About Harry Shutt

Harry Shutt is a freelance economist, consultant and author of numerous books on the World Economy.

Capitalism’s terminal debauch

As the Global Financial Crisis (GFC) drags on, the inability or unwillingness of the ruling global elite to recognise or address its true causes appears ever more surreal, not to say terrifying. The sense of impotence and ideological bankruptcy among political leaders is manifested almost daily – as in President Hollande’s attempt on 9 June to convince his Japanese hosts that the Eurozone crisis is “over” (http://www.bbc.co.uk/news/business-22832471) and in Britain’s opposition Labour party simultaneously embracing the governing Coalition’s policy of austerity and welfare cuts even as the independent Institute for Fiscal Studies projects that this strategy will preclude any relief from public spending cuts and tax rises until at least 2020.

This flight from reality is a sign of the utter helplessness felt by world leaders in face of their failure to find a solution to the global economic paralysis stemming from the GFC. From their perspective, of course, any such solution must be compatible with preserving the present “neo-liberal” world economic order, which since the 1980s has concentrated untold wealth in the hands of the tiny minority that they represent, while the vast majority of the world’s population sinks deeper into impoverished hopelessness.

A conspicuous recent symptom of their frustration is the attempt by the new government of Japan, whose economy has experienced no significant growth in over 20 years, to break free from chronic stagnation by engaging in a renewed massive bout of Quantitative Easing (QE) – or money printing by any other name. The main idea behind this move is ostensibly to promote domestic inflation – instead of the chronic deflation the country has experienced since around 1990 – by encouraging a devaluation of the Yen and thereby, it is hoped, a rise in consumption and growth. The immediate impact of this initiative was dramatic, prompting a 25 per cent fall in the value of the Yen against the US dollar in the 6 months to mid-May 2013 and a corresponding rise in the Nikkei stock market index (over 80 per cent) in anticipation of the higher inflation and economic growth investors apparently believed would result from this stimulus.

The scale of this intervention – involving the purchase by the Bank of Japan of government bonds (JGBs) with Yen newly created by itself – has been even larger (proportionate to the size of the national economy) than the parallel initiative in the United States, where the Federal Reserve’s QE programme is currently monetising debt at the rate of over $1 trillion annually. Not surprisingly, it may seem, such massive injections of funds, channelled through major banks and investing institutions, have served to underpin the broad-based market euphoria building round the world since late 2012, which has seen most stock market indices rise by upwards of 20 per cent. Yet for all the efforts of politicians and mainstream commentators and media to spin this market surge as an indicator of rising economic optimism and the long-awaited revival of economic growth (GDP) – even though it has failed to lift most market indices as high as the all-time peaks attained before the bursting of the dot.com bubble in 2000 – manifestly it has been an entirely synthetic, liquidity-driven bonanza.

Moreover, mainstream propaganda is at pains to downplay the vital role of QE in allowing both public and private debt to continue to be financed. Yet without such massive official purchase of government bonds (and also private-sector “toxic waste” such as US mortgage backed securities) there is no doubt that their market value would have fallen – and interest rates correspondingly risen – to unsustainable levels, thereby forcing public and private institutions into open insolvency and mass default.

Corruption of the market place

The artificial nature of the recent stock market “boom” is still more obvious once we discover that a large proportion of the stock purchases fuelling it has been made by companies buying back their own shares, (http://usatoday30.usatoday.com/money/perfi/stocks/story/2012-03-20/stock-buybacks/53674154/1) often financed by increased debt rather than retained earnings. In other words, company executives and directors are using the opportunity provided by the abundant cheap finance conjured out of thin air by QE both to manipulate their share price higher – facilitated by the prospective reduction in the number of shares outstanding – and to enrich themselves by selling their own shares in the company at a higher price, as well as through increases in their remuneration where (as is often the case) this is linked to rises in the share price. At the same time the whole process reflects dwindling rather than growing confidence among corporate insiders in the prospects of their businesses and an irresponsible tendency to cash in while they can, even if that means further weakening balance sheets (now loaded with more debt which will be even more of a handicap once interest rates rise again).

