companies may do less good in fighting climate change than simply funding the competition, which is an act that doesn’t necessarily require divestment to pursue.

Divestment and sustainable re-investment aren’t necessarily opposed. But there is also a prominent tendency amongst divestment campaigns to pursue divisive campaigns. Campaigners have referred not only to fossil fuel companies, but anyone who invests in them as ‘morally bankrupt’, and students have taken universities to court over such claims. Institutions such as universities, charities and pension funds are hardly paragons of greed, and painting a picture of black and white morality may do more harm than good in alienating such potential allies who may have the potential to support other solutions. This simplistic narrative is great for the peace of mind for the campaigners, and for the worldwide unity of the divestment movement. But it can also poison the debate, ultimately resulting in a toxic stalemate, in which institutions refuse to divest, and campaigners refuse to admit ‘defeat’.

Finally, pursuit of divestment as a sole objective can lead to an unhealthy attitude towards the roots of the problem. The ‘social mandate’ for fossil fuel companies does not come only from the shares that we hold in them, but from our consumption of fossil fuels. It is unclear how far divestment should reach – how can it be wrong to invest in Shell, but permissible to invest in a car manufacturer, producing cars that run on petrol? As long as we continue to consume fossil fuels, divestment is largely a case of Pontius Pilate washing his hands. Meanwhile, other actions such as switching electricity provider may have a more direct impact on one’s carbon footprint, but lack the symbolic punch of divestment.

We shouldn’t abandon divestment – it can be appropriate in some circumstances. But the singular focus on divestment that characterises most climate finance activism at the moment is unhealthy, simplistic, and counterproductive. Climate change is a complex problem, and it’s unlikely to warrant a simple solution. With a range of complementary alternatives out there, it’s time that we opened up the debate.

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Is it possible for citizens to rein in the financial system and demand that it works in their interests?

The finance industry is critical for our future. Without an effective system which can collect our savings, and invest them in sustainable projects, there is little hope we can address the economic, social and environmental challenges of the twenty first century.

Yet the forces of finance are often considered the enemies of sustainable development. Indeed many campaigners might look at the activity of financial markets in terms of the irresponsible behavior of companies which it sanctions and encourages, and conclude that, if we are to create a sustainable responsible economy, financial institutions need to be opposed. Sometimes they may be right in that contention.

But here is an extraordinary event that speaks to another perspective. In the run up to the Paris Climate Conference delegates received a petition from the pension funds and fund managers of the world. There were 348 of them and they represented $24 trillion in capital. That is about 25% of the entire investment of the world. They were calling for a tough line to be taken to ensure a sustainable planet; that carbon should be taxed, and subsidies eliminated. In other words the finance industry, often seen as the bogeymen of progress, was more radical in its demands than were the policy makers.

So how come?

The most immediate reason was that the customers of our financial institutions had asked them to take action. They had lobbied for change, and, within those institutions were staff with the skill and the influence to take a more progressive stance. Indeed one of the remarkable changes of the last generation in finance has been the development of responsible investment, such that now, through the Principles for Responsible Investment (PRI), $50 trillion of investors have now made at least some commitment to responsible investment practice.

But these developments are not strange aberrations to the laws of economics. They are not a sign that capitalism has, out of thin air, developed a conscience. Rather they are a sign that the institutions of invested capital, just like the institutions of democratic politics, should reflect the needs of the societies they serve. But, just like political structures, they will not do so unless they asked to do so.

Here is the perspective that many miss. Capital in the early twenty first century is not owned by a few tycoons. Most of the shares of most of the companies on the stock exchange belong to pension and investment funds. Typically those funds represent the savings of millions of ordinary workers, who have set aside their capital in order to provide an income in retirement. It is they, or put another way, it is we who are the new capitalists. The biggest pension fund in Europe represents the public servants of Holland, in the UK it is telecom workers, in the US it is university teachers and the public servants of California. The largest block of capital in Norway is its sovereign wealth fund; there to benefit all the people of that nation. It is these millions of people whose capital is represented on the stock exchange. They are the people for whom every CEO insists they are “creating shareholder value”. Of course such savers need the companies they invest in to be profitable; no profit, no pension. But it makes no sense to generate profit without regard to environmental or social consequences. Savers won’t enjoy a pleasant retirement in a world whose climate is out of control. So if financial systems were working properly, responsible investment should be the norm and the petition to the climate negotiators the rule, not the exception.

But this is only going to happen, if citizens-savers ask that it happens. All of which should be familiar territory to those who subscribe to Open Democracy. We all support democracy and human rights; but we also know that these will only be delivered if we demand them. Indeed it is that combination of open institutions and active engagement which creates a civil society.

As in politics, so in economics. Every company gives some sort of report on its activities, and every board member stands for some sort of election. But how often do the share owners, (that is you, me and our families) engage in that process? If we did, the prize would be huge; a civil economy, reflecting the same sort of checks and balance as civil society.

Here is a story which illustrates how big the prize might be; but also how far we have to go. It is about a shareholder campaign, run by a remarkable NGO called Share Action. Its aim was to encourage the pension-funds which owned a significant proportion of a large pharma company, to tell that company to desist from suing developing country governments. By suing those countries the company risked undermining the global agreement which gave access to medicines to poor people in the developing world—an agreement which has saved countless lives. I met a fund manager afterwards who had been lobbied. “Wow” he told me “that was a successful campaign. I got more letters, calls and emails on that issue than I have had on everything else for the past three years”. “And how many emails did you get”, I enquired. “Six” he replied. Six emails changed the world.

The tragedy is how little activity takes place. I recently visited a world leading university that is committed by its statutes to promoting research. Within its endowment is one major research company. The company’s executive pay system penalizes the CEO for investing in research, but not for failed acquisitions—that is against the very ethos of the university. Yet the shares of their endowment will have voted in favour of that remuneration package, because no one will have brought it to their attention.

The finance industry is largely indifferent to the stewardship of the companies it owns on our behalf – and this is a huge gap. There is, for example, one US investment fund which spends over $130 million in marketing how responsive it is to look after savers’ money; yet it employs only one person to vote the shares of the 10,000 companies it owns on their behalf.

But this indifference is also a huge opportunity. In the past, the finance industry did not serve us well. This is apparent in its poor delivery of the vital services it should be providing to us.

But this problem can be solved. “The price of liberty”, as Thomas Jefferson apocryphally remarked, “is eternal vigilance”. The same price needs to be paid for a finance industry which delivers responsible investment, and responsible services.

David Pitt-Watson explores these issues further in a book entitled What They Do With Your Money, co-authored with Stephen David of Harvard and Jon Lukomnik of the IRRC Institute

The post What good is finance? appeared first on New thinking for the British economy.

Of all the charts I produced for my new book Can we avoid another financial crisis? (Keen 2017), the one that surprised me the most was the one showing British private sector debt relative to GDP.

The American data showed a perennial tendency for private debt to grow faster than GDP, followed by financial crises in which debt was written off, only for the process to repeat itself later on. Figure 1 shows the level of private debt as a percentage of GDP in red, and credit – which is the annual change in debt—in blue. There were regular occurrences of negative credit, and therefore a falling ratio of debt to GDP, but the apparently inexorable trend in the USA was for debt to rise relative to GDP until a serious crash occurred.

I expected a similar pattern for the UK. Instead, I saw the pattern in Figure 2. There was no trend in UK private debt to GDP until shortly after the election of Margaret Thatcher. Then, under both her rule and Tony Blair’s, the private debt to GDP ratio more than trebled in less than 30 years.

Figure 2: Private debt and credit in the UK since 1880

Private debt never exceeded 72% of GDP in the century from 1880 (when the Bank of England’s time series begins) till 1980, and its average value was 57% of GDP. By 2010, when it peaked, private debt had risen from under 60% of GDP to almost 200%. If any chart lets us date when Britain’s economy started to become seriously unbalanced, this is it. The decline in manufacturing had commenced much earlier, but the unconstrained ascendance of finance began in 1981. This was the date on which Britain started to become a fully owned subsidiary of the City of London.

This growth in debt gave The City immense power over the rest of the country, in a Faustian bargain that delivered ever growing demand from credit (which is equal in magnitude to the annual increase in private debt) in return for an ever-growing claim by The City on the assets and incomes of the rest of the country.

For a while, this bargain felt win-win for both sides: as the Bank of England recently acknowledged, bank lending creates money at the same time as it creates debt (McLeay, Radia et al. 2014). This money is then spent, either to buy assets, or goods and services. It therefore adds to total demand, and to incomes and capital gains. So, as banks created “money from nothing”, and the UK private sector spent that money that it got for doing nothing, prosperity seemed to abound. The rising credit-based demand substituted for the decline in demand from actually producing goods and services, and the additional financial claims against the UK’s physical resources grew from a relatively low level. The decline in manufacturing employment was offset by a rise in employment in finance, where the main output was not goods but credit-based money and its Siamese twin, debt. While the debt continued to grow, it boosted both economic activity (see Figure 3) and asset prices (see Figure 4).

Figure 3: As private debt grew, employment in Britain became more dependent on credit

But you can’t have very high levels of credit-based demand without the corollary of an ever-increasing level of debt relative to income. More and more of income is required to service this debt, cutting into spending on goods and services. The turnover of existing money slows down, reducing aggregate demand from actual work, while increasing the dependence on credit.

This dependence is all the more dangerous when that money is used not to finance consumption or investment (both of which at least to some extent generate a greater capacity to service debt by increasing demand, and, in the case of investment, also increasing productive capacity) but to finance speculation on asset prices. That, overwhelmingly, is the use to which most of this additional money has been put. This can lead to gains by individual borrowers if asset prices rise sufficiently to mean they can sell their debt-purchased assets for a profit. But it doesn’t increase the productive capacity of the economy one iota: a more expensive house doesn’t produce more intelligent children, and a higher share price doesn’t boost a company’s productivity (though it can indirectly boost its capacity to raise funds for investment).

Debt-financed asset purchases are thus fundamentally a Ponzi activity: though initially the income stream from a debt-financed speculative purchase may exceed the debt-service costs, the increase in debt isn’t matched by any increase in productive capacity. The trend, as debt to GDP rises, is for the debt servicing costs to overtake the income earning capacity of the asset, so that ultimately the only means of profit for the borrower is to sell the asset on a rising market. Between sales, the borrower is losing money, as the cash flow from the asset is less than the servicing costs on the debt that was used to finance it.

There are not one but two Faustian catches to this deal with the devil of debt. The trickier catch is that the rise in asset prices that sucks people into Ponzi borrowing in the first place is actually driven by the borrowing itself. In the housing market, new mortgage debt is by far the major source of monetary demand for housing, so that there is a link between the new mortgage debt and the level of house prices. This leads to a causal link between the change in new mortgages and the change in house prices (see Figure 4). So it’s not the level of mortgage debt that affects house prices, nor even its rate of change (which is equivalent to net new mortgages), but the rate at which that rate of change is changing: its rate of acceleration.

Even though we experience it all the time while driving, riding in trains, or flying, acceleration is a tricky thing for mere mortals to comprehend. It’s quite possible for acceleration to be falling while velocity is still rising, and for acceleration to be rising while velocity is falling (see Figure 4 for an illustration).

Figure 4: Relationships between level of debt, credit & change of credit

The same can and does happen with mortgage debt: it can decelerate while the change in mortgage debt is still rising, and it can accelerate while the change in mortgage debt is falling.

This trick starts the house price/debt spiral: a boom can commence even when mortgage debt is falling relative to GDP, because it is falling more slowly and therefore accelerating. But it then traps us at the other end, since mortgage debt can decelerate even though it is still rising.

Figure 5: The major determinant of changes in house prices is the change in mortgage credit (Correlation 0.8)

Confused? That’s the point. This mechanism is so confusing that it’s easier for policy makers to not even think about it, and blame rising house prices on tight supply alone. But in fact, it’s rising mortgage credit (which is accelerating mortgage debt) that drives prices, as Figure 5 illustrates using US data. The deceleration of mortgage debt also necessarily precedes the decline in credit, crashing asset markets before the economy itself tanks.

Figure 6: Asset markets crash before the economy does because debt acceleration declines before credit does

So why can’t debt keep accelerating forever, and keep the house price bubble and the economy going? This is where Faust’s second catch comes in: ultimately, there is a limit to just how much debt individuals and corporations can take on – even with low interest rates. For most economies, apart from tiny and tax-dodge-dependent states like Luxembourg (population 300,000), Ireland (5 million) and Hong Kong (7 million), that limit appears to be about 2.5 times GDP – see Figure 6. Japan peaked at 220% in 1993 and has since fallen to 150%, Spain hit 220% in 2010 and is now at 170%, while the USA peaked at 170% in 2008 versus 150% now. The Netherlands, the absolute private debt to GDP record holder amongst economies with more than 10 million people, peaked at 247% of GDP in 2010 and is now at 236%. The UK’s peak was 192% in 2010, and it is now 164%. The borrowing ultimately stops.

Figure 7: Private debt to GDP levels in September 2016. BIS Data

Then credit-based demand not only drops, it can turn negative when debt is very high relative to GDP, thus suddenly reducing demand rather than increasing it. This is why the 2008 crisis was so severe compared to our post-WWII experience. For the USA, it was the first time that credit had been negative since WWII ended (see Figure 7); it was the third such event for the UK, but the first in over 50 years, and much larger and longer than the downturns in 1952 and 1966 (see Figure 8).

Figure 8: Credit demand was regularly negative before WWII, rarely so afterwards

Faust’s final trap after the crisis is that, with private debt still so high relative to incomes, the capacity to generate more demand through credit is severely restricted. Though private debt today is about 30% of GDP below the peak reached in 2009, it is still close to three times the pre-unbalancing average. At that level, credit-based demand can’t expand greatly without returning the UK to its peak level. So, credit-based demand can never reach its previous highs, and the economy remains mired in a slump.

The crunch for the UK economy came in September 2008, when credit-based demand started to fall, from 12.4% of GDP then to minus 5% of GDP in 2010. Here the malaise finally afflicts the Doctors of Debt themselves: with anaemic credit-based demand, the capacity of the finance sector to profit from expanding debt diminishes rapidly.

Table 1: Credit demand after the 2008 slump is the lowest it’s ever been in peacetime in the UK

The internal finance-sector gambling that was a positive sum game for all participants as debt rose becomes a zero-sum game, or close to it. If the parasite almost kills the host, the parasite suffers too. Only QE kept The City afloat as government policy witlessly rescued the parasite in the belief that this would help revive the host.

Figure 9: Credit demand was regularly negative before WWII, rarely so afterwards

It did to some extent: the initial £200 billion in QE probably boosted actual GDP by about one-fifth that much, as capital gains from a QE-fuelled stock market were poured mainly into yet more housing speculation and a tiny amount of consumption by stockholders. But this policy has maintained all the imbalances that expanding credit created in the first place: finance sector employment is far larger than it needs to be, assets remain over-valued compared to incomes, and the private debt burden that caused these imbalances remains far too high.

A fundamental pre-requisite to rebalancing the economy is to return the private debt to GDP level to where it used to be before belief in the false prophets of Neoliberalism led us into this debt trap. That could be done by “QE for the People” modified by the requirement that QE recipients must first pay down their debts. Much more is needed, but if that isn’t done then many other remedies – such as trying to boost UK manufacturing via a lower exchange rate – are likely to fail.

Figure 10: Both households and corporates have driven the debt binge

Postscript: The wanton ignorance of mainstream economists

Conventional economists like Paul Krugman continue to deny that there is any link between credit and economic activity, arguing that any increase in spending power for debtors out of credit must be offset by a decline in purchasing power by those who lend to them, so that in the aggregate credit has very little impact on the macroeconomy:

But, but, you say — that’s not where the debt comes from. It comes from people spending more than they earn. And that’s true — debtors get there by spending more than they take in. But creditors get there by spending less than they take in. (Krugman 2015)

The problem with private debt is that we have good reason to believe that in very wide-open financial systems people get irrationally exuberant, lending and borrowing to an extent that they eventually realize was excessive — and that there are huge negative externalities when everyone tries to deleverage at once. This is a very big problem, but it’s not about generalized excess consumption. (Krugman 2015)

This belief could be excused when the literature on banks creating money “out of nothing” lived in the underground of economics. But after the Bank of England explicitly rejected this “Loanable Funds” model of banking as a fantasy, the days when mainstream economists could hide behind it disappeared. But still they continue to do so.

