Michael Hudson: America"s Monetary Imperialism

Authored by Michael Hudson via Counterpunch.org,

In theory, the global financial system is supposed to help every country gain. Mainstream teaching of international finance, trade and “foreign aid” (defined simply as any government credit) depicts an almost utopian system uplifting all countries, not stripping their assets and imposing austerity.

The reality since World War I is that the United States has taken the lead in shaping the international financial system to promote gains for its own bankers, farm exporters, its oil and gas sector, and buyers of foreign resources – and most of all, to collect on debts owed to it.

Each time this global system has broken down over the past century, the major destabilizing force has been American over-reach and the drive by its bankers and bondholders for short-term gains. The dollar-centered financial system is leaving more industrial as well as Third World countries debt-strapped. Its three institutional pillars – the International Monetary Fund (IMF), World Bank and World Trade Organization – have imposed monetary, fiscal and financial dependency, most recently by the post-Soviet Baltics, Greece and the rest of southern Europe. The resulting strains are now reaching the point where they are breaking apart the arrangements put in place after World War II.

The most destructive fiction of international finance is that all debts can be paid, and indeed should be paid, even when this tears economies apart by forcing them into austerity – to save bondholders, not labor and industry. Yet European countries, and especially Germany, have shied from pressing for a more balanced global economy that would foster growth for all countries and avoid the current economic slowdown and debt deflation.

Imposing Austerity on Germany After World War I

After World War I the U.S. Government deviated from what had been traditional European policy – forgiving military support costs among the victors. U.S. officials demanded payment for the arms shipped to its Allies in the years before America entered the Great War in 1917. The Allies turned to Germany for reparations to pay these debts. Headed by John Maynard Keynes, British diplomats sought to clean their hands of responsibility for the consequences by promising that all the money they received from Germany would simply be forwarded to the U.S. Treasury.

The sums were so unpayably high that Germany was driven into austerity and collapse. The nation suffered hyperinflation as the Reichsbank printed marks to throw onto the foreign exchange market. The currency declined, import prices soared, raising domestic prices as well. The debt deflation was much like that of Third World debtors a generation ago, and today’s southern European PIIGS (Portugal, Ireland, Italy, Greece and Spain).

In a pretense that the reparations and Inter-Ally debt tangle could be made solvent, a triangular flow of payments was facilitated by a convoluted U.S. easy-money policy. American investors sought high returns by buying German local bonds; German municipalities turned over the dollars they received to the Reichsbank for domestic currency; and the Reichsbank used this foreign exchange to pay reparations to Britain and other Allies, enabling these countries to pay the United States what it demanded.

But solutions based on attempts to keep debts of such magnitude in place by lending debtors the money to pay can only be temporary. The U.S. Federal Reserve sustained this triangular flow by holding down U.S. interest rates. This made it attractive for American investors to buy German municipal bonds and other high-yielding debts. It also deterred Wall Street from drawing funds away from Britain, which would have driven its economy deeper into austerity after the General Strike of 1926. But domestically, low U.S. interest rates and easy credit spurred a real estate bubble, followed by a stock market bubble that burst in 1929. The triangular flow of payments broke down in 1931, leaving a legacy of debt deflation burdening the U.S. and European economies. The Great Depression lasted until outbreak of World War II in 1939.

Planning for the postwar period took shape as the war neared its end. U.S. diplomats had learned an important lesson. This time there would be no arms debts or reparations. The global financial system would be stabilized – on the basis of gold, and on creditor-oriented rules. By the end of the 1940s the Untied States held some 75 percent of the world’s monetary gold stock. That established the U.S. dollar as the world’s reserve currency, freely convertible into gold at the 1933 parity of $35 an ounce.

It also implied that once again, as in the 1920s, European balance-of-payments deficits would have to be financed mainly by the United States. Recycling of official government credit was to be filtered via the IMF and World Bank, in which U.S. diplomats alone had veto power to reject policies they found not to be in their national interest. International financial “stability” thus became a global control mechanism – to maintain creditor-oriented rules centered in the United States.

To obtain gold or dollars as backing for their own domestic monetary systems, other countries had to follow the trade and investment rules laid down by the United States.

These rules called for relinquishing control over capital movements or restrictions on foreign takeovers of natural resources and the public domain as well as local industry and banking systems.

By 1950 the dollar-based global economic system had become increasingly untenable. Gold continued flowing to the United States, strengthening the dollar – until the Korean War reversed matters. From 1951 through 1971 the United States ran a deepening balance-of-payments deficit, which stemmed entirely from overseas military spending. (Private-sector trade and investment was steadily in balance.)

U.S. Treasury Debt Replaces the Gold Exchange Standard

The foreign military spending that helped return American gold to Europe became a flood as the Vietnam War spread across Asia after 1962. The Treasury kept the dollar’s exchange rate stable by selling gold via the London Gold Pool at $35 an ounce. Finally, in August 1971, President Nixon stopped the drain by closing the Gold Pool and halting gold convertibility of the dollar.

There was no plan for what would happen next. Most observers viewed cutting the dollar’s link to gold as a defeat for the United States. It certainly ended the postwar financial order as designed in 1944. But what happened next was just the reverse of a defeat. No longer able to buy gold after 1971 (without inciting strong U.S. disapproval), central banks found only one asset in which to hold their balance-of-payments surpluses: U.S. Treasury debt. These securities no longer were “as good as gold.” The United States issued them at will to finance soaring domestic budget deficits.

By shifting from gold to the dollars thrown off by the U.S. balance-of-payments deficit, the foundation of global monetary reserves came to be dominated by the U.S. military spending that continued to flood foreign central banks with surplus dollars. America’s balance-of-payments deficit thus supplied the dollars that financed its domestic budget deficits and bank credit creation – via foreign central banks recycling U.S. foreign spending back to the U.S. Treasury.

In effect, foreign countries have been taxed without representation over how their loans to the U.S. Government are employed. European central banks were not yet prepared to create their own sovereign wealth funds to invest their dollar inflows in foreign stocks or direct ownership of businesses. They simply used their trade and payments surpluses to finance the U.S. budget deficit. This enabled the Treasury to cut domestic tax rates, above all on the highest income brackets.

U.S. monetary imperialism confronted European and Asian central banks with a dilemma that remains today: If they do not turn around and buy dollar assets, their currencies will rise against the dollar. Buying U.S. Treasury securities is the only practical way to stabilize their exchange rates – and in so doing, to prevent their exports from rising in dollar terms and being priced out of dollar-area markets.

The system may have developed without foresight, but quickly became deliberate. My book Super Imperialism sold best in the Washington DC area, and I was given a large contract through the Hudson Institute to explain to the Defense Department exactly how this extractive financial system worked. I was brought to the White House to explain it, and U.S. geostrategists used my book as a how-to-do-it manual (not my original intention).

Attention soon focused on the oil-exporting countries. After the U.S. quadrupled its grain export prices shortly after the 1971 gold suspension, the oil-exporting countries quadrupled their oil prices. I was informed at a White House meeting that U.S. diplomats had let Saudi Arabia and other Arab countries know that they could charge as much as they wanted for their oil, but that the United States would treat it as an act of war not to keep their oil proceeds in U.S. dollar assets.

This was the point at which the international financial system became explicitly extractive. But it took until 2009, for the first attempt to withdraw from this system to occur. A conference was convened at Yekaterinburg, Russia, by the Shanghai Cooperation Organization (SCO). The alliance comprised Russia, China, Kazakhstan, Tajikistan, Kirghizstan and Uzbekistan, with observer status for Iran, India, Pakistan and Mongolia. U.S. officials asked to attend as observers, but their request was rejected.

The U.S. response has been to extend the new Cold War into the financial sector, rewriting the rules of international finance to benefit the United States and its satellites – and to deter countries from seeking to break free from America’s financial free ride.

The IMF Changes Its Rules to Isolate Russia and China

Aiming to isolate Russia and China, the Obama Administration’s confrontational diplomacy has drawn the Bretton Woods institutions more tightly under US/NATO control. In so doing, it is disrupting the linkages put in place after World War II.