These corrupt, market-distorting practices in the stock market may be seen as just another manifestation of a broader climate of manipulation now pervading all asset markets. The best publicised case of such market rigging has been the LIBOR interest rate fixing scandal exposed in 2012. On top of this now come allegations – which have thus far received little media coverage – that the vast foreign exchange market (with daily turnover of more than $4.5 trillion), whose epicentre is once again London, is also subject to widespread distortion of exchange rate benchmarks by market traders. Even more hidden from view is the abundant evidence that the US authorities are colluding with private sector financial institutions to suppress gold and silver prices (http://www.gata.org/node/12708) (in the interests of maintaining the value of the US dollar, otherwise severely threatened by the Federal Reserve’s ever more profligate monetary policy) – a process which is illegal under anti-trust law.

All this reinforces the growing sense that virtually all international financial markets are by now effectively rigged – and that the often criminal practices involved are tacitly sanctioned, indeed orchestrated, by the governments of the industrialized world under US leadership. Indeed, while evidence of this has been building for many years – as witness the establishment of the shadowy US presidential Working Group on Financial Markets following the stock market plunge of 1987 and a number of well documented instances of official share buying in Japan and other Far Eastern markets since then, it may be said that the widespread adoption of QE since the onset of the GFC has served to underpin and sanctify the whole principle of generalised market manipulation.

It should go without saying that allowing such an essentially fraudulent market climate to develop is extremely hazardous for those who would preserve the illusion that the world economy is governed by more or less free markets and a “level playing field” for all. For once market players perceive that markets have become institutionally perverted and corrupt arenas where a privileged few with inside information can make vast profits at the expense of the mass of ordinary investors the latter are bound to start leaving the casino in droves – if not burning it down. At the same time it will become harder and harder to convince the public at large that they should make huge sacrifices to keep the system afloat.


Against this background the continuing resort to QE – an unprecedented experiment that turns the basic principles of market economics on their head – represents an enormous gamble. It has been justified largely on the basis that it can stimulate revived growth by pumping more money into the economy. However, its failure to do so thus far – notwithstanding attempts to pretend that the US economy at least is now recovering – has led in recent months to growing worries in the markets that it will soon prove unsustainable. For without the prospect of a boost to growth leading to a reduction, let alone a reversal, of budget deficits holders of US Treasury Bonds and JGBs are losing confidence that they will hold their market value. This concern is already being reflected in a slight rise in market interest rates. Yet for reasons noted above any significant rise in interest rates – of 1 percentage point or more – would likely precipitate mass global insolvency, which would be compounded by a generalised collapse in asset values. Even more chilling is the prospect that, even if the longed for revival of growth were to occur, it would inevitably lead to a sharp rise in interest rates as both demand for capital and inflationary pressures pick up. The only way this might be averted would be by engaging in further monetary expansion (via QE) so as to continue bearing down on interest rates, although this would bring the obvious danger, indeed certainty, of hyperinflationary collapse. Either way, therefore, there is now evidently no way of avoiding the catastrophic market meltdown that policy makers have been struggling to avert since 2007.

This harsh reality is finally starting to be reflected in the mainstream media, as it continues to pay lip-service to neoliberal orthodoxy while at the same time being forced to recognise its inevitable failure. Thus a leading commentator in the right-wing Daily Telegraph (http://www.telegraph.co.uk/news/politics/labour/10103347/If-the-Labour-Party-wont-spend-whats-the-point-of-it.html) on the one hand chides both the Tories and Labour for their failure to make serious cuts in the welfare budget, but none the less concludes that the British national debt burden is after all too large be paid down and can only be eliminated through inflation or default. This thought is echoed by a former senior economic policy official in the George W. Bush administration, Dr Pippa Malmgren, who in a recent interview states that “at the end of the day, the magnitude of the debt that is held by the United States, and indeed by all of the industrialized economies that have a debt problem, is so great it cannot be paid down. The human suffering involved would be so far beyond our capacity to withstand, so it has to be defaulted on.” (http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Archive.html – 8 June).

Thus the global elite – or criminal syndicate – which attempts to manage the world economy in its own interests now finds itself in the position of a chess player who has run out of moves. Yet such is the irresponsibility of those in charge that, so far from conceding defeat, we can only expect them to try ever more desperate ploys – such as precipitating yet more wars – in trying to escape the inevitable. One thing that seems most unlikely to deter them is the scale of human suffering they might unleash.