The fallacy in their thinking is easily demonstrated by looking at the two types of lending – from one non-bank agent to another (Loanable Funds or LF) and by a bank to a non-bank (Bank Originated Money or BOM as an accountant might call it).

A “Loanable Funds” loan simply shuffles existing money from one person’s bank account to another: no new money is created (row 1 in Table 2). A “Bank Originated Money” loan creates a new asset for the Bank, and creates new money as well – which the recipient then spends.

Table 2: Comparing Loanable Funds and Bank Originated Money

The former operation doesn’t create any additional demand, as Krugman asserts. But the second operation does – and this is what he is now wilfully ignoring by failing to comprehend the macroeconomic implications of Bank of England’s clear statement of real world banking (Krugman 2014).

Figure 10: Krugman’s blog where he fails to comprehend the macroeconomic implications of “Money Creation in the Modern Economy”

Nobel prizes should be harder to earn than that.

References

Keen, S. (2017). Can We Avoid Another Financial Crisis? (The Future of Capitalism). London, Polity Press.

Krugman, P. (2014). “A Monetary Puzzle.” The Conscience of a Liberal http://krugman.blogs.nytimes.com/2014/04/28/a-monetary-puzzle/.

Krugman, P. (2015). “Debt Is Money We Owe To Ourselves.” New York Times https://krugman.blogs.nytimes.com/2015/02/06/debt-is-money-we-owe-to-ourselves/?_r=0.

Krugman, P. (2015). “Debt: A Thought Experiment.” New York Times https://krugman.blogs.nytimes.com/2015/02/06/debt-a-thought-experiment/.

McLeay, M., A. Radia and R. Thomas (2014). “Money creation in the modern economy.” Bank of England Quarterly Bulletin 2014 Q1: 14-27. http://www.bankofengland.co.uk/publications/Pages/quarterlybulletin/2014/qb14q1.aspx.
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Image: EPA

The scale of the risk is clear. If business were to continue as usual, with no immediate action to mitigate the effect of climate change we face at least a 50% risk of exceeding 5°C global average temperature change in the coming decades. Given that we are currently only around 5°C warmer than in the last ice age, climate change is banishing us, or better, we are banishing ourselves to completely unchartered territories. It is beyond a doubt that these changes would irreversibly transform the physical geography of the world, but perhaps more importantly for some, this self-imposed exile would fundamentally upend our economic system.

The Cambridge University Institute for Sustainability Leadership has been working to studiously model the risk climate change poses to the economy as a whole. In their Unhedgeable Risk Report they model three scenarios, one where we pursue growth without consideration for the economy, one where we step up our existing climate commitments progressively over time, and one where we actually do enough to meet a 2 degree target.

The warning they deliver is stark: the economic shocks that will result from unchecked climate change will cause ‘substantial losses in financial portfolio value within timescales that are relevant to all investors’. In the scenario where climate policy has stalled, they predict that only half of these losses can be avoided by moving out of risky investments and into safer ones. The other half are simply unavoidable – or in financial terms ‘unhedgeable’. This would cause a global recession, dipping into negative growth for most of a year, and a permanently depressed global growth rate. Meanwhile there would be grave impacts to poverty reduction, as the poorest countries in the world are the most susceptible to the geophysical effects of climate change, and investments in these countries would face particularly acute risks. Avoiding these risks would require radical measures that go beyond the financial system. But if market players face unavoidable losses due to this unhedgeable risk, then there is a purely self-interested incentive to support a socio-economic environment where these systematic changes can take place.

All this means that while it may be true that the geophysical consequences of climate change are likely to occur in the second half of this century, financial markets, macroeconomic trends and the reduction of poverty are likely to suffer much sooner because of the uncertainty regarding the climate crisis on behalf of consumers and investors. This suggests not only that the fate of the economic system is inextricably tied to the climate crisis, but also that there should be an incentive for businesses and investors to get proactive, and deal with these risks before either the physical consequences of climate change, or the uncertainty they will inevitably generate, become real. Here, investors have a particularly important role to play, in providing the signals that can guide the market towards a sustainable future, or deeply astray.

After nearly a decade of stories uncovering the self-serving greed of bankers and investors which triggered the 2008 financial crisis, we might be forgiven for forgetting that financial systems were designed to serve a social purpose. Yet a well-functioning financial system has a role: to provide funds to those ideas and enterprises which it thinks will provide value to others. It is meant to bridge the gap between ideas and execution, by providing the cash businesses need to get going, or to continue on.

Yet our current financial system has drifted far from this core purpose. Trading has become increasingly frenetic, and increasingly ruthless in search of profit. In the mid-20th century 15% of all stocks held by investors would be traded within a year. By 2010, this figure had climbed to 250%. This represents a fundamental shift in our attitude to trading: from one where stocks were bought largely as an investment into a business’ long-term prospects, to one where investments shift rapidly, chasing marginal profit in the fluctuation of share prices, rather than looking for sustainable businesses.

This has driven a change in the behaviour of businesses. For instance, a study presented 400 corporate Chief Financial Officers with a hypothetical project that would have guaranteed an overall return, but would have reduced a quarterly earnings. The authors found a majority of CFOs unwilling to take on the project, prioritizing being able to report higher short-term earnings, and thus safeguard their share price, over producing anything of value and ensuring the company’s long-term success. In line with this short-term culture, between 2000 and 2009, average CEO tenure dropped from 8 years to 6 years. In thrall to the financial markets, which control the perception of their value, businesses are increasingly focused on short-term profit themselves. This has been described as a shift from “a culture of management to a culture of speculation”, and it is proving disastrous for our ability to get businesses to confront the realities of climate change.

Of course businesses are not the only ones in denial. As Rolling Stone noted, the US Republican Party are the only mainstream political party in a major polluter nation who still systematically deny climate change, and they do so with almost religious fervour. With the US as the second-largest emitter of CO2 worldwide, behind only China, and having just installed a climate-denier-in-Chief, things look bleak. And if you trace how this state of affairs came about, the financial system is deeply implicated.

On one hand there are the now all-too-familiar stories of companies lobbying and lying about climate change for private profit – whether it’s Exxon Mobil burying decades of climate data, or Volkswagen lying about their vehicle’s’ emissions. Such machinations are constantly justified in terms of securing shareholder value – fighting climate change simply isn’t a good investment. On the other hand, the same American foundations such as the Searle Freedom Trust, the John William Pope Foundation, and the Howard Charitable Foundation which have championed the sorts of radical free-market ideas that have secured the dominance of short-termist, quick-profit practices in the financial sector, have also given hundreds of millions of dollars to climate change denial think-tanks and lobbyists.

The result is a world where we directly subsidize the fossil fuel industry to the tune of $492 billion every year. At the same time, the IMF estimates that the damages caused by fossil fuels to health, and the environment amounted to $4.8 trillion in 2015, comprising an astonishing 5.9 percent of global GDP^[1]. This not only represents a huge barrier to tackling climate change, but it should also disturb anyone who believes in the market system as a fair arena for competition.

The financial system is undoubtedly a major part of the problem when it comes to creating change. In fact, in many ways it’s invested in the problem. Yet the scale of the climate challenge means that any solution to the crisis we’re in will have to harness the financial system to drive change. To avoid catastrophic global warming, we will need to move a lot of money into sustainable solutions, and fast.

The International Energy Agency estimates that in order to switch from fossil fuels to sustainable energy will cost $44 trillion, between now and 2050. Meanwhile, looking beyond the energy industry, the World Bank estimates an additional $70-100 billion per year will be needed to allow the rest of the world to adapt to the changes we’ve already caused, in terms of dealing with impacts on health, agriculture, forestry and fisheries, water supplies and much more. This means investment on a scale beyond what most governments are currently putting forward. In fact, between 2011-2015 private and public investment totalled $1.195 trillion. If that trend continues, we’ll miss the 2050 IEA target by over 71%. It’s clear, then, that halting global warming will take everything we have.

Getting the financial industry to shift, from being invested in perpetuating the climate crisis to being invested in solving it is no easy matter. Yet there are clear financial motivations to tackling climate change – at least for some. The Cambridge Institute for Sustainability Leadership argue that although we will need to take a short term financial hit, to properly face down climate change, halving the global growth rate from 0.7% to 0.3%, this best-case scenario, within 8-12 years we would end up seeing growth rates above any other possible model. In other words, there’s a smart case to be made for long term investors to back climate solutions.

Meanwhile for those who feel that pandering to the financial system is an abandonment of questions of justice, there’s good news – pushing investors towards climate-friendly solutions also has the potential to help reform the financial system – by reorienting it towards more long term investments, and empowering the sorts of investors who care about sustainable, well-governed companies over those out to make a quick buck. It’s not a comprehensive solution to the flaws of the industry, but given the destruction a short-termist focus has wrought, it’s a start.

Given the importance of finance to climate, it’s disconcerting then that we hear so little about it when it comes to discussing how to tackle climate change. Beyond headline grabbing pledges from the likes of Bill Gates, and the complex question of carbon trading, it’s a topic that barely registers in the frantic debate about policy and legislation. Over the next few weeks, we hope to provide an overview of exactly how the financial system might be harnessed towards a more sustainable future, what some of the barriers are to doing this, and what we, as citizens can do.

^[1] Author’s calculation, based on figures in the paper, but taken to remove pre-tax subsidies.

This article is the first in a short series on sustainable finance with Cambridge University.

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The subordination of society to self-regulating international markets is the reason why British workers and industries so often fall prey to predatory financiers, writes Ann Pettifor. It is also a fundamental cause of current political crises throughout the west – just as Karl Polanyi described almost 80 years ago.

‘I would rather see Finance less proud and Industry more content.’ Winston Churchill fretting about a return to the gold standard, in a memorandum to Sir Otto Niemeyer, 22 February 1925

As this article goes to press, the British government finds itself onthe defensive and virtually helpless in the face of two potential global ‘megadeals’ that may lead to substantial job losses. The first is the failed US $143 billion takeover bid for Unilever by Kraft Heinz and its cost-cutting partner 3G Capital – a private equity company owned by Jorge Paulo Lemann, a Brazilian billionaire. Unilever has 7,500 staff employed in the UK. While the threat of a takeover appears to have been averted for six months, 3G Capital has mobilised up to $15 billion for the next megadeal, and still has Unilever in its sights. 3G was behind the Kraft–Heinz merger, finalised in 2015, after which 13,000 jobs were shed. As Warren Buffett says of his partner 3G, their joint investments have been highly profitable, but 3G specialises in ‘eliminating many unnecessary costs… very promptly’.1

The second threat is General Motors’ sale of its European arm, Opel, to the company behind Peugeot, PSA. Because Vauxhall is part of the Opel company, the jobs of 4,500 workers – building Vauxhall’s Astra cars in Ellesmere Port and Vivaro vans in Luton – are at risk. Furthermore, more than 20,000 people work in Vauxhall’s retail network, and 7,000 people work in its wider UK supply chain.2 Vauxhall is particularly vulnerable because the UK’s lax labour laws makes it easier for PSA to cut costs by firing workers and closing plants in the UK than it would be in, for example, France or Germany.

Mrs Thatcher’s anti-union stance, inherited by successive Conservative and Labour governments, has exposed not only British workers to predatory behaviour by an unregulated finance sector, but also British industry. Unlike Churchill, Thatcher and her successors were content to see finance proud, and industry vulnerable.

The latest ‘fire sales’ and intensified ‘asset-stripping’ of healthy British companies by big, global, tax-dodging finance corporations can be explained in several ways. The first is the prospect of Brexit, and the fear that British firms will lose access to the single market. The second is also explained by the Brexit vote: the 17 per cent fall in sterling, which makes companies – and indeed all British assets – cheaper for foreign buyers. The third is that global private equity firms have strong appetites for acquiring healthy firms, and then financing takeover deals with taxpayer-subsidised debt. These subsidies represent substantial foregone tax revenues for the governments concerned – foregone revenues that will rise as a share of GDP as interest rates rise. Indeed, what appeared to gall the Unilever board most was ‘the idea that it was expected to cover the bill on credit – by having debt raised against its own pristine balance sheet’.3

Presiding over the fire-sale

Like parasites, private equity firms do not kill their hosts, as this would cut off the supply of rent (in the form of debt payments) gouged from healthy firms for many years into the future. Making a company pay for its own takeover by sacking employees, stripping assets and then systematically bleeding it of future revenues is capitalism at its most barbaric.

The prime minister seems to understand this, but also appears impotent in the face of globalised finance. In her speech to the 2016 Conservative party conference she said, ‘Our economy should work for everyone’.4 But hers are empty words as she oversees the systematic culling of nationally significant British firms like ARM, the UK’s largest tech firm, taken over in 2016 by Japan’s SoftBank.5 In this sense the British government, unlike most European governments, fails at its most important duty: that of defending the economic realm to ensure the security of its citizens.

And it is this failure of regulatory democracy to defend the livelihoods and living standards of its citizens that, I believe, lies behind the Brexit vote, support for Donald Trump, and the rising popularity of France’s far-right Front National. If democratically elected governments are not capable of defending citizens from voracious, parasitic capital, then citizens revolt. Rather than turning to social democrats perceived to be colluding with global, liberalised finance (or ‘globalisation’), they turn instead to a ‘strongman’ or -woman who promises to ‘build walls’ or exit the EU, and defend them from freewheeling, self-regulating markets in capital, trade and labour.

Grounding the ‘almost planetary’ economy

Karl Polanyi, author of The Great Transformation, explained this phenomenon in a series of lectures delivered in 1940, reproduced recently by PRIME economics.6

‘Within national frontiers representative democracy had been safe-guarding a regime of liberty, and the national well-being of all civilized nations had been immeasurably increased under the sway of liberal capitalism; the balance of power had secured a comparative freedom from long and devastating wars, while the gold standard had become the solid foundation of a vast system of economic cooperation on an almost planetary scale. Although the world was far from perfect, it seemed well on the way towards perfection. Suddenly this unique edifice collapsed. The very conditions under which our society existed passed forever.’7

The gold standard, he explained ‘had become the basis of a world economy which embraced capital markets, currency markets and commodity markets on an international scale’. The apparently simple proposition that all factors of production must have free markets implies in practice that the whole of society must be subordinated to the needs of the global market system, Polanyi argued. This subordination of society to self-regulating international markets, and the detachment of this ‘almost planetary’ economy from the policymaking boundaries of a national democracy ‘developed into a catastrophic internal situation’ in the 1930s and was ‘the critical state of affairs out of which the fascist revolutions sprang’.8

History, of course, does not repeat itself, and because of the rise of new technology and other developments, today’s democratic governments face challenges different to those faced by governments in the 1920s and 1930s. Nevertheless, Polanyi’s analysis of the impact of self-regulating international markets on democratic governments appears extraordinarily relevant to today’s events.

This piece was written for the IPPR journal Juncture

• 1  Gapper J (2017) ‘Warren Buffett needs a new recipe for investing’, Financial Times, 22 February 2017. https://www.ft.com/content/e76558cc-f834-11e6-bd4e-68d53499ed71
• 2  Blagg H (2017) ‘“Speedy changes” concerns: Unite GS to press case to PSA boss’, UNITE live blog, 23 February 2017. http://unitelive.org/speedy-changes-concerns/
• 3  Vincent M (2017) ‘Who wrote the chat-up lines in Kraft’s clumsy courtship?’, Financial Times, 20 Feb 2017
• 4  May T (2016) ‘Theresa May’s keynote speech at Tory conference in full’, Independent, 5 October 2016. 
http://www.independent.co.uk/news/uk/politics/theresa-may-speech-tory-conference-2016-in-full- 
transcript-a7346171.html
• 5  Farrell S and Kollewe J (2016) ‘ARM shareholders approve SoftBank takeover’, Guardian, 30 August 2016. 
https://www.theguardian.com/business/2016/aug/30/arm-shareholders-softbank-takeover-tech-lord-myners

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Britain’s decision to leave the EU has sparked much debate about the future of the economy. The government aims to boost productivity and spread prosperity across the country. Thinking again about how the UK supports small and medium-sized businesses (SMEs) needs to be part of this process.