The U.S. plan was to hurt Russia’s economy so much that it would be ripe for regime change (“color revolution”). But the effect was to drive it eastward, away from Western Europe to consolidate its long-term relations with China and Central Asia. Pressing Europe to shift its oil and gas purchases to U.S. allies, U.S. sanctions have disrupted German and other European trade and investment with Russia and China. It also has meant lost opportunities for European farmers, other exporters and investors – and a flood of refugees from failed post-Soviet states drawn into the NATO orbit, most recently Ukraine.

To U.S. strategists, what made changing IMF rules urgent was Ukraine’s $3 billion debt falling due to Russia’s National Wealth Fund in December 2015. The IMF had long withheld credit to countries refusing to pay other governments. This policy aimed primarily at protecting the financial claims of the U.S. Government, which usually played a lead role in consortia with other governments and U.S. banks. But under American pressure the IMF changed its rules in January 2015. Henceforth, it announced, it would indeed be willing to provide credit to countries in arrears other governments – implicitly headed by China (which U.S. geostrategists consider to be their main long-term adversary), Russia and others that U.S. financial warriors might want to isolate in order to force neoliberal privatization policies.

Article I of the IMF’s 1944-45 founding charter prohibits it from lending to a member engaged in civil war or at war with another member state, or for military purposes generally. An obvious reason for this rule is that such a country is unlikely to earn the foreign exchange to pay its debt. Bombing Ukraine’s own Donbass region in the East after its February 2014 coup d’état destroyed its export industry, mainly to Russia.

Withholding IMF credit could have been a lever to force adherence to the Minsk peace agreements, but U.S. diplomacy rejected that opportunity. When IMF head Christine Lagarde made a new loan to Ukraine in spring 2015, she merely expressed a verbal hope for peace. Ukrainian President Porochenko announced the next day that he would step up his civil war against the Russian-speaking population in eastern Ukraine. One and a half-billion dollars of the IMF loan were given to banker Ihor Kolomoiski and disappeared offshore, while the oligarch used his domestic money to finance an anti-Donbass army. A million refugees were driven east into Russia; others fled west via Poland as the economy and Ukraine’s currency plunged.

The IMF broke four of its rules by lending to Ukraine: (1) Not to lend to a country that has no visible means to pay back the loan (the “No More Argentinas” rule, adopted after the IMF’s disastrous 2001 loan to that country). (2) Not to lend to a country that repudiates its debt to official creditors (the rule originally intended to enforce payment to U.S.-based institutions). (3) Not to lend to a country at war – and indeed, destroying its export capacity and hence its balance-of-payments ability to pay back the loan. Finally (4), not to lend to a country unlikely to impose the IMF’s austerity “conditionalities.” Ukraine did agree to override democratic opposition and cut back pensions, but its junta proved too unstable to impose the austerity terms on which the IMF insisted.

U.S. Neoliberalism Promotes Privatization Carve-Ups of Debtor Countries

Since World War II the United States has used the Dollar Standard and its dominant role in the IMF and World Bank to steer trade and investment along lines benefiting its own economy. But now that the growth of China’s mixed economy has outstripped all others while Russia finally is beginning to recover, countries have the option of borrowing from the Asian Infrastructure Investment Bank (AIIB) and other non-U.S. consortia.

At stake is much more than just which nations will get the contracting and banking business. At issue is whether the philosophy of development will follow the classical path based on public infrastructure investment, or whether public sectors will be privatized and planning turned over to rent-seeking corporations.

What made the United States and Germany the leading industrial nations of the 20^th century – and more recently, China – has been public investment in economic infrastructure. The aim was to lower the price of living and doing business by providing basic services on a subsidized basis or freely. By contrast, U.S. privatizers have brought debt leverage to bear on Third World countries, post-Soviet economies and most recently on southern Europe to force selloffs. Current plans to cap neoliberal policy with the Trans-Pacific Partnership (TPP), Transatlantic Trade and Investment Partnership (TTIP) and Transatlantic Free Trade Agreement (TAFTA) go so far as to disable government planning power to the financial and corporate sector.

American strategists evidently hoped that the threat of isolating Russia, China and other countries would bring them to heel if they tried to denominate trade and investment in their own national currencies. Their choice would be either to suffer sanctions like those imposed on Cuba and Iran, or to avoid exclusion by acquiescing in the dollarized financial and trade system and its drives to financialize their economies under U.S. control.

The problem with surrendering is that this Washington Consensus is extractive and lives in the short run, laying the seeds of financial dependency, debt-leveraged bubbles and subsequent debt deflation and austerity. The financial business plan is to carve out opportunities for price gouging and corporate profits. Today’s U.S.-sponsored trade and investment treaties would make governments pay fines equal to the amount that environmental and price regulations, laws protecting consumers and other social policies might reduce corporate profits. “Companies would be able to demand compensation from countries whose health, financial, environmental and other public interest policies they thought to be undermining their interests, and take governments before extrajudicial tribunals. These tribunals, organised under World Bank and UN rules, would have the power to order taxpayers to pay extensive compensation over legislation seen as undermining a company’s ‘expected future profits.’”

This policy threat is splitting the world into pro-U.S. satellites and economies maintaining public infrastructure investment and what used to be viewed as progressive capitalism. U.S.-sponsored neoliberalism supporting its own financial and corporate interests has driven Russia, China and other members of the Shanghai Cooperation Organization into an alliance to protect their economic self-sufficiency rather than becoming dependent on dollarized credit enmeshing them in foreign-currency debt.

At the center of today’s global split are the last few centuries of Western social and democratic reform. Seeking to follow the classical Western development path by retaining a mixed public/private economy, China, Russia and other nations find it easier to create new institutions such as the AIIB than to reform the dollar standard IMF and World Bank. Their choice is between short-term gains by dependency leading to austerity, or long-term development with independence and ultimate prosperity.

The price of resistance involves risking military or covert overthrow. Long before the Ukraine crisis, the United States has dropped the pretense of backing democracies. The die was cast in 1953 with the coup against Iran’s secular government, and the 1954 coup in Guatemala to oppose land reform. Support for client oligarchies and dictatorships in Latin America in the 1960 and ‘70s was highlighted by the overthrow of Allende in Chile and Operation Condor’s assassination program throughout the continent. Under President Barack Obama and Secretary of State Hillary Clinton, the United States has claimed that America’s status as the world’s “indispensible nation” entitled it back the recent coups in Honduras and Ukraine, and to sponsor the NATO attack on Libya and Syria, leaving Europe to absorb the refugees.

Germany’s Choice

This is not how the Enlightenment was supposed to evolve. The industrial takeoff of Germany and other European nations involved a long fight to free markets from the land rents and financial charges siphoned off by their landed aristocracies and bankers. That was the essence of classical 19^th-century political economy and 20^th-century social democracy. Most economists a century ago expected industrial capitalism to produce an economy of abundance, and democratic reforms to endorse public infrastructure investment and regulation to hold down the cost of living and doing business. But U.S. economic diplomacy now threatens to radically reverse this economic ideology by aiming to dismantle public regulatory power and impose a radical privatization agenda under the TTIP and TAFTA.

Textbook trade theory depicts trade and investment as helping poorer countries catch up, compelling them to survive by becoming more democratic to overcome their vested interests and oligarchies along the lines pioneered by European and North American industrial economies. Instead, the world is polarizing, not converging. The trans-Atlantic financial bubble has left a legacy of austerity since 2008. Debt-ridden economies are being told to cope with their downturns by privatizing their public domain.

The immediate question facing Germany and the rest of Western Europe is how long they will sacrifice their trade and investment opportunities with Russia, Iran and other economies by adhering to U.S.-sponsored sanctions. American intransigence threatens to force an either/or choice in what looms as a seismic geopolitical shift over the proper role of governments: Should their public sectors provide basic services and protect populations from predatory monopolies, rent extraction and financial polarization?

Today’s global financial crisis can be traced back to World War I and its aftermath. The principle that needed to be voiced was the right of sovereign nations not to be forced to sacrifice their economic survival on the altar of inter-government and private debt demands. The concept of nationhood embodied in the 1648 Treaty of Westphalia based international law on the principle of parity of sovereign states and non-interference. Without a global alternative to letting debt dynamics polarize societies and tear economies apart, monetary imperialism by creditor nations is inevitable.