20 June 2013

Immigration and the mythology of globalisation

One symptom of the ongoing global financial and economic crisis (GFC) that is recurring more and more frequently is the demand to address the problems associated with migrant workers who, whether legally or not, have for decades been leaving their home countries in seemingly ever larger numbers in search of improved economic opportunities abroad. This has become a particular focus of concern in those relatively wealthy countries – located mainly in North America, Western Europe and Australasia – which are the target destination for most such migrants. Here, as economic growth has faltered since the turn of the century and virtually dried up since the start of the crisis in 2007, unemployment levels have inevitably soared to the point where the capacity of these economies to absorb more migrant labour from overseas – or even to continue providing work for those already here – is increasingly being called into question, as is the capacity of public and social services to cope with the influx of foreigners, many of whom are substantially deprived, if not destitute, when they arrive.



As a consequence of these developments immigration has become a priority concern in the eyes of the public, such that political parties are forced to consider measures to try and cut – or even reverse – the inflow of migrants, particularly in the face of xenophobia fanned by increasingly popular far-right parties such as Golden Dawn in Greece and the UK Independence Party in Britain.



Unfortunately, but not surprisingly, debate on the issue is seriously distorted by misinformation emanating from particular vested interests underpinned by a continuing mainstream political consensus that “globalisation” – involving largely free cross-border movement of trade, capital and labour – is a desirable if not inevitable feature of modern economic organisation. A notable instance of this has been the (not entirely successful) attempt by the further and higher education sector in Britain to minimise restrictions on the issue of visas to foreign students, on whose fees it has become increasingly dependent. Yet while arguing that this benefits the national balance of payments by increasing the volume of fees paid in foreign exchange, it ignores the well documented fact that a significant number of such students are either incapable or have no intention of paying the fees due, seeing their visa as a way of gaining entry to the UK in order to seek employment illegally.



At the same time it is often argued by business lobbyists – and even a number of economists – that net inward migration of labour does not tend to depress wages, by increasing the supply of labour relative to the demand for it, even though such a claim amounts to a negation of the most basic law of economics. Such self-serving delusions are seemingly given further credence by those – including many who would count themselves on the left – who evidently consider immigration as positive from a broader socio-economic perspective, e.g. in terms of promoting cultural diversity and international solidarity. In any event it is clear that many who are otherwise strongly opposed to the exploitation of labour are very reluctant to express any support for tightening restrictions on immigration – often, it would appear, out of fear of being branded racist.



Such “political correctness” is regrettable not only because it plays into the hands of those on the cynical right who quietly welcome the role of migrant workers in keeping wages depressed while at the same time gaining political mileage by pandering to mounting popular xenophobia if not actually “playing the race card” (as reflected in the British tabloid press). It is arguably even more damaging in that it prevents a more rational debate on the whole issue of transnational migration based on a realistic perception of its causes and the interests and needs of those affected.



Above all such attitudes typically rest on the very questionable assumption that migration by deprived people from poor countries is generally beneficial to migrants and their families – and indeed to their countries of origin – and is so perceived by themselves. Nobody is more guilty of promoting this rosy view than development agencies such as the World Bank, who never tire of pointing out that the remittances sent home by migrant workers to their families constitute a vital source of foreign exchange to many developing countries, with annual flows to the latter now as high as US$ 400 billion (far more than they receive in development aid). Remarkably, the Bank tries to claim that the process is also positive for the host countries’ economies, though they are unable to quantify this or relate it to the corresponding loss to their GDP resulting from the outflow of remittances. What they also fail to mention is the negative social impact of migration resulting from the prolonged splitting up of families. Equally they take no account of the subsidy given by poor countries to rich ones when their skilled workers, trained at their national expense, are lost to the domestic economy – e.g. Filipino nurses recruited for the British NHS rather than for local health care services that are in dire need of upgrading.



Such official exaggeration of the benefits resulting to those migrating to rich countries also plays to the popular belief, eagerly fostered by Western media, that many immigrants are actual or potential “freeloaders” seeking to take unfair advantage of supposedly generous welfare systems in the industrialised West. The grim reality for the vast majority of migrants is that



  1. they only resort to leaving their home countries out of desperation in order to escape utter destitution for themselves or their families – or, in a rising number of cases, under threat of death, persecution or loss of human rights (all increasingly common in the now disintegrating world order);

  2. the prospect of leaving the familiar surroundings of their community and of prolonged separation from their friends and relations for an environment where the culture and language are alien to them is a daunting one;

  3. the risks of failure – of losing most of their remaining money or even their lives in the process – mean that emigration represents an enormous gamble.