SMEs, normally defined as companies employing 250 people or fewer, are the bedrock of long-term economic performance. In the UK, however, they face challenges – in particular accessing credit.

Finance conditions for SMEs in the UK generally are less favourable than in some comparable EU countries, including Austria and Germany. SMEs in less prosperous parts of the UK have an even harder time – more often being turned down when applying for credit. In 2014, a Government-commissioned report estimated the SME finance gap to be between £26 billion and £59 billion.

The structure of the British financial system is part of the problem. Lending to SMEs is generally a long-term investment that delivers modest returns. So it’s not a compelling proposition for commercial banks which dominate the UK market.

A new form of banking could help: local or community banks.

Local banking

Local banks differ from commercial banks in a couple of key respects. First, they are profit-making but not profit-maximising – they take a long view and target steady but not spectacular returns. Second, they have a mandate to promote local economic growth alongside profit: a so-called dual bottom line.

This could deliver real benefits in the UK. By increasing the volume of lending in local economies, they could help SMEs access credit and improve regional economic resilience. They could also help to dampen the economic cycle by increasing their lending during downturns – when commercial banks often cut their exposure. And they could strengthen competition for savers’ deposits.

Several European countries – Germany, Spain, Switzerland – have networks of local banks which illustrate the potential.

The Sparkassen in Germany is one useful example. There are over 400 Sparkassen across the country; they are financed by public money so have to turn a profit; they are operationally independent; and they have a mandate to lend in their local area, with a focus on SMEs. Together they provide around 40 per cent of all business finance in Germany.

There are local initiatives in the UK as well. The Cambridge & Counties Bank is funded by local institutions with a mission to provide credit – in chunks of between £50,000 and £1 million – to SMEs in the counties of Cambridge, Northampton and Leicester. In 2015 it passed a quarter of a billion in lending.

Making it happen

What would local banking in the UK look like?

First, they would have an explicit mandate to lend to SMEs, and promote local growth. This would differentiate them from the existing banks.

Second, they would be operationally independent. International experience, for instance in Spain, highlights the risks associated with political involvement in local banks. Robust governance arrangements are vital.

Third, local banks would ideally be established as a national network. The network would provide mutual support e.g. expert advice, informed scrutiny and finance in at times of economic shock.

Where would the money come from? Because of their long-term approach, local banks are unlikely to be initially attractive to potential shareholders. One option is for the state to be the first investor. Safeguards to ensure public money is used wisely would be needed, but experience from other countries could help.

In the UK, the British Business Bank (BBB) is well placed to invest in local banks. The BBB was created in the last parliament with a mission to make finance markets work better for small businesses and around £4 billion of public money has been committed. This wouldn’t bridge the whole SME funding gap, but it could support a network which would be able to grow over time.

Looking ahead

Brexit has, if anything, reinforced the case for spreading economic opportunity more evenly across the country. SMEs will play a central role in this – but today they are hampered by unhelpful finance conditions.

Governments of different stripes have recognised this challenge. But their preferred policy response – increasing competition in the banking sector – hasn’t delivered real change. A more creative approach is called for.

Local banks could help. By improving credit conditions for SMEs they could unleash pent up commercial energy; they could reinforce economic resilience through counter-cyclical lending; and by pursuing local growth they could reduce long-standing regional imbalances.

The full Demos report on local banks is available here.

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“Blockchain technology will let us build the internet afresh, and better. Its novel approach to organising data and decision-making will totally disrupt everything from publishing and text messaging, to banking and government. It gives revolutionary new hope for society, across the board.” So say the pervasive blockchain evangelists stalking our internet ;-p

Many readers will know the blockchain as a recent technology that enables peer-to-peer communities to manage currency, governance and a host of other activities which previously required intermediaries, like governments and banks. The internet relies on databases to manage information which is accessed by web users. The blockchain is a new kind of distributed database, which depends on the networked computers of ordinary users to keep it running and keep it accurate.

In general, all data in this kind of database, whether that’s data on money transfers or electoral votes or social media posts, is visible to all users and cannot be tampered with by a higher authority, such as a government or a bank. Its workings are determined by the user community, whether that community is a small group of local residents, or every computer user on the planet.

Since its advent as the technical foundation of Bitcoin, a novel form of digital money, there have been countless lofty claims about the blockchain phenomenon. Now that blockchain is well into its 2.0 phase, with the Ethereum project giving rise to blockchain-based allsorts, including voting systems and legal apparatuses, critics are similarly widespread, ready to complicate this hope.

In spite of the debates, the blockchain space is a classic case of coders getting on and creating their idea of the future regardless. Bitcoin has been an unstoppable demonstration of the possibilities and has set major precedents for the digital future. Similarly, new frameworks and experiments are today being deployed, which aim to shape standards for governance, the economy and the wider information society. Whether we like it or not, whether deemed legal or otherwise, we can see networked blockchain initiatives defining the future today.

As with so much technology, the frontier moves ahead regardless of critics, states and their populations. Citizens need a role in making these realities, so we must join the action, learn the tools and forge them for our own needs, putting “society in the loop”.

Whilst we must think critically about the developments, we see the nascent blockchain technology as a potent site for novel, positive economic and political change. Its unique offering of decentralised (or distributed) peer-to-peer control over the management and record of transactions, means that institutions, like banks, that we have traditionally trusted – or rather had to trust – to intermediate between us can be side-stepped. The software involved is designed to allow networks of ordinary computer users – who might be based all over the world – to come together to create a collectively-run network that they trust, thanks to cryptographical techniques that allow data to be securely stored and shared. The software is typically based on collaborative, open-source principles and so allows us to achieve greater consensus and fine-grained control over how it operates too.

There are so many examples of viable and visionary blockchain projects in production – from social media network AKASHA to governance app Boardroom. AKASHA, for example, stores social media posts on a shared, public blockchain that anyone can download and use, forever – which, they hope, makes those posts immune to censorship.

OurCoin: crafting a currency

To explore the blockchain’s potential benefits, we considered a novel blockchain-based currency and economic governance system. Let’s call it OurCoin – a currency amenable to the needs of a community that espouses values of fairness and equality, which even the IMF is calling for more of. These virtues are notably absent from most monetary systems.

The Bristol Pound is a British community currency with specific features desirable to its users.

Here we envisage key, possible features of the currency, which blockchain technology would enable.

1. Preferences against extreme inequality could be incorporated into the design of the currency. For example, individuals holding wealth above a certain threshold could see excess coins in their accounts redistributed for the community’s benefit. This policy is similar to a wealth tax but more direct and transparent – demonstrating how OurCoin can bring monetary and fiscal policy together. The community could democratically decide the specifics of the redistribution, such as funding a community or infrastructure project.
2. Monetary policy could be directly managed by popular approval too. Consider demurrage – when the value of your money falls if you hold it for more than a certain period of time. This could be a feature of the currency used to disincentivise hoarding and stimulate economic activity. Freicoin already exists with this feature to “eliminate the privileged position held by money compared with capital goods, which is the underlying cause of the boom/bust cycle and the entrenchment of the financial elite”. As with any element of OurCoin’s design, demurrage could be weighted in various ways such as to primarily target hoarding of large cash piles, such as the billions currently held, unproductively, by large global corporations.
3. The community can even offer people different ways to obtain the currency. For example, it could be issued to meet the needs of today’s economy, such as through universal basic income. Or, workers and firms active with OurCoin could receive it at a preferential rate (as opposed to those obtaining it by, for example, buying it with other currencies), which would also incentivise economic activity within the system.
4. Incentives could be introduced to encourage spending that supports the community, either directly (e.g. shopping at local businesses) or by supporting the ethos of community members (e.g. the community may want to encourage spending in low versus high carbon industries).
5. The community could vote to pardon individual debts held in the system through debt jubilees.

Further specifics and other ideas could come from ongoing community consultation, or expert input – from governance experts, political philosophers, economists, psychologists and sociologists.

With OurCoin It would be possible for all users to vote, policy by policy, on the precise mechanics of the system. Difficult decisions, guided by expert insights, might come to be made with the help of integrated, next-generation systems which allow democratic processes to benefit from the best ideas as with alternative, delegative democracy models.

Our currency would include the ability to pivot, incorporating new policies and features over time, as elected by OurCoin holders. In this way, the community can learn, experiment and decide to change the currency rules as appropriate. This process would be highly accessible, encouraging explanation and incentivising collaborative development, even on the minutiae of the system’s functioning. It is something like this that shapes the development of community-run Facebook-alternative Diaspora.

We hope to recruit users, including those who are wealthy in other currencies, to use OurCoin in spite of the impact that e.g. redistribution may have on their own wealth. The attraction would not only be a more just, democratic economic system, but also the growing wealth of services available exclusively, or on favourable terms, to OurCoin users – “there’s only one way to pay for this particular massage, Mr. Hammond”. We believe that through experimentation, the community of users could quickly explore and develop an economic system that works better for everyone. Even those people who are currently wealthy in other currencies could prefer OurCoin, despite its redistributive tendencies, if it offers a more stable and prosperous system too. This would become more effective at scale.

Making OurCoin your coin

One of the active lines of research and practice in the blockchain universe reduces the barrier to entry for people or communities wanting to set up systems of this sort, along with customisations specific to their needs. What once required immense logistical capacity and resource, can now be brought about by small groups of dedicated citizens.

At the practical heart of the project, economic ideals and mechanisms manifest in the currency’s rules of operation would give people the opportunity to vote for and live by an alternative, with their cash and their labour. Whilst the exact mechanisms required to create an equitable yet productive economic schema of this sort may take time to perfect, we have the means here to try them out, and move towards a better way. If we can show a workable, attractive system, people will be induced to buy in. Much like the technology of the blockchain itself, once it’s been proven, there’s no turning back – you can’t unsee it.

The most radical effects, such as wealth equalisation, can only occur once the currency achieves really significant volume and has enticed people to bring a large part of their own economic activity into it, in some cases at significant personal expense. That is a longer term goal which requires the development of a truly abundant ecosystem within the confines of OurCoin, so we must show that the incentives we create are sufficiently effective. Those incentives will certainly be unlike others that have gone before, given the fine-grained focus of such code-based systems. Nevertheless, the likelihood of making these extraordinary currency conditions succeed is an open question.

The global economy has always been a massive experiment; one that blundering politicians, unaccountable global institutions and corporations currently have disproportionate power over. Citizens deserve the chance to design their own money.

Implementing a blockchain-based economic system, like OurCoin, at a national or global level requires revolution or long transition. But experimenting to demonstrate it just requires some participation in a complementary currency. The blockchain enables us to do this at a scale not seen before.

Here’s your chance to help design something better.

In the spirit of open collaboration, please add your own ideas, criticisms and desires for this model in the comments or as annotations with hypothes.is.

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The way banking works today, where money is mostly (i.e. 97%) debt-money, makes indentured slaves of us all. The more the main banks can extend new credit in exchange for our promises to repay, the more interest they can rake in, but the harder we have to work to service that debt. Rising house prices mean the more money the banks can create, out of nothing, and the more enslaved the populace becomes as it labours to pay the bank’s mortgage, or the landlord’s rent, or mortgage (obtained from the bank), or face eviction. We are shackled by this system. But it does not have to be this way. Money is a social construct. We can change money and change the world.

If we re-base the system on sovereign money not debt-money, the growing inequality within society between the rentiers and those who work for a living, the increasing vulnerability of the real economy to financial boom and busts, and channelling of investment away from real wealth production into financial trivia, will all ameliorate. The vast bulk of society will be better off, and the banking elite will be cut down to size. The way to achieve this is to change the way money is created.

Most money circulating in the economy is not in the form of notes and coins, it is digital information held in, or transferred between, the accounts that firms and individuals hold at banks. This digital money is simply created by these banks out of nothing – double entry bookkeeping to be more exact –  when they grant you credit. And then they charge you interest on it. If you believe a loan was only made possible by someone else’s deposit you are just labouring under an illusion. It’s a common illusion, it’s a highly plausible one, but it’s an illusion just the same. Consider; it is a reasonable assumption that if a firm offers to rent you a car, or if a neighbour offers to lend you his lawnmower, they have the car or lawnmower in question. This lends intuitive credence to the picture of money lent by one person = money deposited by another. But it is wrongheaded to think this way. And the banks aren’t going to disillusion you. But the fact is that almost all money comes into existence when banks open lines of credit. It’s nearly all based on debt.

When you spend this digital money the banks, in effect, have created their own money by substituting their name on the cheque or bank transfer, or other financial instrument, for your name. The up-proven trustworthiness of your own promises to honour the many transactions of daily commerce are replaced by the solid reputation and proven reliability of promises from Barclays or HSBC. The only thing that holds the banks back from flooding the economy with this digital money is the fact that, in swapping their own credibility for your promise to repay, they can run out of creditworthy borrowers; reliable debt slaves. If, having spent the digital credit provided by the bank, you then default on repayment to the bank, it is genuinely out of pocket. Furthermore, this notion of individual  “creditworthiness” is highly subjective and influenced by confidence in the economy in general. Credit can be abundant or as rare as hen’s teeth. Of course, under this system not only do the banks create money out of nothing and then rent it back to you; when you duly repay the line of credit the money just disappears ! Under this system of money creation the quantity of money circulating in the economy is determined by the sentiments of bankers as they trade-off between greed and risk-aversion. The total money in the economy shrinks if the rate of debt repayments is greater than the rate of money creation. Yes, this system, the one we have now, also destroys money. But a sound money system would not be subject to such vagaries.

So, the total quantity of money circulating in the economy is currently set by the confidence of the banks. If they think times are good they will relax credit criteria, and they will especially like it if business confidence is strong, if employment is growing, spending is high and asset prices are booming. Particularly house prices: bankers love rising house prices as security for their loans. When they loose that confidence, the money circulating in the economy shrinks as loans are repaid (or default) and are not replaced with equivalent new loans since credit criteria are tightened. This was the root of the 2007-8 global banking crisis as the values of the largely USA sub-prime housing market collapsed. Once assets that loans are secured against start to fall in price, the urge is to offload those assets and prices collapse even further. And Governments, that’s you and I, the taxpayers, have to step in to stop the whole system from collapse. Individual banks were rescued or allowed to collapse, but the larger problem of lost confidence, imploding money supply, are less easily addressed. Hence Quantitative Easing (QE) across the world. QE is where the central banks (e.g. Bank of Japan, Federal Reserve, European Central Bank or Bank of England) steps in to, in effect, boost the supply of money to make up for the shrinkage in aggregate money caused by the private banks. The central banks create new digital money to fill the gap left by retreating private money.

It should be noted that the current system of Quantitative Easing works in such a way as to boost the reserves of banks and other financial institutions such that the value of existing assets is inflated. In fact the Bank of England’s own estimates of the earlier round of QE, some £375bn in 2009-11, is that it increased the wealth of the top 5% of all households by about £128,000 apiece, whilst doing almost nothing for the poorest 50% of households. But, if the objective is simply to keep the economy from deflation, it would be just as possible and certainly more reflationary of economic activity (rather than share prices and property values) to give the newly created central bank digital money to households to spend into the real economy, or to use it to finance public projects – house-building or infrastructure or alternative energy – i.e. real assets.