The past century’s global fracture between creditor and debtor economies has interrupted what seemed to be Europe’s democratic destiny to empower governments to override financial and other rentier interests. Instead, the West is following U.S. diplomatic leadership back into the age when these interests ruled governments. This conflict between creditors and democracy, between oligarchy and economic growth (and indeed, survival) will remain the defining issue of our epoch over the next generation, and probably for the remainder of the 21^st century.

Budget Preview: Chancellor Philip Hammond"s Impossible Task To "Square The UK"s Circle"

At lunchtime today, Philip Hammond will give the weakened Conservative government’s first budget in the new parliament.

Against a likely backdrop of downgrades for the economy from the OBR, the Chancellor will be under immense pressure to provide a sound plan going forward on many issues. As Statista"s Martin Armstrong notes, the NHS has already had its call for an emergency boost of £4 billion rejected, but there will need to be at least some answers to the problems surrounding health and public services funding.

As a new survey by ComRes shows, this topic is one of particular importance to the public, with 67 percent saying that there should be more investment in these services, with a slight majority even saying they would personally be prepared to pay more taxes to enable it.

Clearly, this is a highly significant budget and we would be greatly surprised if it’s considered a success. As we noted yesterday, Reuters columnist and former European economics editor of The Economist, Paul Wallace, believes:

Few British budgets have mattered as much as the one that Philip Hammond will deliver to the House of Commons on Nov. 22. The chancellor of the exchequer must shore up Theresa May’s perilously shaky government ahead of a vital Brexit summit of European leaders in mid-December. At the same time Hammond has to keep a grip on the public finances.

However, it’s worse than that, as the Chancellor is also under pressure from senior members of the Conservative party, never mind UK citizens, to increase spending amid widespread fatigue with austerity. Here is the Financial Times on the stiff challenge Hammond is facing.

UK Chancellor Philip Hammond is under pressure from all sides as he prepares to deliver his second Budget on Wednesday. The first Budget of a new parliament is traditionally the time for chancellors to take bold decisions about taxes and spending. But the economic forecasts are likely to be difficult, public services are under strain, and pro-Brexit MPs are increasingly turning on the chancellor over his support for a “soft Brexit”. If Mr Hammond produces a safety-first Budget, he squanders his opportunity to decisively shape Britain’s future. But boldness risks backfiring, and steering a middle course threatens to satisfy nobody.

The FT notes that the Chancellor’s statement will “serve a cold dish of downgrades for the UK economy” from the independent “Office for Budget Responsibility” (OBR). This year’s growth forecast is expected to be cut from 2.0% to 1.6% and for 2018 from 1.6% to 1.4%. The medium-term forecasts depend on the OBR’s assumptions on productivity growth, which it has already flagged will be cut “significantly”. The FT expects that.

That means growth figures for 2020 and beyond will be closer to 1.5 per cent a year, compared with the 2 per cent that the fiscal watchdog had previously forecast.

Paul Wallace highlighted productivity as Hammond’s biggest problem.

But the gravest challenge he faces is economic: Britain’s persistent productivity blight…

 

Other advanced economies have also experienced setbacks to productivity growth following the financial crisis. Where Britain stands out is in the severity of its reverse. The shortfall in productivity is the main reason real wages are now 4 percent lower than 10 years ago, a potent reason why the leave campaign prevailed in the Brexit referendum.

While public finances look slightly more robust in the near-term, the outlook is deteriorating 3-4 years out, as the  FT explains"

Tax revenues have been stronger than expected this year, alongside lower-than-expected public spending. As a result, this year’s expected public borrowing will fall by about £8bn. The debt burden will begin to fall next year, giving Mr Hammond the opportunity to boast that he has turned the corner on public finances. But good news in the short term disappears towards the end of the forecast horizon, as weaker economic forecasts bear down on projected tax revenues. Before any accounting or tax changes, the deficit forecast in 2020-21 is likely to rise by more than £10bn compared with the March forecast. The government has already said it wants to reduce borrowing to under 2 per cent of national income by 2020-21, but Mr Hammond’s headroom is likely to roughly halve, from £26bn to about £13bn, in that year.

However, he does have one thing up his sleeve…an off-balance sheet accounting gimmick.

The chancellor wants to signal that after a difficult year, things are looking up, with debt falling and Brexit-related uncertainties lifting. To offset bad news in the medium-term public finances, he will use a £5bn-a-year accounting change — by taking housing associations’ borrowing off the government’s books — to free up more money for housing, wages and healthcare.

Affordable housing is a major problem for Hammond and Prime Minister Theresa May. According to the FT:

Fixing the “broken housing market” is the government’s biggest domestic priority. The chancellor wants to make rents more affordable and ease the path to home ownership for younger adults who have deserted the Conservative party in recent elections. Mr Hammond has already set a target of 300,000 new homes per year, but has also insisted there is no “single magic bullet” to solving housing problems.

He will announce a housing package on Wednesday that is likely to include commissioning of new building on public land and funding for local authorities to construct homes. He will also reaffirm the Tories’ promise from last month’s party conference to commit £10bn more of Help to Buy equity loans, and set out plans to lower stamp duty for some first-time buyers. There will be no big reform of planning laws for the “greenbelt” of protected area outside of London, but local authorities could be given more powers for compulsory purchase of land.

In its budget preview, the left-leaning Guardian newspaper highlights the deteriorating outlook for public finances due to the productivity problem.

Lower expectations for the output per worker will have an impact on the gross domestic product, cutting the amount of economic output available for taxation. The Institute for Fiscal Studies reckons the downgrade will contribute to a £20bn black hole in the public finances, limiting Hammond’s spending power if he wants to stick to his pledge to remove the deficit by the mid-2020s. John McDonnell, the Labour shadow chancellor, seized on the October data to argue that seven years of spending cuts had “caused pain and misery for millions with little to show for it”.

As if “Fiscal Phil” Hammond didn’t have enough on his plate, he’s also been lambasted for his gaffe that “there are no unemployed people” in Britain, in a television interview at the weekend. Disliked by the pro-Brexit side of his party, Hammond’s budget speech is being viewed by some as the “make or break” moment of his career. We concur.

Meanwhile, Bloomberg has been doing some sleuthing on budget preparations by government departments and think tanks. It identifies six things to look out for when Philip Hammond stand up in parliament to deliver his speech.

The U.K. budget is usually a mixture of measures that have been heavily trailed in the run-up by various government ministers, with a liberal sprinkling of surprises. In the past six months there have been myriad consultations and papers on everything from the offshore oil to air pollution that hint at possible measures in the works. Bloomberg trawled through that documentation, as well as recent announcements, to identify six areas that are likely to get a mention when Chancellor of the Exchequer Philip Hammond lays out his economic blueprint.

1. Stamp Duty and the Housing Crisis
Prime Minister Theresa May last week pledged that it’s her personal mission to “build more homes, more quickly.” To that end, the budget is likely to include a number of measures to encourage construction and enable younger people to get on the housing ladder. Asked on the BBC on Sunday about whether the home-buying tax known as stamp duty would be cut for younger buyers, Hammond declined to discuss tax matters, but didn’t deny he was looking at the measure.

“We recognize the challenge for young first-time buyers, that in many parts of the country deposits are now very large,” Hammond said. “Nobody is saying we’ve done enough. We must do more. We recognize there’s a challenge there and on Wednesday I shall set out how we intend to address it.”

2. North Sea Oil and Gas
Whilst remaining committed to its climate-change goals, the U.K. is also trying to extract as much value from its waning oil and gas fields in the North Sea. The industry is crucial to the economy in Scotland, which would be grateful for any assistance to a financial lifeline even as it remains angry at the Conservatives for taking it out of the European Union.

At the last budget in March, the government published a “discussion paper” that examined allowing transfers of tax history between buyers and sellers of oil and gas assets -- a measure designed to make it easier to buy and sell the fields, and keep them producing for longer. It would allow buyers to get a tax refund as a result of any costs incurred decommissioning the field at the end of its life.