Equally, there is a steadfast refusal by the mainstream media and political parties to recognise the economic inefficiency and distortions involved in allowing the importation of cheap migrant labour to do menial jobs – such as car washing or fruit picking which could easily be done by the plentiful supply of existing unemployed labour which otherwise remains stuck in benefit dependency at the taxpayer’s expense. As such the policy amounts to a subsidy to private employers of cheap labour. Still less is there any recognition of the extent to which the whole process of migration – trading on desperation and feeding exploitation – encourages the lucrative branch of organised crime that is human trafficking, encompassing international prostitution rings.



Hence any realistic attempt to address the problems linked to growing inward migration of workers in the developed countries must be based on the recognition that such migrants are as much victims of the process as are those in the receiving country – who inevitably tend to be more concentrated in relatively deprived areas – who suffer the consequences in terms of increased pressure on local public services as well as competition for ever more scarce job opportunities.



Furthermore, such a reappraisal would need to face the fact not only that unrestricted labour migration is socially undesirable and economically inefficient but that the entire globalisation project has proved to be based on a false prospectus and has been a major factor in bringing economic and social ruin to the whole world, developing and developed alike. Above all it has demonstrated that removing restrictions on cross-border trade, financial transfers and migration, so far from being a recipe for rapid economic expansion and wealth creation, has simply served to increase insecurity and instability – social as well as economic – and the concentration of wealth in fewer and fewer hands. Perhaps the most graphic symptom of its failure is the so-called Arab Spring which has erupted since 2010. For there can be little doubt that a crucial source of the discontent driving this movement has been the chronic mass unemployment and intensifying poverty and hopelessness in those Arab countries without significant oil wealth. The tipping point may well have been the onset of the GFC, particularly as it has affected Europe, which has long provided an outlet for surplus labour, particularly for Maghreb countries such as Tunisia, where the uprising began. For the sudden drying up of employment opportunities in the EU – notably in Spain, where unemployment has now mushroomed to 27 per cent – has inevitably had huge repercussions for Arab economies which had come to depend on them. At the same time local enterprises have been seriously weakened by the global downturn and intensifying competition from abroad.



The lesson to be drawn from this experience is that problems arising from cross-border labour migration can only be solved by a comprehensive restructuring of the world economic order such as to eliminate the enormous economic waste and social damage associated with it. This will entail renouncing the delusions of the “free market” in favour of an economic model based on the principle of guaranteeing minimum security for all within a framework of relative economic stability (recognising also that a revival of rapid global growth will not be sustainable). For this to work it will also mean giving national and local communities more control over their markets and resources – ensuring the retention of national value added by restricting capital flows – rather than sacrificing them to the destructive forces of international competition.



Sadly, of course, in the real world such ideas are very far from the political agenda, which remains dominated by the neo-liberal dogma of the 1980s. Seemingly it will need the Arab Spring – or worse – to come to Europe and the US before a meaningful shift in this ideological logjam can occur.


31 May 2013















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Last days in the bunker?

As the economic news across the world has turned increasingly ugly since the beginning of 2013, signs of intensifying desperation within the leadership of the industrialised nations are starting to appear. In the face of negative growth of GDP in all major countries (including the supposedly more buoyant US) in the last quarter of 2012 politicians, central bankers, leading economists and captains of finance and industry have all begun to express alarm at the failure of official measures designed to stimulate revival to have any positive impact.

As from the start of the global financial crisis (GFC) in 2007-8, there are two broad strands of official opinion as to how it should be overcome, starting from the common perception that its initial manifestation – the impending mass insolvency of the financial system – had to be averted by unprecedented state bail-outs of (largely private) banking institutions. The first, and predominant, strand of opinion has been that the resulting huge extra burden of public sector debt must be reduced by means of intense fiscal austerity, principally through cuts in expenditure rather than tax increases. The second strand asserts that, in order to reduce the excessive levels of debt in both the public and private sectors there needs to be yet more public sector borrowing – thereby increasing the debt level, at least initially – to finance new capital spending on the basis that this will boost growth throughout the economy and hence raise the extra revenues needed to pay down the debt. Although economists continue to argue about which of these somewhat conflicting strategies is more likely to lead to the desired recovery, most governments have in practice pursued a combination of both. At the same time there has been near unanimity that monetary policy must be extremely relaxed, so that near zero interest rates have been the norm ever since the start of the GFC – on top of which “quantitative easing” or QE (using money created by the central bank to buy government debt and thereby increase liquidity in the economy while also serving to prevent interest rates on the debt from soaring to unsustainably high levels) has increasingly been resorted to by central banks.