So the present monetary system, based upon credit allocation by private banks, is unstable and unfair and is building a UK economy overweight with debt and house prices beyond sanity. It reduces the bulk of the population to debt slavery, whilst privileging the very few. If we wish to change track we must change the way in which money is created.

The intention of the 1844 Bank Act was to prevent private money creation by confining all cash, both coin and paper, to origination by the Bank of England.  Money would be sovereign and the seignorage (profit made between the cost of producing the coins or paper money and their face value) would accrue to the State. Times have moved on; cheques, credit and debit cards and more sophisticated debt instruments have burgeoned and, helped by computerisation and de-regulation, the role of private debt based digital money now vastly outweighs cash. Yet most people, including a good number of MPs, are still stuck with the belief that only the State creates money. To get out of the current dysfunctional system we must restore the intentions of that 1844 Act and create a new Act, fit for the 21st Century which covers coin, paper and digital money. Make the people the masters of a new debt-free Sovereign money. Change money and change the world.

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We are all familiar with money: it is something we own, which can be exchanged for other things that are up for sale. Money is a social construct; a means of exchange that can allow us to draw comparisons in value between things as different as pints of milk and packets of nails. But money, of course, must be something more than simply an abstract idea if it is going to work in practice. Most people are aware that money has ‘been’ many different things in different places: gold, silver, beads, stones with holes in them, etc. What is money in our globalized world of today?

Again, the answer is familiar. Money is either numbers in bank accounts, or notes and coins. These numbers, notes and coins belong to us until we spend them. But what kind of property are they? Not many people know it, but legally, what these numbers, coins and paper represent is debt from a bank. When we own money, we own debt from a bank. (If you want to know more, the Bank of England’s report on Money Creation is worth reading.)

In everyday life, we can see this in the tiny words still written on bank-notes: ‘I promise to pay the bearer on demand the sum of … pounds’. A century ago, the bank would pay gold. Today, gold has been written out of the picture and ‘what the banks owe us’ is a legal fiction.  Try turning up at your high-street bank and demand: “pay me what you owe me!”, you will get a funny look. If the teller gets your drift, you may be given cash, which is itself more debt or ‘promises to pay’, this time from the central bank.

There are many fictions in law, and each is created and kept going for a purpose. In this case, the purpose is quite clear: to advantage the rich and powerful at the expense of productive working people. The original justification for this advantage was that it was necessary and desirable for the purposes of making war and building empires. It also helped enrich governments, financial speculators and (almost incidentally) bankers.

The fact that money is now debt from banks makes it different from other simple forms of money such as gold, silver, stones-with-holes, bitcoin etc. These differences allow certain evils in our world – such as inequality, debt, corruption, arms production and war – to become much greater than they otherwise would be. The object of this article is to outline some of the connections between the way money is created and our increasingly desperate and crooked human world. But first, a few more remarks on how we got to the situation in the first place.

When money was gold, a bank would accept a deposit of gold from customer X and give X a note saying, ‘we owe you gold.’ X would pass the paper to Y in payment for something, and the bank would now owe Y the gold. Y was now legal owner of the debt of gold. During this process, no gold would be shifted or moved. Whoever owned the note could, however, go to the bank and demand the gold.

A change in the law.

Before bank-money could, like a cuckoo’s child, begin to nudge all other forms of money out of the nest, a momentous change in the law was needed. Debt had to become something that X could legally pass on to Y. Otherwise, when Y came to ask for the gold that X had deposited, the bank could tell Y to get lost.

As far as modernity is concerned, this change in law was first made in the English Parliament between the years 1694 and 1704, at a time when Parliament consisted of rich men voted in by other rich men. After that, country by country, copy-cat laws were adopted. Globalization has completed the process more-or-less worldwide.

The first consequence of debt becoming ‘negotiable’ was that value could be created out of nothing, simply by two parties creating equal-and-opposite debts. Each party would own a valuable entity – the debt of the other. The difference is obvious today when considering the difference between a private loan between friends, and large-scale lendings-and-borrowings.

If I lend money to a friend, I no longer have that money until (perhaps) one day I get it back. No new money has been created. If, on the other hand, I lend money to a government or a corporation, I get a ‘bond’ in return – a piece of paper which can be bought and sold, and which is as valuable as the money I am lending. I can buy things with it: it is a form of money which circulates only among the wealthy. The sacred text of economics, The Wealth of Nations puts it simply: ‘The merchant or monied man makes money by lending money to government, and instead of diminishing, increases his trading capital.’ (Book 5, Chapter 3). ‘Negotiable debt’ is the essence not only of national and corporate debts, but also of banking.

Now that gold is out of the picture (the last vestiges of the ‘gold standard’ were formally abandoned in 1976) governments supply ‘reserve’ digits which take its place. These digits maintain the system working in the same way it has for several centuries – but without the inconvenience of having to keep large stores of genuine value, and without the restraint which a possible demand for gold put upon the amount of money that could be created.  

Today, banks create money out of nothing, by creating two equal-and-opposite debts. The bank owes the borrower, the borrower owes the bank. What the bank owes becomes money. Governments supply reserve upon demand.

At the point, another ‘magic trick’ of banking occurs. The interest payments go one way – to the bank. Because what the bank owes is money, it can charge interest on its own debt – like water travelling uphill.

Historically, via banking and negotiable debt, the old feudal world, in which laws were made for men good at hacking each other to pieces, was replaced by a new ruling class of ‘moneyed men’. Our so-called ‘democracy’ has not yet produced a new and democratic world – nor a reduction in killing each other. Instead, certain truths that used to be familiar have gone underground, beneath the radar of public debate.

And so to the question: ‘What are the special characteristics of bank-created money?’ Some of these have been mentioned already.

• Banks find themselves in the enviable position of charging interest on what they owe: today, that is all the money in existence.
• New money is created by private agreement between two parties – bank and borrower – when both expect to make a profit on the newly-created money.
• When loans are repaid, the bank’s fictional debt disappears. Money is destroyed. This means that once profits have been taken, new money can again be created without (necessarily) increasing the money supply.
• All monetary value consists of the debt of others, so the system is inherently unstable. Finance is a world of interlinked debts: when many debts begin to look bad, the system teeters.
• The ‘debt’ and ‘value’ elements of the created money separate when payments are made. It is the job of virtuoso operators to end up with the value, and leave others holding the debt.
• When times are good, lots of money gets created because everyone sees a profit in borrowing; when times are bad, very little gets created.

So: how do these special characteristics feed the acknowledged evils of our world – things like war, poverty, unemployment, inequality, corruption, and destruction of the environment? Some of the connections are obvious, some less so. I will outline a few.

Inequality is a pretty obvious one. As I mentioned earlier, a bank creates new money to profit itself and the borrower. The bank profits from interest payments. Borrowers use the new money to purchase things: businesses, capital assets, luxuries, investments. They enjoy rises in asset prices, and rents from their new assets.

Economies may suffer from many different maladies. The one that recurs again and again is economic engorgement, when most wealth is situated with a few people, and spending on consumables dries up. Picture a café where the customers have a lot of money between them, but all of it is sitting in the pocket of one person. Not many cups of coffee will be sold. When spending dries up, profits dry up, and rich people will lose money too – unless governments supply them with more via practices like ‘quantitative easing’.

The instability of a debt-based money system has been noted already. Extreme cycles of prosperity and recession are inevitable when banks create the money supply. Due to what economists have called the ‘perverse elasticity’ of bank-created money, banks create too much money in the good times, and not enough in bad times.

Booms and busts are exploited by financial speculators. Large amounts are lent when borrowers are confident they will profit eventually. When the worm turns, credit is called in. Revenues dry up; borrowers can’t pay; assets are seized. Greece today is a stark national example. People losing their homes after mortgage defaults are painful personal examples.

Interest on debt, both national debt and personal, must be paid for by the production of working people: workers must earn more before they’ve anything to spend. Workers in countries with high levels of debt become more expensive; jobs are outsourced to where debt is less, and labour is cheaper.

Banks create money for speculators to replace equity with debt. Share prices are inflated and speculators take profits. Corporations hobbled by fixed-interest, fixed-value debt are less adaptable to changing circumstances than corporations owned by shareholders.

Banks feed a vicious circle between arms production and purchase, eagerly creating new money for both buyers and sellers. Banks create money for governments to acquire arms: with demand guaranteed, they willingly create money for manufacturers too.

War is massively destructive, and yet banking in England was instituted and made legal for the precise purpose of enabling war. Governments need to borrow for war, and the way money is created makes borrowing easy and unaccountable – an important point, for what truly democratic nation would vote to indebt itself for purposes of destruction and slaughter? In addition, during war governments manufacture money for people – soldiers, armaments workers – who spend. This relieves the condition of ‘engorgement’ referred to above.

A steady-state economy is inconceivable when the money supply takes from most and gives to a few; soon, most money sits waiting for investment, and spending dries up. In these circumstances, growth is necessary just to keep the economy going: growth means that money which would otherwise sit idle pours into new factories, new employment – and into the pockets of workers who will spend it.

When the system itself demands relentless growth, resources and environments are relentlessly plundered and destroyed. ‘Built-in obsolescence’ replaces ‘built-to-last’.

Money created on prospect of profit enables already-large organizations to borrow huge quantities to purchase rivals, or to bankrupt them by practices like pricing below cost for extended periods of time (Uber being a current example: ).

Extreme inequality means greater dependency for most people upon powers with money – governments and commercial corporations. Governments redistribute wealth to some extent, but those ‘with’ do not like to see too much going to those ‘without’.

Nations with strong banking sectors generate money out of nothing and purchase assets in foreign countries. In this respect, nations behave like banks, exporting debt they hope they will never have to pay. Weaker nations get poverty and corrupt governments, which suppress dissent and act as predatory kleptocrats. Dispossessed citizens emigrate, in search of peace and a living, to countries which have contributed to their ruin. They often get a brutish reception.

In circumstances outlined above, democracy becomes plutocracy, ‘economics’ becomes a propaganda machine, and mainstream media organizations owned by states and corporations, leave a lot unsaid. The standard narrative of capitalism – ‘savers lend to borrowers’ – also becomes a fiction, as savings are dwarfed by newly-created money.

An important outcome of the corruptions listed above is the drift to extremist politics. Workers know they are being cheated out of freedoms and the rudiments of a decent life, but do not understand how. Monstrous escapees from some medieval vision of hell – people like Vladimir Putin and Donald Trump – sense their opportunity and offer themselves as remedies. The true remedy – reform – is lost, submerged beneath the radar of public debate. Straightforward corruption in politics.

Money manufactured secretly by banks makes transparency in public affairs difficult if not impossible. A blunt illustration: many Russian oligarchs have their own banks, manufacturing money for (among other things) bribes. A bribe may be a very profitable investment – even a necessity in many countries, for someone who wants to climb to great wealth.

In many countries, robbing the public purse is routine. Bank-created money makes this easy. Government officials take out loans, relocate the money and default on the loan. The bank will be out of pocket; but friends in government put public money towards shoring up the bank. The judicial system may be in on the racket too, turning a blind eye.

Some examples are currently in the newspapers: In Bangladesh, ‘some $565 million in assets are said to have been looted from the state-owned BASIC Bank between 2009 and 2012, yet the scam’s suspected mastermind, a former chairman of the bank, wasn’t troubled by the anti-corruption commission investigating the fraud, reportedly thanks to his political connections.’  In Malaysia, a ‘billion-dollar political scandal’ involves two brothers, a banker and the Prime Minister. In Moldova, a large proportion of the wealth of the country has been looted and relocated with financial partners, mostly in Russia.

Despite the cultural myths of our age, most people do not want to give their lives over to getting more ad infinitum. They want enough to live well, in return for work they can be proud of. Our system of money-creation favours individuals for whom ‘getting more’ overrides all other considerations.  The consequences of power residing in the wrong hands is incalculable – and perhaps most significant of all the effects of banks creating money.

The way our money-supply is created contributes to many evils. Without this contributing factor, what would the world look like? No doubt the evils would continue in lesser degree. But the world would have a chance to climb out of present reality, when so much good, real and potential, seems on the point of being overwhelmed. Reform would not be difficult; the problem is, as ever, a problem of political will.

The post Where does money come from, and why does it matter? appeared first on New thinking for the British economy.

This piece is a response to John Mills’ challenge, ‘We need to rebalance the British Economy‘.

In her first big party conference speech, Britain’s new prime minister rode the wave of populist revolt that swept Britain before 23 June, 2016. “This is our generation’s moment” she said: “To write a new future upon the page. To bring power home and make decisions…here in Britain. To take back control and shape our future…here in Britain.”

But the prime minister only went halfway to meeting the concerns of more than seventeen million British ‘leavers’. For May’s vision is not just to “bring power home and make decisions…..here in Britain”. It is also “of a confident global Britain that doesn’t turn its back on globalisation but ensures the benefits are shared by all. And that Britain” she said emphatically “the Britain that we build after Brexit – is going to be a Global Britain.” (My emphases).

The prime minister’s approach builds on Tony Blair’s view that there was no need to stop and debate globalisation: “you might as well debate whether autumn should follow summer” he said to the Labour Party Conference in 2005. Or Gordon Brown’s recent Guardian plea that “we need a national conversation, and a national commission, on making globalisation work for Britain.”

Like her Labour predecessors, the new prime minister clearly signalled that she will do nothing to tame the global financial tail that wags the British economic bulldog. While she was willing to acknowledge that ‘global citizens’ are ‘citizens of nowhere’, her government will not address the much deeper economic and political malaise facing Britain – namely, financial globalisation.

Financial globalisation is the system whereby ‘citizens of nowhere’ – active in global capital markets – determine the life chances and living standards of citizens around the world. In other words, the system which permits financiers to use capital mobility to enjoy absolute advantages over all other sectors of a domestic economy, and which thereby elevates financiers to the position of masters not only of economies like Britain’s but also of the global economy. Capital enjoys this power because unlike trade or labour, flows of capital face very few barriers to movement, and can therefore quickly migrate to where returns or capital gains are highest. By contrast, flows of trade and labour face geographic, political, regulatory, physical and even emotional barriers to movement. It is this that makes capital dominant over trade and labour in the global economy, and increasingly so in a domestic economy like Britain’s.

And it is this dominance of finance over the real economy that has persuaded many industrial capitalists that if ‘you can’t fight ‘em, join em’. The result is that the economy has become increasingly financialised; Capitalists have tried to find ways of mimicking the finance sector’s ability to make gains effortlessly from debt and speculation. They make large amounts of their profits by accumulating unearned income from ‘rent’ on pre-existing assets, including land, houses, commercial buildings, vehicles, databases, brands, works of art, yachts etc. Those that do not own pre-existing assets that can be rented out are obliged to earn income – invariably from their labour.

A stock ticker screen at the London Stock Exchange in the City of London. Picture by Philip Toscano PA Archive/PA Images

We should be mindful, as ecological economist Herman Daly once remarked, that policy-making in taxation, greenhouse gas emissions, pensions, criminal justice, welfare, etc, requires boundaries. British pensions and benefits are not payable to e.g. Brazilian citizens. Criminals could render the justice system meaningless if there were no barriers set by borders. HMRC cannot tax South African citizens resident in South Africa. However, while policy requires boundaries, global finance abhors boundaries.

We can be almost certain that Mrs May’s finance-friendly government will not bring offshore capital back onshore – to operate within the boundaries of British government law and policy-making. There will be no substantial re-structuring of Britain’s finance sector.  On the contrary, it is very likely that British taxpayers will be expected to continue to finance and subsidise the footloose activities of these ‘citizens of nowhere’, and to bail out the City of London’s institutions in the event of failure. Contrary to the fine words in Mrs May’s conference speech, there is even talk of taxpayers footing the bill for the City of London to continue operating within the EU, when other traders will be excluded from access to the Single Market. If the British government persists in this deference to the City, both the government and voters can look forward to a continuing decline in real living standards while global elites deploy mobile capital, new technology and algorithms to gouge rent from every conceivable British asset – and from British workers in a range of sectors, and in their homes.  The income from these ‘rents’ will not be reinvested in the British economy, but will be channeled to wherever tax and regulation are lowest, and wherever in the world speculative returns are highest.