Hammond told the Sunday Times he’s “looking at” a possible change in the tax rules, which is “the No. 1 ask of my Scottish colleagues.” Even so, he did issue a note of caution, adding that the Treasury needs to ensure the reform “is robust and that we don’t inadvertently create scope for gaming on a grand scale in the tax system."

3. Boosting Research & Development
May on Monday said the government aims to increase public and private research and development spending to 2.4 percent of economic output by 2027, and beyond that to 3 percent. “This could mean about 80 billion pounds ($106 billion) of additional investment in the next decade,” she said.

As part of an announcement the same day linked to her government’s Industrial Strategy -- due to be published next week -- she said that would begin with a commitment for an extra 2.3 billion pounds of investment in the 2021-2022 tax year, taking total public investment to 12.5 billion pounds that year. The government also signaled plans for a 1.7 billion-pound fund focused on improving regional transport links.

4. Shale Wealth Fund
In another measure aimed at boosting the fossil-fuel industry -- in this case by making it more palatable to local communities -- the government promised at the last election to overhaul a pledged fund worth as much as 1 billion pounds to distribute some of the profits from hydraulic fracturing.

The aim is to ensure “a greater percentage of the tax revenues from shale gas directly benefit the communities that host extraction sites.” The government last week responded to a consultation on the issue pledging the fund will initially consist of as much as 10 percent of tax revenues from shale-gas extraction, with proceeds to be spent on projects ranging from play parks for children to improved transport links and restoring historical sites.

5. Air Pollution Tax
Diesel vehicles have become a political football of late. For years, governments ignored evidence that diesel is worse for air quality and encouraged its use because the fuel is less damaging to the climate than gasoline. With air pollution now under the microscope in London in particular, the government published an air-quality plan over the summer and is likely to include measures in the budget designed to help clean up the air in Britain’s cities by encouraging cleaner vehicles.

Possible measures include raising the sales tax on diesel cars, known as vehicle excise duty, or raising taxation on diesel fuel itself, which is currently taxed at the same level as gasoline, at about 58 pence per liter. The government has also said it will consider programs to encourage motorists to trade in their older, more polluting cars, for newer, cleaner ones. Ministers also stepping up efforts to encourage the use of more electric vehicles by supporting the development of batteries and the deployment of charging points.

6. Fund for Start-Ups
In August, the government proposed a new National Investment Fund that would help start-ups access the “patient capital” funding they need to develop into so-called “unicorns” -- innovative companies valued at over $1 billion. A consultation on the proposal closed in September, and Hammond is likely to propose a confirmed plan of action in the budget.

The consultation suggested funding should come from the British Business Bank, replacing the backing currently received from the European Investment Fund. One of the reasons this could get a mention is that the the government is keen to demonstrate that London can attract Big Tech even when it’s no longer in the European Union.

Although the view is hardly unique to this government, a mere 22 percent said that they feel taxpayers" money is currently being spent wisely.

Whether this percentage will go up or down after the Chancellor"s statement today, remains to be seen.

Visualizing $63 Trillion Of World Debt

If you add up all the money that national governments have borrowed, it tallies to a hefty $63 trillion.

 

Courtesy of: Visual Capitalist

In an ideal situation, governments are just borrowing this money to cover short-term budget deficits or to finance mission critical projects. However, as Visual Capitalist"s Jeff Desjardins notes, around the globe, countries have taken to the idea of running constant deficits as the normal course of business, and too much accumulation of debt is not healthy for countries or the global economy as a whole.

The U.S. is a prime example of “debt creep” – the country hasn’t posted an annual budget surplus since 2001, when the federal debt was only $6.9 trillion (54% of GDP). Fast forward to today, and the debt has ballooned to roughly $20 trillion (107% of GDP), which is equal to 31.8% of the world’s sovereign debt nominally.

THE WORLD DEBT LEADERBOARD

In today’s infographic, we look at two major measures: (1) Share of global debt as a percentage, and (2) Debt-to-GDP.

Let’s look at the top five “leaders” in each category, starting with share of global debt on a nominal basis:

Together, just these five countries together hold 66% of the world’s debt in nominal terms – good for a total of $41.6 trillion.

Next, here’s the top five for Debt-to-GDP:

While only Italy and Japan here are considered major economies on a global scale, the high debt levels of countries like Greece or Portugal are also important to monitor.

In the IMF’s baseline scenario, Greece’s government debt will reach 275% of its GDP by 2060, when its financing needs will represent 62% of GDP.

 

- A recent IMF report, obtained by Bloomberg

Greece, for example, is continuing along a particularly unsustainable path – and external creditors are getting stingier. Most recently, both the IMF and Greece’s euro-area creditors have demanded for the country to implement a law that automatically introduces austerity measures if a budget surplus of 3.5% of GDP isn’t hit.

While Greece has dismissed such demands as “unacceptable”, the country – along with many others around the globe – will have to accept that constant debt accumulation has eventual consequences.

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To get “$63 Trillion of World Debt” in printed form, go to the Kickstarter page now. Deadline: Oct. 31, 2017

Italy's Parallel Fiscal Currency: All You Need To Know

Authored by Marco Cattaneo, from Basta con l’Eurocrisi, via GEFIRA,

There is an increased talk in Italy about fiscal money as an instrument to resolve the economic crisis, which is not over yet.

Despite the optimism shown by the Italian government and the EU, the Eurozone economy is far from being in an acceptable condition, and this applies in particular for Italy.

In 2017 Italy’s real GDP will grow by 1.5% compared to the previous year, which is 6% less than what it was in 2007, ten years earlier! Within the same period unemployment has doubled, the number of people in poverty tripled from 1.5 million to almost 5, and this trend does not seem to be reversing. The Italian economic system is working far below its potential: this gap has been created first by the global financial crisis of 2008 and then by the austerity policies “prescribed” by the EU in 2011. Italy can solve this problem by introducing an adequate quantity of purchasing power in its economic system. It can’t do it by issuing euros, nor (due to the mechanisms of the Eurozone) by increasing the state deficits.

All these difficulties stem from the fact that Italy is not an issuer but a user of the currency, the euro. The introduction of a fiscal currency might help to bypass the constraint that Rome cannot print money and maintain the impression that the euro works. The fiscal money concept goes back to chartalism theorised by German economist Georg Friedrich Knapp at the beginning of 1900 and then expanded by the economists adhering to the “Modern Monetary Theory” (MMT).

The basic principles of the fiscal money are two:

1. First: it is a particular government bond that has a value given to it by the state, even if it does not enjoy the status of a legal tender. In other words, the state binds itself to accept it, e.g. for the payment of taxes or governmental services, while business and citizens are free to use it or not. .


2. Second: as the bond is not designed to be reimbursed with the euro, which the state can no longer emit, the state is always able to honour its agreement. The bond cannot be exchanged for euros, but bondholders can use this special bond to pay their taxes or services provided by the state. It principle looks like a discount coupon that cannot be exchanged for euros but has a value, and oblige the issuer to provide a discount.

Since the state agrees to accept it but not to redeem it, it can’t default on its obligation. Such a bond is equivalent to a sovereign currency.

How can the fiscal money work in Italy?

Right now in Italy, three opposition parties are evaluating the fiscal money proposal.

Forza Italia (Berlusconi’s party), proposes Fiscal Credit Certificates (CCF). CCFs were initially invented by Marco Cattaneo and then developed with the help of various economists and researchers in numerous articles, books and an ebook that gained widespread popularity. The state emits CCFs witch gives the right to a reduction in the payment of taxation (or any other financial transaction with the public sector) two years after their emission.

CCFs are distributed in different ways: To workers to increase their income, as some reverse tax; To businesses to reduce the weight of taxation on income (which implies an immediate increase in competitiveness with foreign businesses. and prevents the economic recovery from deteriorating the trade balance);
To low-income groups as a form of social spending; as an addition to what they already get in euros.

They can also be used to finance public investment.

While the CCFs are not legal tender, they have value because everybody can use them to pay taxes or buy government services. And since they have value, they can be exchanged for goods or euros. Suppose that the Italian government issues CCFs worth 100 euros in tax. It is highly likely that commercial operators, such as shops, will accept CCFs as an alternative for the euro. Commercial operator can use the acquired CCFs to fulfil their tax obligation.