In fact at the time these “extraordinary measures” were first widely adopted following the banking disaster of 2008 it should have been obvious, on any objective analysis, that such measures could never lead to anything resembling normality – let alone a sustained revival of growth – while the economies of all major countries remained weighed down with such a crippling burden of debt, and that consequently most of this debt would need to be written off before equilibrium could be restored. Despite this the main organs of establishment propaganda – naturally including the mainstream media – have for the last four years maintained a public posture of confidence that the global economy is on course for recovery.

However, now that it is apparent that all the policy measures, conventional and unconventional, that governments have managed to deploy have predictably left their economies flat-lining at best – with real GDP no higher now than in 2007 and public indebtedness still rising – panic is evidently starting to set in. Thus in Britain two leading establishment economists – Martin Wolf, chief economics commentator of the Financial Times, and Lord Turner, Chairman of the Financial Services Authority – have seemingly joined forces to call for the printing of “helicopter money” (cash freshly minted by the state) to be distributed across the economy in a last-ditch effort to stimulate consumer demand. Yet it must be obvious to them that such an approach, if adopted, would risk much higher levels of consumer price inflation (which is already well above both the official target level and average income growth) and / or a renewed bubble in asset prices, including house prices, which are still well beyond the reach of most first-time buyers five years into the downturn. As it is, one of the few positive symptoms resulting from QE is that, as a result of the extra liquidity injected into the system, stock market prices have risen significantly in recent months, although strikingly the main benchmark indices in the US and UK are still below the all-time high levels reached in 1999-2000. Doubtless Wolf, Turner and their colleagues are also aware that, if they could get away with such an “inflationist” strategy for a few years it could significantly devalue the huge debts still weighing down the economy, albeit at the price of reducing many millions dependent on small savings and low incomes to penury.

At the same time right-wing commentators and Tory politicians desperate for some action to revive growth are calling for huge tax cuts on business and investment (corporation and capital gains tax) to be paid for by even bigger cuts in spending than those already inflicted on the bleeding body of the public sector. This despite the copious evidence from past experience that a) “supply side” measures such as cutting direct taxes tend only to result in only higher public debt (as under Reaganomics in the US in the 1980s) and b) trying to cut one’s way to fiscal balance is equally self-defeating, as most recently demonstrated by Greece and Italy. Yet all the while the inescapable reality remains, as it has been since the start of the GFC, that there is no way of restoring any kind of stability or balance to the global economy without effectively writing off virtually all of the unpayable debt still paralysing the system. However this is achieved – whether through the ending of state support for financial institutions and asset values or via hyperinflation through QE or other forms of money printing – the inevitable outcome will be a market meltdown even more cataclysmic than that of 2008 and a consequent collapse of personal income, wealth and savings such as to threaten social stability and civil order across the world.

This intensified resort to vain fantasies as the inexorable forces of systemic failure close in calls to mind the delusional behaviour of Hitler and his dwindling entourage in the Berlin bunker in 1945, summoning non-existent divisions to be thrown into the Eastern front as the Red Army remorselessly advanced on the capital. For Hitler the stark choice was surrender or suicide. For Chancellor Osborne and his peers in other countries the options may seem almost as unpalatable, although unlike the Fuhrer they may hope to survive capitulation personally.

In contrast to the position facing Germany in 1945, however, there is now no obvious alternative regime available offering a vision of a more humane economic and social order that could restore some degree of stability and hope to the world. This is because, despite the West’s supposed commitment to pluralism and democracy, all our political institutions – including most of the media – have, over the last 30 years, been progressively coopted and absorbed into a monolithic structure committed to sustaining the neo-liberal ideology propagated by and for big business interests.

In this climate of extreme market liberalisation and globalisation – modified by highly distorting government-supported manipulation and subsidy favouring selected groups or individuals – there has been no place for any notion that the resources of the state could or should be deployed to control or restrict economic activity in the wider public interest if that is seen to be at odds with corporate power and private profit maximisation. Hence it seems quite hard to conceive of any major Western government having both the will and the capacity to do what now needs to be done to maintain or restore minimum conditions of survival as the global economy progressively disintegrates. For this would require the creation, at least on a temporary basis, of some form of command economy, involving tight government control over all aspects of the economy – including not only credit but prices, incomes, production, trade, foreign exchange and capital flows – as a prelude to restoring economic life on a more stable long-term basis.