Participants in the London Stock Exchange’s float in the City of London during the Lord Mayor’s Show. Picture by Laura Lean PA Archive/PA Images

While the recent fall in sterling may be welcome relief for exporters, its rapid decline is nothing less than a defiant reaction by financiers in global capital markets to the Brexit vote. It is but the latest manifestation of the power of these financiers to dictate political preferences and to act, in effect, as masters not just of the economy, but of British democracy.

Financial globalisation has weakened and unbalanced the British economy, and that in my view, explains more fully the Brexit vote. For it is my contention that financial globalisation has led to the decline of British industry, the decline in investment, the rise in unemployment or insecure employment, and to the fall in labour’s share of the economy. Above all, it is financial globalisation that has caused regular, overlapping and increasingly catastrophic crises.

Key decisions by Britain’s public authorities to re-regulate (not de-regulate) the British economy in the 1970s had the express purpose of advantaging the City of London and disadvantaging industry – especially the export sector, as Davies and Walsh explain in their 2014 paper ‘The role of the state in the financialisation of the economy’.

One of the most significant of the changes was the removal of controls over capital flows in and out of the country. A second change was the transformation of banking to allow bankers to lend, not on the basis of the value or viability of a project, but instead on the basis of whoever was willing to pay the highest price (or rate of interest) on a loan. As a result, borrowing for investment became prohibitively expensive, afforded only by the few.

In addition as Davies and Walsh demonstrate, other changes were made to advantage finance:

“Stamp duty on the purchase of shares and bonds was cut in stages from 2 to 0.5 per cent. Dividend payment controls were abolished in 1982. In contrast, although corporation tax was cut for all businesses, this was paid for specifically by removing capital investment allowances for machinery and plants – measures which primarily hit manufacturing. There were steady value-added tax (VAT) rates rises on goods and services, but financial and insurance services were made VAT-exempt. This doubly disadvantaged industry next to finance as the former made much greater use of real world goods and services than the latter.”

As its architects intended, these changes to the financial system took place without much public or academic debate. Partly as a result of this stealth, the process of financial globalisation was not, and is still not well understood by either economists, or politicians – a fact that reflects badly on the mainstream economics profession. Aeronautical engineers have an understanding of the climate and engineering conditions that affect the safety of passengers. By contrast, economists, especially microeconomists, do not share the same concern for the safety and wellbeing of citizens operating within market economies. Whereas no aeronautical engineer would abandon passengers to the vagaries of the weather or to untested technology, economists breezily delegate management of the financial system and of the British economy to ‘the invisible hand’.

As a result of the transformation of the economy in the 1970s, globalised financiers have starved firms of affordable finance, which in turn has led to cuts in investment in both skills and infrastructure. Management of the exchange rate is no longer the responsibility of Britain’s public authorities. Instead this critical economic tool was privatised, and the currency – like many others – is now subject to the whims of speculators in capital markets. The result of these changes was entirely predictable. Labour’s share of the economic cake was slashed; inequality intensified and divergences between British regions deepened, fuelling public outrage. Worse, I will assert here, it is financial globalisation that has ratcheted up both Britain’s but also the world’s toxic emissions.

If we want to balance the power wielded by the financial sector over our economy, we must be clear that rebalancing the economy also means re-thinking the relationship between the economy and growth. An alternative, more balanced economy will not be based on the untenable and environmentally disastrous concept of ‘growth’, let alone ‘green growth’. Instead, a balanced economy is one that promotes sustainable economic activity – in particular full, meaningful employment aimed at substituting labour for fossil fuels. As the economist Robert Pollin explains

“spending on green investments creates approximately three times as many jobs as spending the same amount of money on maintaining our existing fossil fuel sector. The reasons are straightforward. First, clean energy investments are simply more labour intensive. Also, a higher proportion of overall spending on the green economy remains within the domestic economy as opposed to purchasing imports.”

So a rebalanced British economy is one in which Britain’s demand for goods and services meets the nation’s well-managed supply of finance, labour, commodities, products and services.

Picture by Joe Giddens PA Wire/PA Images to an official report.

Before the Second World War the concept of ‘growth’ scarcely existed, as Geoff Tily explains in his PRIME essay On Prosperity, Growth and Finance.

“National accounts and measures of national income (the forerunners of GDP) were devised in the 1930s, in the wake of the great depression. Policymakers and economists were preoccupied by getting the economy and financial system to function and addressing a crisis in unemployment. Later in the Second World War economic statistics were needed to try and prevent inflation, given that all resources – especially labour – were fully utilized. Then, later in the Bretton Woods era, full employment was regarded as the proper goal of economic policy-making.”

With financial liberalization all this was to change. Financiers could make extraordinary capital gains from financial speculation – far more than the average industrial capitalist could make in profits. This was largely because financiers can gamble and make gains in money markets without engaging with either the land – in the broadest sense of the word – or labour. Industrial capitalists by contrast have to engage with both land and labour. The substantial capital gains made from speculation by increasingly deregulated financiers were then pitted against the lower profits made by industrial capitalists from investment, employment and output. As financiers became more dominant, competition with industrial capitalists intensified.

It is hard to pinpoint the exact timing for the shift of emphasis, but under the surface changes were underway from at least the 1950s. The pressure on industrial capital was applied by both the finance sector, but also by friends in the economics profession, and in particular economic commentators. The latter began to reframe the key concept of levels of economic activity, and invented the term growth. Growth follows the trajectory of capital gains more closely than it follows that of more volatile profits. Capital gains – like those made from winning the lottery – can rise exponentially (until they crash). Profits rise and fall as capitalists battle the land and labour.

In the UK one of the most prominent campaigners for the concept of ‘growth’ was Samuel Brittan of the Financial Times: he proudly identified himself as a ‘growthman’.  At a time of full employment, he and other economists castigated the government (and industry) for what they regarded as an economy less profitable or dynamic than that seen in other countries. To apply pressure on those active in the real economy, they had to raise the bar of economic expectations. Full employment was not a sufficient goal. It was to be abandoned.

The concept of growth was subsequently adopted as the goal of all economy policy by the newly-founded OECD in 1961. In that year the organisation agreed an extraordinary fifty per cent growth target for the whole of the 1960s, as Tily explains:

“The aim of fixing the level of employment and output to sustainable levels had been abandoned. Instead the world had officially been set a systematic and improbable target: to chase growth. Nobody seems to have paused to consider whether growth derived as the rate of change of a continuous function was a meaningful or valid way to interpret changes in the size of economies over time.”

Whereas in nature growth is part of the process of life that begins with birth, moves to maturity and ends in death, in economics ‘growth’ is expected always to expand, and to be boundless.

Sunflower Electric Cooperative’s coal-fired power plant. Picture by Charlie Riedel AP/Press Association Images

The result of the new unmanaged ‘growth’ strategy of the 1970s was disastrous: a decade of uncontrolled inflation followed, as management of the exchange rate was abandoned, and as too much ‘easy’ money chased too few goods and services. 1970s inflation is always wrongly blamed on Maynard Keynes and the unions, but in truth these policies were anti-Keynesian. It was the 1971 decision to remove controls over bank lending that caused a massive expansion of credit (often for speculation) and that fueled inflation. The almost simultaneous decision by Britain’s public authorities to abandon responsibility for managing the exchange rate, and instead to switch to ‘flexible exchange rates’ meant that sterling fell 16% between 1971 and 1974. Import prices rose by 79%; consumer prices by 35%. The unions tried to ensure wages kept up, but they were to be defeated. Loss of control over bank lending was a key factor in 70s inflation, but so was the now out-of-control exchange rate.

These changes hurt consumers, workers and manufacturers, but greatly enriched and empowered the finance sector. Vast sums of money were made from buying and selling sterling; by speculating on whether the currency would rise or fall and by ‘buying cheap’ in one currency and ‘selling high’ in another. Even greater sums were made from lending at high rates of interest. But then, once the public authorities gave up acting as ‘guardians of the nation’s finances’ why would speculators invest in Britain for the long-term? Why would they engage with either the land or labour in the process of manufacturing – when vast sums could be made short-term, by gambling on tiny movements in the value of any marketable asset?

The ‘growth’ and inflation of the 1970s, was followed by decades of rapidly expanding consumption, falling real incomes, de-industrialisation and rising income inequality. Britain became less self-sufficient, and more dependent on imports. We began to rely on ‘the kindness of strangers’ to finance the nation’s rising overdraft with the rest of the world.

Policies for what were effectively exponential growth took their toll not just on the real economy, but on the ecosystem as ‘easy money’ at high rates of interest (think of credit cards) facilitated a massive expansion of consumption and, to satisfy that demand, extraction of the earth’s scarce assets. Which is why ‘green growth’ is an oxymoron, and should never be used by those concerned to protect the commons. Instead we should replace the language of ‘growth’ with the term ‘economic activity’ – to include employment, investment and output.

The real aim of rebalancing the economy will be to increase activity – especially skilled, well-paid, meaningful employment – within a framework that subordinates finance to the role of servant, not master of the economy; and that builds an economic framework of national self-sufficiency within the finite and sustainable limits of the ecosystem.

Financial information displayed inside the London Stock Exchange. Picture: AP Photo/Matt Dunham

The policy prescriptions for returning the British economy back into balance are both viable, tried and tested. We know they work, because they have worked before, in our very recent history: a period known by all mainstream economists as ‘the golden age’ of economics: 1945 – 71.

Of course the argument will be that “it is not possible to turn the clock back”. But if we survey the current political scene in both Europe and the United States it is possible to see, before our very own eyes, the clock being turned back. Once again electorates are turning in desperation to ‘strong men’ for leadership and protection against the predatory forces of financial globalization. These are rightly perceived to be beyond the control of democratic governments. They are not of course, but both social democratic as well as conservative governments in Europe and the US have subordinated the interests of domestic economies to the interests of those active in global capital markets – ‘the citizens of nowhere’.

In Europe in the 1930s, as Karl Polanyi argued in a famous passage from The Great Transformation, the masses turned to authoritarian leaders like Mussolini and Hitler for such protection from “the self-regulating market’. For Polanyi

“the self-adjusting market implied a stark utopia. Such an institution could not exist for any length of time without annihilating the human and natural substance of society; it would have physically destroyed man and transformed his surroundings into a wilderness. Inevitably, society took measures to protect itself…..”

Former chancellor George Osborne attends the inauguration of the ceremonial market opening in London. Picture by Stefan Wermuth PA Wire/PA Images

Today the people of Europe are once again turning to populist, protectionist anti-immigrant leaders, for protection.  France’s Marine Le Pen leads the National Front, a party founded by Nazi collaborators that promotes protectionism. In Hungary Viktor Orban leads his right-wing, protectionist and anti-immigrant Fidesz party. Norbert Hofer of the nationalist and anti-immigration Freedom Party has been given another chance by the Austrian courts to become the first far-right politician elected head of state in Europe since World War II. Jaroslaw Kaczynski leads Poland’s right-wing Law and Justice party, which has embraced economic interventionism. In Greece the neo fascist party, Golden Dawn openly uses violence to pursue its aims. And in Britain UKIP and the right-wing of the Tory Party have campaigned for Britain to “take back control”.

In the United States ‘America First’ is the slogan of the Donald Trump campaign – a campaign that will not go away after the presidential election. His campaign slogan is taken from the 1930s ‘America First’ campaign backed by the anti-war Left, and which counted Charles Lindbergh as one of its leaders. Lindbergh blamed Jewish people for drawing America into war, and warned “their greatest danger to this country lies in their large ownership and influence in our motion pictures, our press, our radio, and our government.” Today ‘America First’ is once again the slogan of the Trump campaign – but this time it is Muslims that are blamed for US weakness. Trump proposes to renegotiate trade terms; strengthen the military; make American energy independent, and build a wall against Mexican immigrants.

The rise of populist, nationalist, and even fascist political parties is a predictable response to the ‘stark utopia’ of a self-regulating globalized financial system. A major incentive for pushing back on the war-mongering of political populism would be the introduction of policies for managing and regulating the global financial system to restore political, economic and social stability and balance.

This argument in turn is based on a simple democratic one: that elected governments have a duty to their people, and to their domestic economy – not to invisible players in global capital markets. Governments, like aeronautical engineers, have a duty, and are accountable for the management of the domestic economy and for keeping it safe for the population it governs. To abandon such duties is to vacate the nation’s political space and to invite populist, authoritarian parties to ‘take control’.

Picture by AP Photo/Lee Jin-man)

The most important policies for rebalancing the British economy require management of capital flows in and out of the UK: capital control. In other words, monitoring and restrictions (perhaps in part using ‘Robin Hood’ taxes) applied by the authorities on flows of mobile capital – to act as ‘sand in the wheels’ of such mobility. Such taxes are vital to slow down and manage flows of ‘hot money’ into and out of Britain, where valued property acts as an attractive tax haven for laundered, and often illicit flows of speculative capital. Unbridled flows can cause the exchange rate to rise, or to fall suddenly, hurting both exporters, investors and consumers. They can of course be reversed quickly, as we have seen happen since the EU vote, and in so doing can destabilize the economy. These flows have been left to ‘the invisible hand’ with governments apparently helpless in the face of instability and disorder.

Above all, capital mobility renders all domestic taxation policy-making meaningless. If firms (like Apple, Starbucks, Facebook or Amazon) or wealthy individuals can simply move their money abroad, tax policies are rendered futile. Campaigning for big oligopolies to pay taxes is meaningless without campaigns for capital control.

Second, the Bank of England must re-introduce a range of macro-prudential tools – regulations that aim to mitigate risks to the financial system as a whole. These are needed to manage the production and distribution of money, and to discourage credit-financed speculation – in property and other pre-existing assets (stocks and shares, bonds, works of art, vintage cars, brands etc.). The use of such tools is necessary if society is to ‘take back control’ of the management of the financial system from bankers. Above all, they are important if the Bank of England is to regain control over the whole spectrum of interest rates – not just the ‘Bank of England policy rate’ – which applies only to bankers. All rates, short and long, safe and risky and real – should be managed in the interests of Britain’s domestic industry and of sustainable activity. High rates of interest demand high rates of return on all forms of economic activity – and explain why so much of the ecosystem is plundered (think of forests, fisheries and the land) to finance debt repayments.  Low, affordable rates will make the financing of climate change projects viable, and will support a wide range of activity, including public projects and services.

Third, democratic governments must begin once again, to coordinate and cooperate at international level, to manage exchange rates, global imbalances and the global financial system. Its management and stability can no longer be left to the insatiable greed and rapacious instincts of the ‘citizens of nowhere’: Vulture Funds, Private Equity firms, Silicon Valley billionaires, global investment bankers and speculators.

The Bank of England. Picture by Anthony Devlin PA Wire/PA Images

If Britain is to maintain political, social and ecological stability then it is absolutely essential for the British government to manage the financial system, not leave it to the anarchy of unregulated financial markets. Proper governance of the financial system will make finance for productive investment affordable. Management of the financial system will help stabilize the exchange rate – much as was done during the Bretton Woods era. Management of the exchange rate can begin to address Britain’s massive (6% of GDP) current account imbalance, and help to rebalance the economy away from financial globalization, and towards greater domestic self-reliance.

Such governance is necessary if we are to return the British economy to balance: one where well-paid, meaningful employment is available for all who are able to work – regardless of which region of the country they happen to live in. Employment at liveable wages, and supportive of families and communities, will be our most valued measure of balance and stability. This is because full, meaningful employment is not just vital to social and political stability – but also to environmental stability. One has only to think of the way in which mass youth unemployment has laid waste to much of the Middle East. If we are to transform the economy away from dependence on fossil fuels, then substituting labour for insecure energy sources will be a central part of that transformation.