CCFs are officially not government debt and do not add to the total amount of Italian public debt. The Italian government will accept the CCFs two years after issuance, in the meantime they can be used as a parallel currency. Two years between the emission and the use to pay taxes will be enough for the economic recovery in the form of GDP increase, simply because CCFs have increased purchasing power and economic activities, and thus tax revenue increase, compensating for the reduction of state revenue caused by payment via CCFs. During the two years that they are in circulation, the CCFs will function as legal tender, and the Italian government can increase its spending by paying its expenditures partly in CCFs, and without increasing the national debt.

Movimento 5 Stelle (the movement started by comedian Beppe Grillo) has expressed interest in the model proposed by Gennaro Zezza.

It envisages digital fiscal money in the form of electronic cards distributed among the public. Units of value can be used for the purchase of goods and services in the private sector. Unlike the other versions of ”fiscal money”, this one would not require the 2 years delay after the emission. The use to pay taxes will be possible in installments, say 20% per year starting from the beginning.

Lega Nord and in particular Claudio Borghi, responsible for economic policies, propose the emission of “Minibots”, or CCFs that would circulate in the form of paper with the same size as the euro banknotes. Minibots would be issued to businesses or individuals who have the right to a fiscal deduction. Instead of a tax deduction, the company or person receive an equal amount of “Minibots”, Minibots could be used immediately to pay taxes or as a form of payment for services by state enterprises.

Minibots do not increase the receiver’s assets because they cancel out the right of a promised tax deduction or another form of a credit of the state. It transforms, however, an illiquid credit, the government owes a private company or person, into an instrument that can circulate and be used immediately.

Fiscal money: a permanent or provisional solution?

Fiscal money is an instrument manageable by the national government to boost both internal demand and increase the competitiveness of Italian businesses by lowering the taxation. It restores in the euro-system the flexibility necessary to correct its dysfunctions, without necessarily breaking it. The emission time can be organized to ensure

1. high levels of employment,


2. an optimum trade balance,


3. meeting public finance budget constraints.

When it comes to Point (iii) in particular, given a goal of fiscal deficit (the difference between expenditure and revenue of the state), the necessary level to end the negative economic cyclical phase will be obtained via an adequate level of emission of fiscal money.
The parallelism between fiscal money and the euro gives the possibility to create a stable eurozone. In this sense, fiscal money must become an instrument permanently available to governments to enact anti-cyclical policies and overcome moments of difficulty for the economy (starting with the current one). It is possible that the emission of fiscal money will lower to zero during a particularly positive economic cycle. The instrument would always be available in case of need.

Fiscal money and EU legislation

The fiscal money idea is not in conflict with any existing EU legislation. It is not a currency as the law does not force its acceptance. Therefore it does not violate the principle of monetary monopoly of the ECB when it comes to emitting legal tender, the euro. It is not public debt. Eurostat rules clarify without ambiguity that it is not debt as long as the public sector is not forced to make payments in it. Fiscal money is a non-payable tax credit: it does not create a right to be paid but a right to reduce the tax payments due. There is no due date or coupon payment. When the Italian government issues 1 billion euro future tax credits, it does not increase the national debt.

Most importantly, the regulations of the Eurozone are based on the principle of not increasing the risk of default on public debt by member states. Emitting fiscal money does not conflict with this goal because no state can be forced to default on a bond that is a future fiscal discount. The Italian government will never be forced to redeem CCFs or Minibots in the euro, a currency that the Italian state has no sovereignty over and cannot create.

Naturally, the existence of fiscal money can constitute a first step for a state to leave the euro system if at a certain point the fiscal money is declared legal tender instead of the euro. The Emission of fiscal currency comes with a risk: it could be the end of the euro. However, the real risks of the end of the euro result from the design flaws of the Eurozone and are not created by the emission of fiscal money. The Eurozone problems already exist and will continue until the ongoing dysfunctions are fixed, dysfunctions that the fiscal money helps to overcome.

Schäuble: Another Financial Crisis Is Coming Due To Spiraling Global Debt, "New Bubbles"

Following the disappointing for Angela Merkel and her CDU German election results, which propelled the populist AfD into Germany"s political establishment with 92 members of parliament, the first casualty was Germany"s finance minister, Wolfgang Schäuble, who in a few days will relinquish his long-held post and move on to the ceremonial role of Bundestag president. As part of his farewell tour, Schäuble - like so many other former members of the establishment- took a parting shot at the system he helped create and warned that "spiraling levels of global debt and liquidity", as well as "new bubbles" present a major risk to the world economy.

Speaking to the FT, the Europhile beloved in Germany for successfully steering one of the world’s largest economies for the past eight years, and who nearly led to Grexit in the summer of 2005, said there was a danger of “new bubbles” forming due to the trillions of dollars that central banks have pumped into markets. Confirming another fear widely propagated by the Putin propaganda alternative media, Schäuble also warned of risks to stability in the eurozone, particularly those posed by bank balance sheets burdened by the post-crisis legacy of non-performing loans, something we have warned about since 2012, and an issue which remains largely unresolved.

A strong advocate of fiscal rectitude and debt reduction, Mr Schäuble dominated Europe’s policy response to the eurozone debt crisis and has been vilified in countries such as Greece as an architect of austerity. But he will mainly be remembered as the most ardently pro-European politician in German chancellor Angela Merkel’s cabinet, skilled at selling the benefits of the euro and of deeper European integration to an often sceptical German public.

To underscore his point, Schäuble said that the Brexit vote last year had demonstrated how “foolish” it was to listen to “demagogues who say . . . we’re paying too much for Europe”. “In that respect they made a great contribution to European integration,” he said. “Though in the short term that doesn’t really help Britain.”

Ahead of his last finance minister meeting on Monday, Schauble "sought to reassure Germany’s allies that the AfD’s surprise success would not in any way affect the country’s commitment to liberal democracy."

“There’s no chance Germany will ever relapse into nationalism,” he said. The AfD’s voters were dissatisfied, felt excluded, were angry about perceived injustice and worried about how the world was changing. “But there’s no reason to believe that democracy and the rule of law are in danger,” he said.

However, taking a broader swipe at the current financial regime, Schauble warned that the world was in danger of “encouraging new bubbles to form”.

"Economists all over the world are concerned about the increased risks arising from the accumulation of more and more liquidity and the growth of public and private debt. I myself am concerned about this, too," he said echoing the concern voiced just one day earlier by IMF head Christine Lagarde, said the world was enjoying its best growth spurt since the start of the decade, but warned of “threats on the horizon” from “high levels of debt in many countries to rapid credit expansion in China, to excessive risk-taking in financial markets”.

Schäuble also echoed the latest warning from the BIS, which last month said that the world had become so used to cheap credit that higher interest rates could derail the global economic recovery.

Meanwhile, Schäuble defended austerity, saying the word was, “strictly speaking, an Anglo-Saxon way of describing a solid financial policy which doesn’t necessarily see more, or higher deficits as a good thing." The soon to be former finance minister also took a pot shot at the UK:

“The UK always made fun of Rhineland capitalism,” he said, contrasting Germany’s consensus-driven, social market model with Anglo-American free markets and deregulation. “[But] we have seen that the tools of the social market economy were more effective at dealing with the [financial] crisis . . . than in the places where the crisis arose.”

Of course, Germany"s success - almost entirely a function of the common currency which has effectively kept the Deutsche Mark from soaring - has come at the expense of crisis after crisis among Europe"s southern states. Unfortunately it has resulted in an entire generation of unemployed youth in countries like Greece, Italy and Spain.

Still, in keeping with his dour image, Schäuble"s last words were pessimistic:

“We have to ensure that we will be resilient enough if we ever face a new economic crisis,” he added. “We won’t always have such positive economic times as we have now” concluded the jolly 75-year-old.

Perhaps Wolfi is worrying too much: after all, according to Janet Yellen, "we will not see another crisis in our lifetime." And if we do, well central banks are primed and ready to injects trillions more to keep the artificial "recovery" and market "all time highs" can kicked just a little bit further.