Given the current balance of political forces in the world’s rich countries there is evidently no prospect of any government acting to pre-empt the gathering financial holocaust. Even once it clearly manifests itself – almost certainly in the form of a new round of bank failures – it seems hard to believe that the increasingly criminal ruling élite will easily submit to the need for such a command economy. For this would entail not only a) huge financial losses for themselves (and the rest of the “1 per cent”) as asset values are wiped out on the markets, but b) a demonstrable failure of the dominant neoliberal ideology (if not of capitalism itself) as comprehensive and terminal as was that of Soviet Communism in the 1980s. For the powerful few, therefore, the stakes are high. Yet for the mass of ordinary people round the globe they are higher still, and many may increasingly feel they have nothing to lose but their lives in the struggle for a more hopeful future, as the Arab “Spring” arguably demonstrates. As the world approaches the moment of maximum danger it is crying out for leadership to take it in a different direction.

3 March 2013


Britain’s one-party state

      Amid the continuing economic paralysis brought on by the global financial crisis attention has lately been focused on the chronic huge imbalance in government revenue and expenditure in the world’s largest economy, the United States. Without some moves to close this gap, it is widely perceived, there is no hope of reducing the enormous level of public debt which, along with equally massive private sector debts, is crippling the economy and threatening generalised bankruptcy. In order to achieve such a reduction there must either be an increase in revenue – through higher taxes – or cuts in public expenditure or some combination of the two. The extent to which the emphasis should be more on direct tax increases (particularly on the wealthy who enjoyed massive tax cuts under the Bush administration) or public spending cuts is a matter of fierce political debate between Republicans and Democrats in Congress, with most Republicans rejecting any tax increase whatever on principle.




      Leaving aside the fact that fiscal austerity on its own cannot possibly restore stability (let alone growth) to such heavily debt-ridden economies, what seems striking from a British perspective is that tax increases are at least on the agenda in the US – notwithstanding Republican intransigence. By contrast in Britain, which has an even greater public deficit and debt problem than the US, debate between the political parties or in the mainstream media on how to remedy this dire situation centres exclusively on the extent and nature of the necessary cuts in spending – with the main emphasis on public services, where cuts most severely affect the poorest and most vulnerable in the community. As for taxes, the only significant increase enacted by the Coalition government has been on Value Added Tax, an indirect tax levied on all members of the public equally – and therefore hitting those with the lowest incomes hardest. So far from any proposal to raise direct taxes on those with higher incomes (those best placed to help close the gap) the Coalition has since 2010 favoured them with a cut in the top rate of income tax and a further cut in corporation tax on top of those lavished on them by successive Tory and Labour governments over the past 30 years – resulting in a decline in the top rate of income tax from 83 to 45 per cent and in the rate of corporation tax from 52 to 21 per cent since 1979.




      These concessions, combined with the enormous opportunities for tax avoidance provided by the ever more complex regulations and the ready access of companies and wealthy individuals to offshore tax havens, have led to spreading public resentment at the unfairness of the system, particular at a time when the British public is facing seemingly endless demands for greater austerity. This animosity – mainly articulated by ad hoc groups of activists such as UK Uncut, the Tax Justice Network and the Occupy movement – has built to the point where politicians have felt the need to react. Amazingly, however, their response has so far consisted solely of denunciations of a few US-based multinationals (Amazon, Google and Starbucks) for paying virtually no tax on the substantial profits they derive from their UK operations. Understandably, when summoned by MPs before the Public Accounts Committee to answer charges from its Chairman that their failure to pay more UK tax was “outrageous” and “an insult”, the three companies all pointed out that their conduct was in full compliance with the laws laid down by Parliament and with their obligation to maximise returns to their shareholders. Nevertheless, spurred by threat of a consumer boycott, Starbucks announced a decision to make a voluntary extra tax payment of £20 mn over two years – a derisory sum in relation to their hundreds of millions of UK annual sales. As even one Coalition MP was forced to admit, such a demonstration that tax was effectively optional for large corporations makes a mockery of the system.