Management of the financial system will support a wide range of economic policies that can restore social as well as political balance and stability to Britain. These include effective taxation of the owners of wealth to help reduce the rampant inequality that now dogs Britain. Policies and activity that can provide hope, meaning and respect to those millions whose roar of anger and despair was heard so clearly in the vote for Brexit. Policies that, given the finite nature of the world’s natural resources, can ensure a degree of self-sufficiency for the people of Britain; can diminish the threat of conflicts and sustain peace between Britain and her neighbours.

For as Keynes once famously argued:

“Ideas, knowledge, science, hospitality, travel–these are the things which should of their nature be international. But let goods be homespun whenever it is reasonably and conveniently possible, and, above all, let finance be primarily national.”

The post Make finance the servant, not the master appeared first on New thinking for the British economy.

First as tragedy

Between 1929 and 1931, a minority Labour government tore itself to shreds in a desperate attempt to keep Britain in the Gold Standard international monetary system. Winston Churchill – then Chancellor of the Exchequer – re-established Sterling at the centre of a revived Gold Standard in 1925, revaluing it at pre-war levels despite the devastation which the First World War had inflicted on the British economy. Labour, seeking to reform rather than overthrow British capitalism, offered little in the way of an alternative. Within the party’s social democratic orthodoxy, the stability of the international economic architecture and high finance had to be secured before Labour could focus on its own supporters amongst the industrial working class. Industrial areas experienced great hardship as Britain struggled on maintaining relatively liberalised trade and a highly uncompetitive currency valuation. The fiscal situation was also hindered, and the Labour government ultimately fell due to an internal feud over further cuts to unemployment benefit. Yet the rules of the game were dramatically changed just days and weeks after this collapse. The incoming (largely Tory) National Government took Britain off the hallowed Gold Standard, raised tariffs, subsidised industry and set about arranging preferential Commonwealth trading. Sidney Webb, the leading Fabian intellectual who had served as the Secretary of State for Dominions and Colonies in the Labour administration, responded to the situation with the exasperated cry of: “they didn’t tell us we could do that!”

Ed Miliband’s response to Theresa May’s first Tory conference speech as prime minister was a Webb-like gasp of surprise, albeit in postmodern (tweeted, darkly ironic) form. Having battled to position the Labour party as the face of moderate, happy austerity – wielding a friendly axe, in Peter Brookes’ memorable depiction – Miliband watched a Tory government boldly endorse the kind of state intervention and delayed cuts that had characterised his central economic policies. Furthermore, the Tories are flirting with the economically perilous prospect of ‘hard Brexit’, and appear prepared to force big business to shoulder a substantial share of the costs. The effects of the uncertainty and costs associated with the falling value of sterling were summarised in the recent ‘Marmitegate’ standoff between Tesco and Unilever. It seems unthinkable that a ‘responsible’ Labour government would have tolerated (or have been allowed to tolerate) the dangers to business as usual that May’s government is presently overseeing as part of its ‘duty’ to represent the will of the British people.

For those who have spent the last near-decade portraying the Tories as unswervingly pro-business, or for those who have insisted on the impossibility of any alternative economic approach to unbridled ‘neoliberalism’, recent developments have come as a shock. Contrary to the deterministic readings of Britain’s financialised political economy, popular anomie has shaken the social foundations of the country between 2014 and 2016. Under May this has achieved a recognition at the highest levels of the state, as the relationship between government, economy and ‘society’ shifts from one of growing marketisation towards a new, more muscular role for the state. Left-wingers enthralled by Mariana Mazzucatto’s ‘Entrepreneurial State’ thesis – that states play a central role in creating and harnessing markets – have been left cowering or confused at the prospect of its enthusiastic embrace by the right: suddenly, the big state doesn’t seem so friendly after all.

This poses several questions. How have the right, yet again, positioned themselves at the forefront of a wave of political-economic change? What are the forces driving this right-wing reformation, given the clear lack of enthusiasm from business? Most importantly: will it work? And finally, what can the left do, now that key distinguishing features of its economic programme have been so forcefully appropriated?

Embedded capitalism and ‘buying time’

One of the most famous analyses of the Gold Standard’s collapse is Karl Polanyi’s The Great Transformation, published in 1944 as the finishing touches were being applied to the new post-World War Two international economic system. Polanyi argued that the Gold Standard followed a utopian logic unique in human history: the advocates of “market society” wanted to subordinate the social and non-economic character of human relations to the rational, inhuman force of markets. They did so by mobilising the repressive forces of the centralised state within England before the British Empire’s combination of trade, high finance and gunboat diplomacy spread the logic of the ‘invisible hand’ round the globe during the nineteenth century. The result, in Polanyi’s diagnosis, was the violent reassertion of “society” in the form of world war, Bolshevism and fascism. Coalitions of social interests sought various alliances against the transformation of their lives and livelihoods into the “fictitious commodities” of land, labour and money. Despite the turmoil of the first half of the twentieth century, Polanyi was optimistic that these ‘counter-movement’ coalitions would be able to restate the primacy of society in a progressive, humane way – and he appeared vindicated by the triumph of the “social state” across the industrial world from 1945. Polanyi’s most influential contribution is the concept of “embeddedness”, the idea that the economy is always actually subordinate to social relations. The negative side of this is his critique of “disembedding,” the utopian project to elevate and rationalise the economy above social influence.

Polanyi’s most pronounced theoretical advocate in modern political economy is Wolfgang Streeck, who has described the embedded post-war consensus as a system of “democratic capitalism”. Streeck’s synopsis of the Eurozone crisis, Buying Time, argues that this democratic embedding of capitalism was always fragile and crisis-prone. Since the erosion of national social democratic structures in the late 1960s, European governments have been applying increasingly threadbare bandages to the growing disconnect between the economic and social functions of the state. As wages fail to keep up with profits and the fiscal basis for universal public services crumbles, ruling classes have sought various means of avoiding the reassertion of democratic demands for a social state. High finance and industrialists have spent decades attempting to disentangle their economic interests from national democracies by constructing increasingly inter-connected and financialised forms of capital accumulation. The European single market and its stringent restrictions on national autonomy in economic policy-making are among their key achievements. These systems are opaque, unaccountable and undemocratic. Their political correlate is the double-edged sword of a nominally apolitical and detached class of technocrats locked in a growing struggle with an inchoate and ever-more furious set of populisms.

In this context, the structural causes and indeed potential function of Brexit becomes reasonably clear; and it also makes the appeal or a “hard” Brexit over its “soft” alternative more apparent. It is an attempt to “take back control”, not only in terms of laws and state functions taken back from Brussels, but also to reassert the embeddedness of market forces in some kind of integrated social whole. Theresa May’s surprising boldness over the extent of Britain’s disentanglement from the European Union comes from a recognition that British society is basically falling apart. Her willingness to terrify business, her apparent tolerance of a plummeting pound, and her nonchalant attitude to the economic impact of measures such as proposed migration restrictions, represent a fundamental divergence from the immediate economic interests of business. Years in the Home Office, Britain’s most paranoid and apocalyptic government department, have prepared her for a very specific and rarely visible state function: maintaining social order, perhaps the only task that can possibly take priority over private profits. May is imposing the will of political power on an economic system which has come to expect its every demand to be met, and for the social consequences to be borne by the worse-off.

The significance of this transition has not yet been fully comprehended. In the chief organ of business opinion, the Financial Times, leading economic commentator Martin Wolf recently condemned May’s use of “unwise words” and “loose talk”, which have had material consequences for the stock markets and the value of the pound. Wolf correctly points out the clear limits to sovereignty imposed upon Britain by its participation in a liberalised economy and its reliance on global finance capital. However, he fails to realise the power which the idea of sovereignty retains or even gains in these circumstances. The gap between the economic realities of market forces and the political aspiration for social embeddedness can only be stretched so far before it springs back.

Social Nationalism

One necessary conclusion from this is that the British left must begin to take nationalism much more seriously. It is categorically not a simple case of “false consciousness”, a form of glorified propaganda with which the rich keep everyone else in line. Nor is it a form of social solidarity that can be stabilised within some kind of progressive consensus, as certain left-wing intellectuals in Scotland and England have been suggesting. Nationalism is the product of a particular antagonism, between the objective structures of the state as a means of keeping order, and the ways in which that order is subjectively experienced by the people who live under it. In whatever passes for “normal” times, the state’s usual function – greasing the wheels of capitalism – leads inexorably towards the kind of utopian, disembedding economic policies that suit the immediate interests of capital. ‘Neoliberalism’ was one such programme. Such a movement, however, kickstarts the counter-movement, which reasserts some sort of social interest within the prevailing political-economic framework. Given that the experience of capitalism, be it through labour or leisure, occurs through a primarily national lens across most of the world, the counter-movement tends to make its demands within a national frame. But sometimes, depending on the particular circumstances, an alternative form of identity is more salient: resistance may be organised along sub-national or sub-cultural lines. The point is to re-establish some sort of legitimate community in which economic processes can continue.

Theresa May, the quiet Remainer, recognises that it is a social will rather than a clear economic interest which asserted itself so catastrophically with Brexit. She is now seeking to ensure that this interest forms the basis for the British state’s legitimacy as it deals with the ensuing crisis. May is trying to synchronise the “official” top-down form of nationality that underpins British state legitimacy with the more elemental national identity of that state’s frustrated subjects. Hers is a form of popular nationalism, drawn from a xenophobic and overwhelmingly English folk politics of a variety clearly distinct from Cameron and Osborne’s aristocratic idiom. The Eton set ran the country with all the empathy and understanding of an absentee landlord; the relentless pursuit of balanced budgets, the grasping emptiness of the “big society” and the gormless idiocy of holding the EU referendum in the first place betrayed a fundamental ignorance of the people whose lives they toyed with. Thus far, May appears rather more clued-up.

Britain has recently been shaken by two major episodes of populist upheaval. Both the Scottish independence referendum and the EU referendum were plebiscites where nominally non-party campaigns claimed to assert the social aspirations of the maligned majority against the status quo. Both referendums were extraordinary events that communicated the dissonance between Westminster politics and popular feeling. Campaigns which styled themselves as insurgent spoke against predominating economic interests of distant elites, be they based in Brussels, Westminster or the City of London. They prompted hundreds of thousands and sometimes millions of people to reject the economic “reason” of a faceless expert caste and opt for the warm, hearty distinctiveness of rogue individuals. Binary choices combined with populist mobilisation led to a rare moment of profound political realignment, forced onto a hitherto nimble elite by a stranger, cruder Machiavellianism of mass anger.

These commonalities should not be allowed to obscure the differences between Scottish ‘civic’ nationalism and May’s emergent pronounced British nationalism, which are evident at even a superficial glance. In terms of their institutional bases, their cultural character and their ideological positioning, these efforts to re-hegemonise politics are an ocean apart. This is, indeed, part of their power; they can be played off against each other, as May seeks to reunify a fragmented British society while Sturgeon gleefully distinguishes herself from the new Thatcher in the South. However, both cases can be viewed as attempts to re-embed increasingly destabilising market forces within a general cultural and ethical consensus. Both can perhaps be characterised as “social nationalism”, a term used by Gallagher, Scothorne and Westwell to describe Scotland’s new politics in their book Roch Winds: A Treacherous Guide to the State of Scotland. In both cases, the ideal of citizenship serves a particularly prominent role. In Scotland, this comes in the form of a doctrine of rights and social responsibilities and a notion of an economic life governed by the collectivist interests of social partners. Thanks to a long tradition of “administrative devolution” in the country, Scotland has a dual official nationality, and as a result the gap between official nationality and popular feeling never reached the chasm communicated by Brexit. Scottishness has done the heavy lifting of legitimisation when Britishness has failed, and the SNP have shifted comfortably from claiming the mantle of insurgent nationalism-from-below to becoming advocates of a comforting nationalism-from-above. The recent realignment in Scotland must be viewed as a process of legitimating the same basic form of politics – managerial, parliamentary, and comfortable with big business – as that which led to the Brexit result in the rest of the UK.

While the SNP and the Conservatives clearly stand on different parts of the political spectrum, and indeed represent rather different parts of their respective polities, the SNP are by no means a radical break from Westminster politics. Blairism, as Ken McLeod observed after the independence referendum, has arrived in Scotland belatedly but at the head of a popular movement New Labour could only have dreamed of. That movement is now being swallowed by a highly professionalised party machine. At the SNP’s recent conference, Tommy Sheppard ran against Angus Robertson for the party’s deputy leadership on a platform of democratising the party and engaging its enormous membership in campaigns and policy to an unprecedented extent. Robertson, who has led the party’s lurch to the right on foreign policy in recent years and offered little in the way of members’ engagement, flattened the Sheppard insurgency with 52% to the latter’s 25% on the first round of voting. Robertson was widely believed to be the leadership’s favoured candidate, urged to stand when Sheppard began gathering support. In policy terms the party is increasingly committed to hiding difficult political-economic decisions beneath a veil of technocratic “consultation” and expert advisory groups. The SNP’s recent announcement of a “growth commission” was met with barely a mumble of dissent, despite the fact that the commission was made up entirely of business owners, liberal economists and SNP politicians – not a trade unionist or environmentalist in sight.

Meanwhile, May-ism’s contours are just becoming apparent. A premium is placed on (re)constructing a sense of social cohesion. This necessarily entails giving heightened political recognition to those seen to maintain the social fabric of British society – either positively, by favouring them with policy, or negatively, by punishing those seen to be outside such a constituency. Such a vision is, of course, inherently racialised and exclusive. May’s brazen rejection of the globally minded as “a citizen of nowhere”, and her attack on “left-wing human rights lawyers harassing UK troops”, should not be read as occasional excesses or mere fodder for the Daily Mail. They contain the kernels of an outlook which redefines worth, value and belonging. Those who were until recently characteristically (even tokenistically) welcomed, such as patriotic skilled migrants, are newly suspect; not even foreign-born doctors are safe. Elements of loyalty and lineage thus merge in a redefined conception of fairness which rejects characteristic ‘neoliberal’ definitions of economic utility.

They say immigrants steal the hubcaps

Of the respected gentlemen

They say it would be wine an’ roses

If England were for Englishmen again

– The Clash, Something about England

Mayism has found itself tiptoeing across the faultlines of popular Englishness and official Britishness. While the new England has as its animating force the cultural and social project of an ever-harder Brexit, the old and faltering Britain remains above all else a vehicle for the accumulation and protection of capital at home and abroad. These two identities, once snugly intertwined, now frame a yawning, perilous void. Unlike Scottish nationalism, Englishness lacks institutionalisation or a clear place within a hegemonic political project. It has largely been defined as a subaltern identity asserted in opposition to elements of Britishness, especially in the latter’s cosmopolitan and metropolitan forms, but without a clear alternative. Elements of a distinctly English identity have occasionally been mobilised by Conservative politicians within broader attempts at giving economic upheavals a social and cultural facelift. Thatcherism’s attempt to find a social base for the property owning democracy was the most successful of these. Yet Mayism does not attempt to provide a social basis for an expansive era of capital accumulation. May is articulating a response to the chasm between economy and society that neoliberalism wrought, and imposing the political requirements of order at the expense of immediate economic interests of capital.

The Great Disintegration

It won’t work. May’s project will flounder. It cannot deliver the communitarian goals it strives for, and will damage Britain’s competitive position. The falling value of sterling will not provide the same benefits it did during the 1930s. Deindustrialisation and the continued reliance on international investment rule out an inwards-turning inflationary economic boom and there is no option for an imperial trading bloc, despite the fantasies of some Tories. Consumers will have to pay more for imported goods under conditions of prolonged stagnation. Any renewed emphasis on “Englishness” from the left or right, explicit or implicit, will find itself desperately looking around in vain for any substantial historic institutional basis. Opportunistic reformers will issue ever louder calls for an English parliament and further metropolitan and regional devolution, but without being part of an economic programme that can plausibly offer rising living standards and greater personal autonomy, constitutional change is a technocratic pipe-dream. And while Englishness stays lost in the clouds, Britannia will keep calm and carry on sinking beneath the waves. The Union will continue to flounder in a polarised climate but Scotland’s future is just as likely to be deferred; a cold war over independence will sustain a sabre-rattling SNP hegemony for some time yet. For Walter Benjamin, the true catastrophe was that “things keep going on like this.” In Scotland, things will keep going catastrophically nowhere.