Britain's Top Priest Slams Rich-Poor Divide In "Britain's Broken Economy"

While the world has grown used to The Pope sticking his papal nose in the world"s business ("horrrific" borders, "grave risks" of libertarians, and the virtues of socialism); Britain"s most senior clergyman, the Archbishop of Canterbury, has now decided that it is not enough to preach His word, but better to use his position of influence and adulation to discuss what"s wrong with capitalism...

The British economic model needs fundamental reform.

It is no longer generating rising earnings for a majority of the population, and young people today are set to be poorer than their parents. Beneath its headlines figures, the economy is suffering from deep and longstanding weaknesses, which make it unfit to face the challenges of the 2020s.

Fundamental reform has happened before, in the 1940s and 1980s.

The persistent economic problems we have experienced since the 2008 global financial crash demand change of the same magnitude now. This should be guided by a new vision for the economy, where long-term prosperity is joined with justice for all.

The Most Reverend Justin Welby, writing as part of a new report from think tank, the Institute of Public Policy Research,  said that Britain"s economic system is effectively not fit for purpose, benefitting the haves (to the detriment of the have-nots).

"Our economic model is broken. Britain stands at a watershed moment where we need to make fundamental choices about the sort of economy we need," Welby said in comments released as part of IPPR"s "Time for Change: A New Vision for the British Economy" report.

"We are failing those who will grow up into a world where the gap between the richest and poorest parts of the country is significant and destabilising."

The solution - simple - spend more "government" money, end fiscal austerity, and maker sure everyone "pays their fair share" - sound familiar?

We have experimented with bold monetary policy, but are constrained by pre-Keynesian fiscal orthodoxy. Since the financial crisis, the UK economy has been supported by extremely low interest rates and a major programme of ‘quantitative easing’ (unconventional money creation) by the Bank of England.

Fiscal austerity – public spending reductions and tax rises – has left the UK’s recovery in this period slower than almost all of our major competitors.

Growth is now being fuelled again by consumer spending, based on rising debt and falling savings. With monetary policy having little further scope to deal with a slowdown, there is a strong case for increased public investment now to drive demand.

Archbishop Welby"s comments are by no means the first time he has intervened in the UK"s economic debate. As BI reports, Welby famously said in 2013 that he would effectively help to try and put much maligned payday lender Wonga out of business, by assisting credit unions which compete with the firm. Welby - who worked in the oil business before becoming a clergyman - was later left embarrassed after it emerged that the Church of England had investments in funds which provided money to Wonga.

*  *  *

Full IPPR Report - "A New Vision for the British Economy"

Austerity Isn't Dead, It Will Come Back With A Vengeance

Authored by Jonathan Rochford via NarrowRoadCapital.com,

There’s been a steady stream of recent articles claiming that austerity is dead. The “magic” of false measurements, animal spirits and money printing are used to convince the gullible that there is an easy way out.

This one from James McCormack at Fitch argues that populist politicians are responsible for killing off pragmatic economic policy.

Whilst I don’t deny the medium term tide is against austerity, the very high levels of sovereign debt mean austerity will return.

To understand why this must happen we need to deal with the three key fallacies that austerity opponents are propagating.

First, austerity is wrongly blamed for reducing economic growth. This is such a deceitful lie as it seems so logical and seems to be backed up by examples like Greece. However, the deception here is the false starting point used to measure the “reduction” in growth once austerity is implemented. Countries facing austerity have used debt financed government spending to inflate their GDP, in the same way Lance Armstrong used performing enhancing drugs to inflate his cycling abilities. No one questions that Armstrong was better as a result of using drugs. Yet it is hard for many to acknowledge that GDP is similarly inflated when governments spend excessively. Greece and many others cheated their way to inflated GDP levels and measuring against that is clearly spurious.

Second, there is the avoidance of the reality that increasing debt drags down future economic growth. Anyone that has personal debt understands that those repayments reduce their ability to spend until the debt is cleared. Yet when it comes to government debt, many cite “animal spirits” as the magic that will allow governments to grow into their debts. Even with low interest rates, which also ultimately undermine economic growth, the debt is still there and spending must eventually be reduced to cover the higher repayments. It is true that government investment in a small number of areas can promote long term growth but this isn’t where the vast majority of government spending is going.

Third, many are propagating the view that printing money isn’t the bogeyman it has been made out to be. Nothing bad has happened to Japan, Europe and the US so why worry? This argument conveniently ignores centuries of human history of money printing, including recent examples in Argentina, Venezuela and Zimbabwe. There’s no magic at play, it’s just a matter of time before investors flee dodgy currencies. They will flood to the safety of hard assets and to countries with responsible monetary and fiscal policies.

Austerity isn’t in favour and it could be a while yet before the consequences play out.

The “magic” of false measurements, animal spirits and money printing are used to convince the gullible that there is an easy way out. Governments with loose fiscal and monetary policies can get away with it for a while, but in the long term they will exhaust their credibility with investors and lose control over their spending levels. At the exact time when standard economics would advocate governments running a deficit, these governments will be cut off from borrowing more. Austerity isn’t dead, it is just taking a break before it comes back with a vengeance.

Albert Edwards: "The Last Time This Happened Was In January 2008"

Two days ago, we were the first to point out that in a striking case of data revisionism, the Bureau of Economic Analysis, in an attempt to retroactively boost GDP, revised historical personal incomes lower, while adjusting its estimates of personal spending much higher, resulting in a sharp decline in personal savings, which as a result, was slashed from 5.5% according to the pre-revised data, to just 3.8%, in one excel calculation wiping out 30% of America"s "savings", and cutting them by a quarter trillion dollars in the process, from $791 billion to $546 billion, a level last seen just before the last US recession.

Today, SocGen"s grouchy bear Albert Edwards, commented on this drastic revision which disclosed that contrary to previous conventional wisdom that US consumers had been hunkering down in recent years and saving up for a rainy day, the surge in spending in late 2016 may have been the only catalyst that prevented the US from collapsing into outright contraction. Edwards also reminds us that such a dramatic savings slump last occurred in 2007, just before all hell broke loose.

As Edwards writes, "very recent data confirms slumping household saving ratios in both the US and UK. This was last seen in 2007, just before the bursting debt bubble blew the global economy and financial system to smithereens. The Fed and BoE should surely hang their heads in shame having presided over yet another impending disaster. Why will politicians and the people tolerate this incompetence? Indeed they won’t."

Away from the US, Edwards also notes that the UK has also recently published some shockingly low household SR data, showing a slump in Q1 to only 1.9% (see chart) and adds that "actually the UK’s situation is worse than it looks relative to the US SR if you measure it on the same basis (see chart below). The US measures household income and savings net of depreciation ? mainly of the housing stock. If you add this back (as the UK does), the US household gross SR is some 3% higher!"

Needless to say, all of the above is an ill omen for the US, and global, economy. Here"s why, in Edwards" own words, which largely echo what we said earlier in the week:

The US Bureau of Economic Analysis has this week undertaken some revisions of the US saving ratio (SR). Actually it has revised both income (downward) and expenditure (upward). And as the SR is the difference between these two very large numbers, it can be severely affected by small changes in income or spending. The new data shows the US SR actually declined from 6% to 4% through 2016 (see chart below) and undoubtedly stopped the US economy sliding into recession in the second half of last year as real household incomes suffered a severe squeeze due to rising headline CPI inflation.

We have previously highlighted on these pages that we believe it will be the US corporate sector borrowing binge that will take centre stage in the next credit crisis. Until this latest SR data we had been less concerned about the situation in the household sector. US household mortgage borrowing, comprising some two-thirds of total household debt, remained subdued in the wake of the 2003-2008 boom and bust. Indeed it is only in the last six months that the Fed Z1 Flow of Funds data shows mortgage borrowing growth has managed to crawl above 3%, compared to six years of double-digit growth in the run up to the 2008 bust. By contrast it has been consumer credit that has boomed at a 6-7% growth rate for the last five years, well in excess of that seen in the run-up to the 2008 bust, led by student and auto loans.