      Despite the ridicule brought on themselves by such pathetic antics no politician from any of the major parties has called for any changes in tax laws or rates to compel either corporations – or wealthy but lightly taxed individuals – to pay more. Nor have there been any demands from mainstream media for any such legislative changes. Likewise even the trade unions, the traditional champions of social justice on behalf of the working masses, are largely silent on this issue, merely echoing vague calls for reduction of tax avoidance loopholes. Such conspicuous cowardice from the British establishment confirms the existence of a political consensus in Britain that the idea of direct tax increases, whether on corporations or individuals, is to be considered taboo even at a time of extreme fiscal crisis; rather it is proposed to extend the grotesquely inefficient and divisive practice of means testing to universal benefits such as child benefit in order to try and close the gap.




      Instead of challenging this consensus by calling for redistribution of income via direct taxation the official opposition, the Labour Party (founded and, incredibly, still substantially funded by the unions), is going through the motions of looking for other ways of achieving more equitable income distribution. The latest buzz-word to surface from the think-tanks in this context is “pre-distribution”, a term which party leader Ed Miliband himself and a number of his colleagues purport to take seriously. Yet those who regard sloganising as an inadequate substitute for rational thought will find on closer inspection that the concept has as much substance as the Emperor’s New Clothes and is merely another attempt by its advocates to hide their ideological bankruptcy in pseudo-academic verbiage. For its essence, apparently, is that a) it does not and must not entail spending more public money on benefits of any kind and b) it will mainly involve exhorting private business to create more and better paid jobs for the underpaid and underemployed without putting any pressure on them to do so. Such a stance is obviously of a piece with that which begs companies like Starbucks voluntarily to pay more taxes than they are obliged to. It also fits all too well with the record of a party whose leaders appear comfortable with their public image as “cabs for hire” and which has shown no remorse for its part in the greatest war crime perpetrated by any European government since 1945.


     All this demonstrates once again the firm resolve of Labour, along with the other mainstream parties, that no policy change must be proposed – or even publicly discussed – that is at variance with the interests and agenda of the huge and shadowy global big business “syndicate” that effectively dominates the world. Party managers and financial backers are clearly mindful of the widening gulf thus being created between the political class and the mass of public opinion – as shown by their strenuous efforts to fabricate opinion polls purporting to demonstrate that most people think it is right to impose greater austerity on the poor and most vulnerable even as the corrupt financiers whose crimes have reduced the economy to such dire straits not only walk the streets with impunity but continue to be rewarded with high salaries and tax cuts.



      The need to deploy such totalitarian methods in order to try and foist this perverse ideology on the public may seem all too logical to a ruling élite resolved to make no concessions to either reason or humanity. For whereas until lately our rulers have clearly felt able simply to ignore public opinion most of the time, they may well now feel that the dangers of serious unrest are such that it needs to be more actively managed – or distorted. A classic example of the more relaxed approach was the unanimous refusal of all three main parties to contemplate renationalisation of the railways at the time of the 2001 election – notwithstanding a series of horrendous accidents following privatisation and opinion polls consistently showing at least 70 per cent of the public favouring a return to public ownership (as it still does). Yet given the growing signs of civil disorder elsewhere in Europe in the face of deepening social deprivation and repression – not to mention the uprisings associated with the Arab “spring” – the authorities may reasonably fear that such disconnect between rulers and ruled will soon become explosive.




      The question crying out for an answer is why Britain – or indeed any of the other Western industrialised “democracies” that are heirs to the Renaissance and the 18th century Enlightenment – is unable to conduct an open, pluralistic public debate on what needs to be done to stem the spreading tide of global chaos and conflict before it engulfs us all. While there may be no single factor capable of explaining such ideological paralysis, it is hard to escape the conclusion that the failure to limit the power of big money to buy the political process (including control of the media) is a principal cause – a power perhaps made more dangerous by the tendency of modern capitalism to concentrate vast wealth in far fewer hands than ever before in history.