The all-pervasive polarisation of British society, culture and politics can only intensify. Perhaps the greatest delusion to have gripped almost all participants in whatever passes for a British public sphere is that there is still hope for some major, unifying political project across the country. Corbyn’s election and the emergence of Labour as the largest party in Europe is a major event of huge historical importance, but it will not sweep to power on the back of some new UK-wide socialist consensus; it will on the contrary help to accelerate the long fragmentation of British politics into warring and mutually incompatible subcultures. Urban Britain, and especially its politically active and engaged sections, reject May’s program entirely. The culture war elements of Brexit, visible in the ‘48%’ as well as the ‘52%’, are bolstered by an essentially social democratic sensibility among city dwellers struggling in property and labour markets, with sympathy for welfare states and the public sector. There are further conflicts within these groups, for instance the emerging gulf in generational priorities even within the Corbynista echo chamber.

But this fragmentary political world cannot possibly be reflected in Westminster’s mirror. Electoral politics across the world has always sought unity, a “fictive unity” in Perry Anderson’s terms, which keeps the real sources of disintegration out of sight and mind thanks to the superficial juridical equality of the ballot. An effective political response to Brexit, and to Mayism, and indeed to any of the crises bearing down on this tiny island, must not only embrace fragmentation but actively pursue it; not in the constitutional sense, where some kind of British or Scottish national unity is the end goal, but in a social sense. There are enemies at home as well as abroad, and they already have the control which Brexit and Mayism promise to “take back”. Their power exists comfortably outside of parliament’s reach, no matter how sovereign that parliament purports to be. It has to be taken back in other realms – in the workplace and on the streets, the sites of conflict that go untouched by the consensual dynamic of parliamentarism. It is there that capital and the state exercise their real power, be it through police violence, starvation-level price rises, “market forces” sackings or simple asset stripping. When the true catastrophe of Brexit becomes all too clear, capital and the state will eventually secure order or profit through direct, unparliamentary coercion – they didn’t tell us we could do that.

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The collapse of the foreign exchange rate since the BREXIT referendum is on a scale we have not seen in many years and yet the government seems totally unconcerned. Indeed in large part the fall in the rate of exchange is directly the result of statements and actions taken by the government. Some decline in the rate was predicted following the referendum, but it seems now to be in free-fall as a result of recent declarations by a government that it is intent on what it calls a ‘hard BREXIT’. No one, least of all the government, has a clue what sort of trading arrangements are feasible and attainable in a world of managed trade and within the WTO framework. At the present time at least 44% of all UK trade is with the EU and it seems highly unlikely that access to this market can be retained unless the UK accepts free movement of labour.

So it is unsurprising that, in these conditions of uncertainty, the exchange rate has collapsed. But the scale of the decline in the exchange rate has been greater than anyone had predicted. Sterling has fallen sharply against the US dollar to a rate not seen since the 1980s and there have been similarly sharp falls against the euro. In the case of the dollar and the euro there are now predictions that the rates may fall to parity within the next few months with huge implications for the British economy and for general living standards.

The overall effect of exchange depreciation on this scale is to reduce real national income – the cost of imports is increased and export prices are lowered. In the short run also the current account will worsen since the cost of imports rises and any growth in export volumes will depend on conditions in foreign markets and on the ability to increase UK productive capacity. But the government seems unperturbed both by the scale of the exchange rate decline and by the potential economic costs that will inevitably follow. It is worth noting that the Treasury assessment of the costs of BREXIT made prior to the referendum predicted a decline of between 5.4% and 9.5% of GDP over 15 years, and losses of revenue per annum of between £38b and £66b over the same period of time because the tax base would be much smaller.

Government having largely created the conditions under which the exchange rate has collapsed now has more or less no instruments of economic policy available with which to reverse the decline and seems totally fazed about what to do. Since the end of the Bretton Woods system of fixed exchange rates in the early 1970s the world has operated under conditions of variable rates which have fluctuated in accordance with market conditions – the latter have in general reflected fundamental economic conditions in different countries. Countries with dynamic and competitive conditions have experienced strong balance of payments positions and other less successful countries the opposite with associated high levels of international debt. Germany is a good example of a country with a strong balance of payments and while one might have expected the exchange rate of Germany to appreciate this in fact has not happened because the Eurozone is a system of fixed exchange rates. Exchange rates have thus been prevented from playing their appropriate role within the Eurozone with very undesirable effects.

The UK very sensibly refused under Blair/Brown to join the Eurozone and sterling has floated against all other countries globally with the exchange rate being permitted to play more or less its appropriate role in the conduct of economic policy. Of course what we have experienced globally, including the UK, has been a system not of freely floating rates but one of managed rates where countries have used instruments of monetary policy to influence the level of their exchange rate so as to achieve competitive advantages. Thus countries could use exchange controls so as to influence capital movements or levels of domestic interest rates as ways of attracting capital. In recent years, for example, Switzerland has levied negative interest rates on bank deposits as a way of deterring capital inflow and thus damping to some degree the appreciation of the Swiss currency. Japan has similarly set domestic interest rates at levels to reduce appreciation of the yen. One of the costs of the Eurozone for members is that individual countries do not have control of the level of interest rates which are set by the European Central Bank and these may be totally inappropriate for individual countries such as Greece or also Italy which have large fiscal deficits.

The UK has for many years been running a deficit on its current account of the balance of payments. In other words there has been a large excess of imports of goods and services over what is exported. In the second quarter of 2016 the current account deficit was no less than 5.9% of GDP and deficits of this sort of scale have been common for many years. Of course a country can only continue to run a large current account deficit if it either has large foreign exchange reserves which the UK does not have [indeed it has been engaged in reducing their level as a means of financing domestic fiscal deficits under the previous Chancellor Osborne] or else it borrows extensively overseas.

And herein lies the first of the problems facing the government. How to generate the conditions favourable to continued foreign capital inflow so as to finance the huge current account deficit and at the same time have low domestic interest rates, with the value of sterling in free fall. The Bank of England in August reduced its key short term interest rate to 0.25% in an attempt to sustain domestic demand in response to the uncertainty released by the Brexit referendum. But low interest rates act as a deterrent to foreign capital inflow and are unlikely to do much to sustain domestic demand. Foreign capital will of course see opportunities to buy British financial and non-financial assets since the sterling cost has fallen as a result of the exchange rate depreciation but similarly their foreign exchange value will be lessened as and when they attempt to liquidate these investments. For any investor it would pay to hold off buying sterling assets until the exchange rate has stopped falling, and it looks as if it will not do so until later in 2017 when it may be clearer what BREXIT means for the British economy.

The Bank (and Government) could reverse its current interest rate strategy (low rates to sustain domestic demand) but any significant rise would create chaos given the level of secured (mortgage) and unsecured debt much of it unfinaceable if rates were to rise. To finance the current account deficit through encouraging capital inflows through higher interest rates would add to the domestic deflationary pressures already caused by the threat of Brexit and thus causing higher levels of unemployment and widening the fiscal deficit as automatic fiscal stabilisers kick in. As output contracts tax receipts fall and higher levels of unemployment generate more government expenditure on welfare and other payments. It would also create chaos in the housing market because it would generate widespread negative equity.

What to do in situations of policy conflict such as this? Well the government story repeated ad nauseam by ministers who seem to understand nothing about economics is that the fall in the exchange rate will boost demand through encouraging exports. Now to a degree this may indeed happen – but with long lags and the scale of any general increase in demand is highly uncertain and probably not very large. Exports currently account for some 28% of GDP and since manufacturing output in the UK is now less than 15% of GDP the leverage that is possible through an expansion of the component of demand that is considered sensitive to a falling exchange rate is relatively small. Plus, and this is very important, there is a very significant import content of exports – estimated by OECD as 23%. A large part of both UK manufacturing output and especially of exports is through chains of inputs that are highly specialised and not easily substitutable from other suppliers. So as the exchange rate depreciates so also does the cost of inputs rise for both domestic markets and for exports – as we have seen for the latter by almost a quarter. So a significant part of the competitive gain to exporters from the fall in the exchange rate of sterling is offset directly by the rising cost of imports that are key inputs in production.

There will also be indirect effects on the cost of exports which derive from domestic cost adjustments as the impact of the decline in the exchange rate feed through into the economy. Imports are 30% of GDP and a fall of, say, 15% in the sterling exchange rate will add something like 5% to domestic costs of all food and other commodities, including fuel where increases in petrol and diesel prices have already been announced by suppliers. Oil prices are set internationally in US$ so the fall in sterling against the $ immediately causes an increase in the price of fuel in sterling terms.

The UK is now as a result of globalisation very dependent on foreign supply of many industrial products with few alternative domestic sources and their costs will inevitably increase. The exchange depreciation that has already occurred will raise domestic costs of production and add directly to prices of more or less everything. There will thus be an impact on domestic cost and price levels and a fall in domestic disposable incomes. This will have multiplier effects on domestic demand and lead to further rounds of output contraction. How wages and incomes will react is uncertain but pressure on disposable incomes and rising unemployment is bound to be resisted across all sectors of the economy.

There are other features of the situation that are worth noting in part because they are longer term in their origin and undermine the government’s strategy [if one can call it that]. If there is to be a rise in net exports (a fall in imports and an increase in exports caused by the fall in the sterling exchange rate) then UK output has to become more competitive. But as we have seen the current account of the balance of payments has been in large deficit for many years and this reflects the general uncompetitiveness of the economy. The exception to this statement is the financial services sector (more on this below) but otherwise the UK has displayed low levels of international competitiveness. This reflects the low level of productive investment and a total disregard by government and private industry of the skills of the domestic workforce.

The ONS has just published data on comparative labour productivity which makes only too clear the gap between UK and its main competitors. In 2014 output per hour worked in Italy was 10% more, in the USA and France 30% more, in Germany 36% more than in the UK. For the G7 countries the average productivity level was 18% more than the UK. This gap reflects low levels of investment per worker in the UK, low levels of investment in skills and especially low levels of Research and Development expenditure. In the case of the latter the UK spends 1.7% of GDP whereas Germany spends 2.9% and the US 2.7% (for the EU of 28 countries the average level is 1.95%). The UK for example trails the USA in productivity per worker in all sectors according to the ONS and especially in manufacturing. So how is the UK supposed to take advantage of a change in the financial exchange rate given these underlying factors which ultimately determine international competiveness?

Of course one of the factors that has made it possible for the economy to function more or less effectively has been the ability to draw on the international market for skills. This reflects the abject failure of governments over many years to invest in education and training. There are key sectors which are totally dependent on recruitment of overseas labour including health and social care, financial services, higher education and basic scientific research, construction and transport. It takes many years to train people and ensure their appropriate experience and yet government has said that it will restrict immigration irrespective of the needs of different productive sectors as part of its hard Brexit policies. It is unsurprising in these conditions and also facing the uncertainty of levels and instability of exchange rates that businesses have declared their opposition to the government’s stand on Brexit.

The UK has become since it joined the EU in the 1970s an important destination for direct investment less because of the opportunities opened in the UK market and more because it was a base for exporting to the rest of the EU. The EU is now the largest market worldwide and yet the hard BREXIT stance of Government threatens access to the single market. British producers will, if BREXIT is implemented as planned by the Government, face the common external tariff which will make it more expensive to sell against competitors inside the EU. The tariff is substantial – intended to be protective – and will further erode any advantage a fall in the sterling exchange rate gives to British located producers.

The tariff plus the rise in the import costs noted above (and any consequent rise in UK costs such as wages) will erode a large part of any exchange rate benefit to UK based producers. It is unsurprising in these circumstances that a major car producer such as Nissan which sends most of its output to the EU has indicated that all investment is on hold until such times as the present uncertainty of exchange rates and access to the EU market are resolved. Fuji with a labour force in the UK of 14,000 has also voiced its dismay with the proposed exit from the EU. These are among many companies who have located in the UK to benefit from being inside the EU tariff system who will now be having second thoughts on location and levels of production. In the process investment will be cut back and new direct investment flows be reduced so worsening the overall balance of payments.

The key dynamic sector for both employment growth and as a share of GDP for many years has been financial services. These now account for some 10% of GDP and are a major source of tax revenue for the government. The growth of this sector has been largely determined by privileged access to the EU market together with extremely weak supervision by the British banking authorities. It seems evident from statements made by the EU that the current access to the EU under the so called ‘EU passport’ for British financial firms will be discontinued and that the particular locational advantages of being in UK will disappear. This is analogous to the point made in the last paragraph about firms locating in the UK so as to have access to the single market. Again some banks have already indicated that they will relocate to Frankfurt or Paris if a hard Brexit is pursued, and this will reduce substantially exports of services and thus add to the current account deficit of the balance of payments. It will also of course lead to a loss of jobs and reduced payments of taxes to the Treasury so adding to the fiscal deficit.

Why are we in this mess?

This is the $64,000 question and there doesn’t seem to be any simple answer. The instability of the exchange rate and the scale of the fall are creating major problems for all producers – and consumers as well. The government seems oblivious to the costs of its policy both now and in the medium to long term. Its own internal Treasury estimate of the costs for output and employment and to the public finances are unfortunately only too realistic – if anything they underestimate the size of the problems facing the UK. There are clear conflicts of economic policy since interest rates have to be focused on the state of domestic demand/output and cannot be used for managing the exchange rate. In these circumstances and given the totally unrealistic policy on foreign trade it is inevitable that the sterling rate will depreciate and go on falling against other currencies. There are no benefits to be derived from such a drastic decline in the exchange rate as we have witnessed recently since any adjustment of domestic cost conditions so as to increase net exports will take many years to create.

The changes in economic policy that are needed are self evident; a clear statement that the UK will remain in the single market with all that that implies. There is undoubtedly scope for management of labour flows into the UK that will meet EU regulations and these need to be explored. Many EU countries in practice have regulations relating to employment and residence that effectively restrain the flow of migrants and these seem perfectly consistent with access to the single market. Drawing on international skills is critical to the performance of the economy and should be encouraged. Reducing exchange rate instability will be critical to inducing capital inflows and making the UK a destination for productive direct investment. Uncertainty needs to be reduced and confidence again created in the British economy. Domestic investment needs to be increased – both public and private – and a real effort made to create a larger pool of skilled and educated labour.

Whether the current government understands the depth of the problems it has largely self-created is uncertain. And whether it has the courage and foresight to reverse its present policies is a great unknown. One would like to be positive but this might be a level of optimism too great.

The post The government’s got Britain caught in an exchange rate trap appeared first on New thinking for the British economy.

It is evident that special factors flowing from the decision on BREXIT affect British economic policy, but the UK is not alone in having relied on monetary instruments to stabilise its economy after the financial crisis of 2008. Both the US Federal Reserve and the European Central Bank have pursued a similar path and all the key Central Banks now face the same set of problems. In the UK a policy of fiscal austerity was imposed by government whereas the Eurozone countries were required to operate within the discipline of the so-called Stability Framework. The latter restrained the use of fiscal policy as an instrument of economic stabilisation and as a result many countries in the euro zone have had years of anaemic growth and high levels of unemployment.

Apart from the Guardian most commentators expect the economic situation post BREXIT to worsen. Exactly why the Guardian has taken the rather rosy view of the impact of BREXIT is unclear although one of its most informed commentators (Will Hutton) has outlined in ‘Don’t be fooled. There will be damaging fallout from Brexit’ exactly why the country faces severe and worsening economic conditions due to BREXIT. In this respect Hutton is very much in line with the Bank of England which in its August 2016 Inflation Report set out its analysis of the effects of BREXIT and announced changes in monetary policy. The Bank concluded, ‘the outlook for growth in the short to medium term has weakened markedly…[with] a downward revision of the economy’s supply capacity… and eventual rise in unemployment’.