But the Fed has had its way. QE has not only inflated corporate debt to grotesque levels, but finally the US SR has responded to the surge in household paper wealth that QE has produced (see chart below). Typically the SR always declines (shown as a rise in the chart below) with rising wealth. Why do you need to bother saving if interest rates are close to zero and house and stock prices are rising? (Maybe some residual caution of the household sector is apparent as the SR has not fallen to a new low despite record high net wealth).

Edwards believes that the collapsing savings rate may be an even greater worry for the UK, where "history suggests that when UK SR (measured gross) declines to, or below, the US SR (measured net), as we saw in 1987 and as we see now (see chart above), we in the UK are sitting on a massive credit bubble that is primed to burst with recessionary consequences. Alarm bells will be ringing all around the Bank of
England ? but it is too late. (Incidentally note the author of the 1992 FT article below is Ed Balls, who went on to become a significant figure in Tony Blair?s Labour government as Gordon Brown?s chief economic confidant. More recently he has starred in the UK Strictly Come Dancing (Dancing with the Stars to our US friends). By contrast I am still a sell-side Global Strategist and some 25 years later, still comparing the UK SR to the US! Hey ho.)"

For those readers who think I bang on about the same theme ad nauseam, I attach a 1992 article from the FT! It shows how the situation the UK is now in has been experienced again and again. Back then an extensive period of robust GDP growth during PM Margaret Thatcher?s tenure proved to be yet another credit boom that turned to dust.

Finally, In an amusing tangent, the SocGen strategist reveals that he is "genuinely getting tired of bashing the major central banks, but every day more evidence mounts that almost exactly the same debt excesses that caused The Global Financial Crisis (GFC) in 2008, are present today."

The UK Bank of England and US Federal Reserve deserve particular vilification for failing to remove the monetary punchbowl quickly enough - just like the 2003-2007 period, allowing grotesque debt excesses to build."

Ironically, the more "tired" he gets of bashing central bankers, the more he does it, which is perhaps why so many Wall Streeters - at least those who aren"t brainwashed into believing that what is going now is normal - enjoy reading his periodic missives.

We Need A Public Inquiry Into The Economics Profession

Authored by Ann Pettifor via RenegadeInc.com,

Britain is preparing to leave the European Union with no real plan and a government in disarray, writes economist, Ann Pettifor. How can we trust economists at the Treasury not to impose more disastrous policies?

If the British economy crashes as a result of Brexit, it will not vindicate economists. It will simply illustrate once again, their failure.

I and my colleagues at Policy Research in Macroeconomics (PRIME) believe there is urgent need for an independent, public inquiry into the economics profession, and its role in precipitating both the financial crisis of 2007-9, the subsequent very slow ‘recovery’; and in the British European referendum campaign.

Financial disarray is not unlikely under Brexit, but whether this turns into anything material depends in the first instance on economic policy. How can we trust economists at the Treasury not to impose more disastrous policies?

Economists have once again proved themselves not only irrelevant, but a dangerous irrelevance.

For too long they have resisted call after call for reform. If they will not do it themselves then it is time for others to take control. The profession should be brought to account through a public inquiry into the this failure.

In voting to leave the EU, England overwhelmingly has rejected economics – and in particular the dominant economic narrative.

Unfortunately, the economics profession as a whole cannot resign, though perhaps the President of the RES, Andrew Chesher, should consider his position.

Because this hardship is indirectly a consequence of the economics profession. Economists led the way to financial liberalisation of the past 40 years, which led to soaring levels of debt, crises and financial ruin. Economists dictated the terms for austerity that has so harmed the economy and society over the past years. As the policies have failed, the vast majority of economists have refused to concede wrongdoing, nor have societies been offered alternative economics policies.

Brexit and the economics profession

While it is risky to second guess public opinion, it may just be that the prospect of hardship to come might not have been very compelling for those already suffering the hardship of low wages, insecure low-skilled jobs, bad housing, high rents, an under-resourced and increasingly privatised NHS, and other forms of public sector ‘austerity’.

With this historic vote, the British people have not just rejected the EU. They have done something that should worry the British establishment, and their friends in the City of London, and internationally, far more.

Perhaps most symbolically, even the Queen suggested they did not know what they were doing.

It is hardly surprising, therefore, that the British public did not find the opinion of Remain ‘experts compelling’.

Remain chose to focus on the economy – to the exclusion of almost all else. All the heavyweights of the economics profession – 10 Nobel Prize-winning economists, the OECD, the IMF, the Federal Reserve, the Bank of England, the NIESR, the Institute of Fiscal Studies, the London School of Economics – were wheeled out to warn the British people of economic facts known, and understood apparently, only to “experts”. The Financial Times amplified their voices and repeated their dire threats and warnings over and over.

But the “experts” and the economic stories they tell, have been well and truly walloped by the result of this referendum. And rightly so, because while there is truth in the story that international co-operation and co-ordination is vital to economic activity and stability, there is no sound basis to the widely espoused economic ‘religion’ that markets – in money, trade and labour – must be unfettered, detached from democratic regulatory oversight, and must be trusted to ‘govern’ whole countries, regions and continents.

The British people have rejected this mainstream, orthodox economics, a strain of fundamentalism that they may rightly judge has proved deleterious to their own economic interests.

Some economists have been getting their retaliation in first. Chris Giles, chief economist at the Financial Times, argued that vindication or otherwise for the profession will depend on whether crisis materialises after Brexit. But at the same time the Chancellor (backed up by New Labour’s Alastair Darling, the Treasury and the Financial Times) threatened the British people with an intensification of austerity – a punishment budget. One in which public spending would be further slashed and taxes raised – the most punitive and counter-productive economic strategy imaginable. And in doing so, they, and the economists that advised them, affirmed once more their contempt for ordinary voters, and their irrelevance to serious economic analysis.

I voted to Remain. I do not believe that Brexit is a wise decision. I fear its consequences in energising the Far Right both in Britain but also across both Europe and the US. I fear the break-up of the United Kingdom, and the political dominance of a small tribe of conservative ‘Little Englanders’. They will diminish this country’s great social, economic and political achievements.

But the people are not to blame.

The economics profession, and their friends amongst the world’s financial elites, are to blame. They engineered their own political and financial bail-outs after the grave financial crisis of 2007-9. Economists cheered on politicians and effectively urged them to transfer the burden of losses on to those most innocent of the crisis. Conservative and Social Democratic politicians with friends in financial circles, were only too happy to oblige.

The economics profession encouraged the imposition of austerity, in both the US (Ken Rogoff Mr 90%, who called for a ceiling on public debt), the UK (see this letter to the Sunday Times from twenty of the most prominent British economists) and of course, from the OECD (see this “UK should press on with austerity”  issued just before the 2015 general election).

They – and we – are now paying the price for that calculated, reckless refusal to make the City of London and Wall St. accountable in full for the crisis – by restructuring and re-regulating both these financial entrepôts.

Above all, economists failed the British people by “pressing on with austerity”. They stubbornly refused to once again promote the subordination of the finance sector to the role of servant, not master of the British economy, and to use governmental monetary and fiscal powers to alleviate the impact of a crisis made in the City, on the majority.

That is why we urgently need a public inquiry into the role of the economics profession in Britain’s financial crises, the 2008 Global Financial Crisis, and the 30-years of crises which preceded it from Chile to Iraq, Afghanistan to Brazil.

"How Does This Ever End?" An Interview With Lacy Hunt

The US economy is struggling with too much debt at every level. A debt jubilee isn’t going to solve it; and shifting demographics will likely make it worse. So, is America headed for two decades of lost growth like Japan? Dr. Lacy Hunt, who was interviewed by Erik Townsend on the latter"s MacroVoices podcast, considers the endgame for the US economy... Well, we could get lucky, Hunt says.

"The US economy could experience a modern equivalent of the California gold rush. In the 1820"s and 1830"s, we took on a lot of debt to finance the early canals, steamship lines railroads - it was over-investment, over consumption. The panic year was 1838. Martin Van Buren was president, he didn"t know what was going on. By this, the country languished very badly for 11 years, and then gold was discovered it California, led to a huge surge in national income, people were very careful how they spent their income.

"We paid off the debt of the 1820"s, 1830"s, and the economy recovered. In 1873, we had another panic year brought on by too much debt that financed the railroads - remember we built the central line first and then the northern and southern routes, a lot of feeder road industries that supplied the railroads over-expanded and it was over-investment, over-consumption.The panic year hit. Grant was no more knowledgeable of what was going on than Van Buren had been in 1838. We had no central bank, the government continued to balance its budget. We had a prolonged period of austerity, but by the early 1890"s, the problem had been solved, and we began to go on our merry way."

"Irrational behavior" on the part of US policy makers means our economy will grow to increasingly resemble Japan"s over the long term...

“I think that our results will mirror Japan over time, certainly not on a quarter to quarter or annual basis, but they’re public and private debt is just under 600% of GDP. Our total public and private debt is about 373%. They"ve tried to solve an indebtedness problem by taking on more debt. There are many many examples of what has happened to extremely over-indebted economies."

Hunt notes that there has been important recent work by Allen Taylor, also by a number of people in Europe. There is also work that’s been done historically. For example, the leader of The Enlightenment, David Hume- his famous paper on public finance, written in 1752 reaches the conclusion that:

...when a state has mortgaged all of its future liabilities, the state, by necessity, lapses into tranquility, languor, and impotence.

And there was Irvin Fisher’s 1933 paper on the consequences of extreme over-indebtedness, including pointing out that

"one of the factors that will happen will be that the velocity of money will be very weak, and so there has been a tremendous amount of work. It’s just generally speaking been ignored."

Hunt points to an excellent summary was published in 2010 by McKinsey Global Institute...

"They looked at 24 advanced economies that became extremely over-indebted. The indebtedness brought on a panic year, such as 1929, 1873, 2008, and they followed the process through to completion.

It’s a very long process, and what it shows is that an indebtedness problem cannot be solved by taking on additional debt.

McKinsey says specifically that multi-year sustained rise in the savings rate, what they term austerity, is needed to solve the problem, and of course, as we all know, in modern democracies, that option doesn’t seem to exist.

So, we try to continue to use what has failed, and while we get transitory improvement in economic activity, the longer-term trend is to weaker and weaker economic performance."

Moving on, Townsend asks, is the secular bull market in bonds really over?

"My view is that the secular low in long treasury bonds is not at hand - doesn’t mean that rates cannot go up, they have gone up quite a number of times since 1990 when this bull run started, but they’re not going to be able to stay up. The economy is too fundamentally weak."

"The main consideration for believing that the trough is not at hand, is that nominal GDP growth and also the inflation rate is not yet at its secular low. There have been many transitory swings that will continue to be transitory swings, but thecritical factors that determines the nominal GDP of both working lower experiencing considerably slower growth and money supply, and at the same time the velocity of money is in a major downtrend."

"In 1997, $1 of new M2 growth increased GDP by $2.20, and the first quarter of this year, it was down to $1.42. This reflects the fact that we have too much of the wrong type of debt. There are many other influences in velocity, but that’s the critical factor.

I think it’s important to remember that the velocity of money is very volatile.

The old secular low was reached at 1.2 in 1946, and that was the year in which we saw the daily, weekly, and monthly lows in the 30 year bond yield. Now, if that is the key factor, not the only factor, but the key factor, which is driving the velocity of money downward, then velocity is going lower because in Europe, which has debt to GDP ratio 100 percentage points higher than the U.S., velocity is at one and in China and Japan, which are also more indebted than the United States, velocity is around 0.5 to 0.6."

So, Dr. Hunt explains, the US debt load willl continue to climb and velocity will continue to slow - unless, of couse, "we get lucky."

...And Now For The Bad News

Authored by Simon Black via SovereignMan.com,

In the late 1760s and early 1770s, the government of France was in a deep panic.

They had recently suffered a disastrous and costly defeat in the Seven Years War, and the national budget was a complete mess.

France had spent most of the previous century as the world’s dominant superpower, and the government budget reflected that status.

From public hospitals to shiny monuments and museums, social programs and public works projects, overseas colonies and a huge military, France had created an enormous cost structure for itself.

Eventually the costs of maintaining the empire vastly exceeded their tax revenue.

And by the late 1760s, France hadn’t had a balanced budget in decades.

Debt was ballooning, interest payments were rising, and the government of Louis XV was desperate to do something about it.

There’s a famous story in which the Comptroller-General of Finances summoned all the government ministers to make deep budget cuts.

But no one could come up with anything substantial.

The overseas colonies were too important to cut.

And they couldn’t cut public hospitals… because too many people were now relying on them. Similarly they couldn’t cut veteran pensions either.

At the end of the session they could hardly find anything to cut that would make a meaningful difference.

All of their fancy programs and benefits had become too ingrained in society at that point; and any cut would have proven politically disastrous.

I thought of this story earlier this week when the US government released a sweeping budget proposal that aims to cut the deficit over the next ten years.

In fairness I’m always happy to see any government cutting spending.

But before uncorking the champagne bottles it’s important to understand some basic realities:

The budget slashes $3.6 trillion in spending through 2028 while proposing zero cuts to Defense, Social Security, and Medicare.

And that’s the entire point: just between those three programs, plus paying interest on the debt, the US government already spends MORE than it collects in tax revenue.

In 2016, for example, the government spent $2.87 trillion on Defense, Social Security, and Medicare, plus an additional $433 billion paying interest on the debt.

That totals over $3.3 trillion, which is more than they collected in tax revenue.

In other words, they could cut EVERYTHING ELSE in government: Homeland Security, national parks, funding for the arts, the Department of Energy. Everything.

And there would still be a budget deficit.

This is the most important thing to understand about US federal government spending: the built-in costs are so extreme that they can’t possibly make ends meet.

And the problem becomes worse each year.

Every single day, thousands of Baby Boomers join the ranks of Social Security and Medicare, which only adds to those programs’ costs.

This isn’t some black magic prediction; the Social Security office has precise data on how many people were born in 1952, 1953, 1954, etc.

So they know with a high degree of certainty how many people will be receiving benefits this year, next year, and the year after that.

The numbers just keep going up.

Point is, if they don’t cut Social Security and Medicare, nothing else in the budget really matters.

All of the cuts they’re proposing are financially trivial… it’s like showing up to the hospital with stage 3 prostate cancer and asking to get a cavity filled.

The more they delay the difficult choices, the greater the destruction becomes.

Spending will continue to exceed tax revenue, which means the debt will continue to rise (and interest payments continue to increase).

This cycle never ends.

The big, giant hope right now is that they’ll be able to engineer gravity-defying economic growth, which should theoretically increase tax revenue.

Again, this is a nice idea.

But their projections are extremely unlikely.

Looking back over the last 30-years, the average annual increase in real GDP per capita is just 1.5%.

The government’s new proposal is based on the US consistently achieving 3% growth year after year after year.

Even during the roaring 90s there were only three times in which that figure was over 3%.

So this is extremely unlikely.

But even if by some miracle the economy grows consistently by 3%, it still doesn’t address the government’s $46+ trillion problem with Social Security and Medicare.

Right now based on their own calculations, both programs are going to run out of money in a little more than a decade.

And they estimate the long-term costs of the program exceed revenue by more than $46 trillion.

(To see for yourself, refer to page 61 from the government’s own financial statements, available here. Note how the estimates get worse each year.)

Look, it’s nice to be optimistic and hope for the best. And any attempt to cut the deficit is certainly better than adding to it.

But it’s dangerous (and foolish) to presume that everything is going to work out OK just because some rosy projection says so.

The best-case scenario is that they buy themselves a little bit of time.

But the most likely result is still the same: default.

The US government has $20+ trillion in obligations to its creditors, and tens of trillions more in obligations to its citizens.

Simply put, the government has too many obligations. And their only way out is to walk away from some of them.

This means default.

Given that the US dollar and US government debt underpin the global financial system, defaulting on their creditors would likely cause a worldwide panic that would make the 2008 crisis look like an afternoon picnic.

Meanwhile, defaulting on their obligations to citizens entails deep cuts to… you guessed it… Social Security and Medicare. The younger you are, the more you can forget about counting on these programs as you grow older.