The Bank predicts little growth during the second half of 2016 with further declines in business investment and weaker levels of personal consumption. Business investment was already falling prior to the EU referendum and continuing uncertainty is expected to depress it further. Against a background of continued weakness in the balance of payments where in Q1 of 2016 the deficit on the current account was 6.9% of GDP and likely to worsen further in the coming months. Furthermore the fall in the exchange rate will have an impact on disposable real income due to rising import prices and their effects on domestic costs of production, and thus depress domestic consumer expenditure.

Given this economic scenario what has the Bank proposed? In summary it is the following:

The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment. At its meeting ending 3 August 2016, the MPC voted for a package of measures designed to provide additional support to growth and to achieve a sustainable return of inflation to the target. This package comprises: a 25 basis point cut in Bank Rate to 0.25%; a new Term Funding Scheme to reinforce the pass-through of the cut in Bank Rate; the purchase of up to £10 billion of UK corporate bonds; and an expansion of the asset purchase scheme for UK government bonds of £60 billion, taking the total stock of these asset purchases to £435 billion. The last three elements will be financed by the issuance of central bank reserves.

What is one to make of these proposals? Inflation is presently not a problem although the effects on prices from the fall in sterling against other currencies will inevitably feed through into costs and prices at some point. More worrying for future levels of inflation is the impact of Quantitative Easing [QE] where a further expansion of £60 billion is proposed on top of the enormous increases since 2009 – taking the total to £435 billion. Furthermore the purchase of corporate bonds and the new Term Funding Scheme to reinforce the cuts of Bank Rate to 0.25% will also add to domestic liquidity.

It is also worth noting that in July the Bank announced further cuts in banking reserve requirements so as ‘to lower the countercyclical capital buffer rate from 0.5% to 0% of banks’ UK exposures  [which] will support lending to households and companies’. The effects of all this monetary easing are totally unpredictable and the Bank’s rationale unconvincing in the light of recent experience.

On QE the Bank has written that, ‘cash injections lower the cost of borrowing and boost asset prices to support spending and get inflation back on target’. Possibly it does to a degree but does one really believe that the economic benefits of QE derived through changes in asset prices are worth the potential future cost in terms of inflation? QE has certainly been a major factor in house price inflation where the cost of housing (both to buy and to rent) is massively out of line with incomes, with all sorts of negative externalities (including increasing rates of homelessness and massively increased expenditure by the state on housing support). Households are as a result having to pay a much higher percentage of their income on housing.

No one (apart perhaps from the Bank) really believes that a worthwhile expansion of domestic demand is feasible and desirable through the wealth effects of rising asset prices as stock markets have also boomed due to QE and house prices rocketed. If one wants to boost domestic expenditure so as to increase demand then fiscal policy is surely the preferred instrument of policy and not the blunderbuss of monetary easing.

The other key change is the further reduction in short term interest rates which were already at historically low levels. It is hard to believe that a further cut of 0.25% is likely to lead to any increase in long term business investment which has been generally depressed since the financial crisis of 2008/9. In the conditions of market uncertainty, intensified by BREXIT, it seems highly unlikely that firms will want to borrow and invest with major and continuing consequences for growth and for employment. Indeed there is doubt about whether the cuts in Bank Rate will actually be passed on by financial institutions which is the rationale for the new Term Funding Scheme which is to ‘reinforce the transmission of Bank Rate cuts.’

The evidence of past behaviour by banks would leave one sceptical about any cut in Bank Rate leading to a fall in lending rates especially given the current pressure on bank profits. Financial institutions are much more likely to pocket the cut in Bank Rate rather than pass it on to their customers – both business and private. After all QE itself puts downward pressure on bank profits. Many important institutions are facing severe financial problems directly as a result of current monetary policy, with pension funds experiencing severe deficits and increasingly exploring risky investment strategies. For pensioners this will mean much reduced pensions compared with what had been expected with levels well below what are considered adequate for retirement.

Another key question is how will households respond to the cut in Bank Rate assuming that this in part is passed on in lower lending rates. Here there is also great uncertainty in part because falling output will further depress employment which will have some negative effect on disposable income. Much more important will be the direct and indirect impact of rising import prices on real disposable incomes as the 10% fall in sterling exchange rates so far feeds through into prices. These depressive forces will be strengthened by the impact of even lower interest rates on savings which are already so low as to have adversely affected incomes, especially of pensioners, and thus have added to the slow growth in domestic demand in recent years.

The Bank argument that falling interest rates will lead to dissaving looks very unconvincing given the general uncertainty created by BREXIT and savers are likely if anything to cut back on expenditure rather than spend. Even more worrying is the effect of continued extremely low interest rates on the whole culture of savings in the medium to long term since it must surely be an objective of policy to encourage savings for retirement rather than have these costs fall on the state. There can be no doubt that current policies have had significant distributional effects since continuing low interest paid to savers have in effect subsidised borrowers thus inducing a growth in both secured and unsecured debt that is unsustainable.

Also imponderable is how will personal borrowers respond to yet another cut in short term interest rates – whether there will be a greater demand for both secured (mainly mortgage debt) and unsecured credit (on bank cards and so on). It can be assumed that the last thing the Bank wants to encourage is yet further speculation in housing funded by lower interest rates on mortgage debt and easier access to it as a result of QE (which expands bank and building society deposits – assisted by the new Term Lending Scheme). Given the more or less fixed stock of housing and the excessive pressure already in some regions (London and the South East) more mortgage financed expenditure which will merely raise housing costs even further.

Many households since 2009 have been encouraged by low interest rates on mortgages and their plentiful supply to take on large amounts of additional debt so that the ratio of mortgages to income is now extremely high. Any increases in interest rates are thus likely to cause immediate problems with repayments and thus lead to possibly catastrophic falls in house prices. This is a potentially significant effect of any shift in monetary policy away from low interest rates, and yet the Bank may be forced by the state of the external balance to raise these so as to finance a continuing current account deficit by encouraging capital inflows.

There are already some signs that parts of the housing market are feeling the negative effects of BREXIT (especially luxury flat purchases by foreigners who now face much more exchange rate uncertainty and greater probability of property price declines). One would anticipate that domestic borrowers are not likely to take on much more mortgage debt given the existing excessive ratio of borrowing to income and the much greater uncertainty about the path of personal incomes and future house prices.

How about unsecured borrowing? Here it needs to be recalled that total unsecured debt in the UK by households (excluding mortgage debt) rose by £48 billion in 2012-2015 to a total of £353 billion in 2016. So during the years after the financial crash when personal incomes were squeezed and real  wages fell in the UK (more than in all the other OECD countries other than Greece) households responded by taking on additional debt. The scale of the problem is such that a report by the TUC found the following:

Overall, 11 per cent of households holding any form of unsecured debt are estimated

as over-indebted in 2015, more than double compared to the 5 per cent in 2012. Of

the over-indebted households, half are extremely over-indebted and so paying out

more than 40 per cent of their income to their unsecured creditors. In total, 3.2 million households or 7.6 million people are over-indebted, an increase of 700,000 or 28 per cent since 2012. On this basis nearly one in eight of all UK households are currently over-indebted. Likewise, 1.6 million households are in ‘extreme debt’.

It seems highly unlikely and highly undesirable as an object of economic policy to encourage yet further borrowing by a personal sector that is already highly leveraged. So where is the domestic demand growth going to come from if the economy is not to enter a deep recession? As noted above the business sector faces such uncertainty and such weak demand growth that they will not seek to expand their stock of fixed assets. While there might be some demand [net] as a result of the fall in the exchange rate this will depend on the trading arrangements finally concluded as a result of Brexit and be highly uncertain. Monetary policy under present conditions mirrors exactly the state that Keynes wrote about in the General Theory where there exists a ‘liquidity trap’ such that easing monetary conditions simply leads to the holding of excessive balances and a weak demand response [at best].

Key Policy Choices for UK

What needs to happen? Firstly, the British government needs to make it clear now that it will seek a permanent and ongoing trading relationship with the EU that as far as possible retains the existing set of arrangements. Anything else will leave the economy floundering in a world of uncertainty that will lead to falling output and rising unemployment – both avoidable. The EU referendum has already worsened the economic performance of the UK and economic policy needs to be re-set so as to sustain output and employment. We already have lower interest rates than other countries so there is no mileage in further cuts into negative territory for reasons marshalled above.

Secondly, the government needs to re-establish growth through a fiscal and industrial strategy that meets the needs of the country rather than one which is ideologically based. If the UK is to be able to compete in a globalised world then it needs public investment in both infrastructure and in human capital. It is precisely at a time of historically low interest rates that the government should expand its investment expenditure, through borrowing mainly and through higher taxation on the top 1%. The UK cannot possibly compete with China and the rest of Asia in terms of labour costs and cuts in nominal [and real] wages on the scale needed to do so are infeasible. So there is no choice but to invest in skills, training and education if UK is to remain a major trading country.

Finally, the argument that increasing the public debt will be inflationary has been shown to be a fable. During the period of the Cameron government, fiscal policy was a significant drag on the economy – totally unjustified in terms of constraints in financing borrowing in the capital markets. One consequence of neo-liberal fiscal policy was a major cutback in the level of public investment which is so essential for inducing and supporting investment by the private sector. It is unsurprising that productivity slowed further since the financial crisis of 2008/9 given the setting of fiscal policy which was based on rolling back the state. Yet the activities of the state are so critical for inducing productivity growth directly through its investment in people and in infrastructure.

Conclusions; policy choices for Europe

The key question now facing all of the Central Banks is how to re-establish more normal monetary conditions and when to do so. Clearly at some point rates of interest will have to be ‘normalised’ in all of the main countries but how to bring this about and what levels should be established are matters of judgement. The attempt by the Bank of England recently to establish a new lower rate of interest (noted above) was largely frustrated because insurance companies and pension funds (and other institutions) did not want to exchange existing holdings of government debt for cash. So it is not obvious how easy it will be through open market operations for Central Banks to actually move to higher interest rates and the process of trying to do so will probably bankrupt them. Currently the Bank of England and the European Bank are holding huge stocks of debt that they have purchased and in order to push up interest rates they will have to sell this debt with capital losses.

Perhaps more important are the effects on economic and social systems of moving to higher levels of interest rates in the near future. In part Central Banks have been using changes in the level of rates as a means of influencing their exchange rate – a beggar my neighbour policy that is generally condemned, but that doesn’t prevent countries from doing it. Of course shifting to higher interest rates has the potential for causing widespread  economic and social distress. To what extent other countries in the EuroZone will be similarly affected by rising interest rates is unclear but there would inevitably be widespread economic disruption. Given the already high levels of unemployment in Italy, Spain, Portugal and France any further fall in demand caused by higher interest rates would be disastrous.

There is, finally, the question that has been raised by Larry Summers which is whether we are facing in the US and Europe a set of structural conditions where for years to come output and incomes will grow much more slowly than in the past. A similar set of predictions were made during the Great Depression of the 1930s but the expected impact never materialised.  As we have argued many countries are now locked into such a trap and it is not at all clear how they exit and what role monetary policy needs to play. Clearly there is no case for the current fiscal straightjacket that the UK and the Euro Zone have imposed on themselves and the case for injecting demand through budgets has been made by many eminent economists – most notably Paul Krugman.

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Public promotional banks are used in many countries to provide cheaper credit to infrastructure projects and businesses. Given that investment in these areas has been endangered by austerity, setting up a national investment bank seems like a sensible move to help shield capital investment from opportunistic government cuts.

But let’s not just set up a bog-standard promotional bank. As I discussed recently, the results of these initiatives tend to be underwhelming. We should be more ambitious. We should set up a decentralised and locally accountable “National Investment Bank Network” with branches at the municipal level; a network of Regional Investment Banks. These would be public services working closely with municipalities and county councils, local companies and local initiatives. They would help to identify and develop investment opportunities and provide tailored finance to support the economic revitalisation of communities across the UK. They should:

Support small businesses directly: The usual practice of lending to other banks “for on-lending to Small and Medium-sized Enterprises” is just a cheap way to hit targets – there’s no way to know how much SMEs really benefit. A public service investment bank should invest in municipal-level branches and local client relationships to support small businesses directly.

Package funding with technical support: This would unlock investment opportunities, local municipalities, businesses and social enterprises need advice and support. Matching funding with technical support can have a larger macroeconomic impact than just trying to lower costs and maximise volumes.

Support the cooperative economy: We need not just investment in businesses, but a different way of doing business. Corbyn’s Digital Democracy Manifesto proposes that the national investment bank will be used to support platform cooperatives. Indeed, all kinds of cooperatives and social enterprises such as housing associations should be prioritised, helping to bridge the funding gap for coops and providing backing such as guarantees for cooperative P2P financing. 

Be radically democratic: We need to explore and develop a new public service model that moves away from top-down command management and fosters accountability to workers and the communities they serve. This model would be based around four principles of organisation (1) Run the local branches like cooperatives, so that managers are selected and accountable to the whole workforce and not the other way round. This already helps to reflect the public interest and keep managers honest. (2) Vest branch ownership in local authorities and make them accountable to those authorities, if not directly to citizens. Branch workers should decide operational matters (e.g. which projects are worth funding) and local communities should set the policy priorities (coops or housing or renewables…?). (3) Confederate these branches to create each Regional Investment Bank, like a coop of coops, each with a with a regional HQ to provide services to the network and support pan-regional operations. (4) Coordinate the actions of these regional banks at a national level. This way the whole system becomes radically democratically accountable, and very hard for the national elite to capture.

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In some ways the UK economy is doing quite well. There is nearly full employment. We are experiencing some – but not much – economic growth. Inflation is not a problem. But in other ways we are doing much worse.

In particular, the UK economy is extremely unbalanced in at least five ways. The proportion of our national income which we devote to physical investment is one of the lowest in the world, which is the main reason why we have almost no increase in productivity. We have de-industrialised to a point where we cannot pay our way in the world. For this and other reasons we have a massive balance of payments deficit, now running at about 7% of GDP.

To finance this deficit, we are running up debt in all directions. Our debt is growing much faster than our capacity to service it, let alone repay it. And finally, what little growth we do have is almost entirely driven by consumer demand and not by net trade (export minus imports) and investment. Because of all these inter-related problems, we have static incomes, widening disparities in wealth and incomes, a deeply divided country on both socio-economic and regional counts, and an unsustainable future.

What can be done to overcome these problems? Basically, they all stem from the same source. Our economy is deeply uncompetitive. The price we charge the rest of the world for our goods is far too high, which is why most of our industry has collapsed. Even as late as 1970, almost on third of our GDP came from manufacturing.  Now it is barely 10%. Because most manufacturing has for a long time been unprofitable to locate in the UK, we don’t invest in it, which is a major reason why our total investment levels are so low.

No other developed country has a foreign payment balance as bad as ours.  We cannot go on enjoying a living standard which is 7% more than we are earning. No wonder, then, that we are running up debts at an unsustainable rate. A foreign payments deficit sucks demand out of the economy which has to be made up by spending financed by borrowing if the economy is not to collapse. This is why both the government, the corporate sector and consumers are now borrowing at unprecedented rates to plug the gap left by our foreign payments deficit, which may be as high as £130bn this year.

Our problem is that for decades now, the UK has had no exchange rate policy. The value of the pound has been left to market forces, which have driven it up to unsustainable levels as we have allowed ourselves to borrow and to sell off assets like no other country in the world. The result, as most manufacturing has become unprofitable, is that industry has been starved of talent, investment has slumped, we have not got enough to sell abroad to pay for our imports, and we are getting deeper and deeper into debt. We can’t go on like this. We need to get a grip on this situation before it is too late, and implement currency devaluation. This would make UK-manufactured goods cheaper on the foreign market, going some way to boosting our manufacturing industry and resolving our huge trade deficit. We need a government that realises that the value of the pound is the most important price in the economy. 

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