      The effect of these distortions in Britain is that our supposedly democratic constitution is now less representative of the popular will than at any time since before the Reform Bill of 1832, when the franchise was limited to a tiny proportion of the population and those with wealth and connections could buy seats in Parliament without the need to present any policy platform to the electors. Such a reversion to open debauching of our institutions seems bound to lead to calls for drastic reform to make them more genuinely accountable and free them from the corrupting power of big money. But perhaps we may doubt whether any such reform can happen in time to avert social collapse and civil disorder on such a scale as to push us back still further in terms of our history to when conflicts were resolved largely by force rather than the rule of law. Given the manifest obduracy of those in power in the face of looming collapse – and increasing signs of high level lawlessness (not only among the “banksters”) – we are entitled to suspect that they now see such an outcome, with all the monumental suffering that implies, as a price worth paying for them to cling to power a bit longer.




3 January 2013


Twilight of the investors

     A striking symptom of the unending global financial crisis (GFC) has been the announcement by Union Bank of Switzerland (UBS) on 30 October of 10,000 staff redundancies across its world-wide operations – almost 20 per cent of its existing personnel. In London, where some 3,000 of these lay-offs have occurred, the development has been made all the more dramatic by the fact that many of those affected only learned of their fate when they arrived at the office to find that their passes had been disabled and they were given a letter informing them of their suspension on full pay (pending termination) before being escorted off the premises by security staff. According to press reports the reason for this seemingly brutal procedure was the management’s fear that, should these individuals be allowed further access to their computer terminals they might feel they now had nothing to lose from engaging in reckless trading, either in the hope of making one last killing for themselves or else, out of spite, to saddle the bank with massive extra losses. Such worries seem all too understandable in the light of the current fraud trial of an ex-UBS London trader in connection with a loss of $2.3 billion allegedly resulting from his dealing, although the defendant claims his bets well above the defined risk limits were placed with the encouragement of his superiors.

     Nothing could better symbolise the terminal decadence of the financialised capitalist economy than this sordid episode. It demonstrates graphically both the climate of dishonesty and mistrust now pervading the investment banking industry and its utter abandonment of any notion that it exists to support economically viable productive investments in favour of a purely parasitic casino culture. While some might suggest that this tendency is somehow attributable to a spontaneous outbreak of moral decay – whether in the financial sector or more generally – such a claim would be no more plausible now than when it was used to explain the Enron and numerous other financial scandals that occurred before and after the bursting of the “dotcom” bubble over 10 years ago. Indeed that event can now be seen to have marked the ending of the prolonged global stock market boom that began in the early 1980s, as equity prices have been declining or stagnating ever since and in real (inflation-adjusted) terms now stand far below their peak in 2000.

     Rather what is now becoming inescapable is the ever greater impossibility of making sufficient returns on investment – as reflected in the level of operating profits relative to capital employed – to satisfy the competitive markets other than by reckless gambling, a requirement made inevitable by the classic cyclical implosion of the corporate sector under the weight of excess accumulated capital. This perception is reflected in a recent report in the Financial Times (8 November) that a number of City institutions have pronounced that the “cult of the equity” is dead or dying, claims that echo an earlier FT article by Samuel Brittan – The End of the Cult of the Equity (2005).

     This recognition is also mirrored in the declining share of equities in the total investment holdings of UK pension funds which, at under 40 per cent, is now below that of fixed interest securities (bonds) for the first time ever. This does not mean, it should be stressed, that bonds are viewed by the market as an attractive investment, but rather that they may be preferred by pension funds desperate for the higher yield offered by speculative, but correspondingly more risky, “junk” bonds – or else simply that bonds in general may be thought less likely to experience a sudden collapse in value such as that which affected equities in the 18 months to 2009, when the benchmark S&P 500 index fell by almost 60 per cent. However, given that the market price of corporate bonds is ultimately just as dependent on the value of the underlying assets as are equities, such a belief in their relative safety is almost certainly misplaced, as noted in yet another FT article (A false sense of security – 19 November). Likewise the high prices of many government bonds – and correspondingly low interest rates – can hardly be seen as sustainable when all the Western governments issuing them are essentially insolvent and can only maintain such market valuations by virtue of money printing and other blatant forms of manipulation.

     The implications of these developments are momentous, though little understood outside a rather small circle of the more clear-eyed market observers and investors – not least because of the huge vested interest in sustaining public belief in the continued viability of long-term investment in the market. The size and power of this vested interest has been growing over the last 60 years, ever since Wall Street (followed by the City of London) began to promote the idea of the benefits of saving through investment institutions such as mutual or pension funds. Its genesis, it should be noted, coincided with the post-World War II economic boom giving rise to unprecedentedly rapid sustained growth in the 1950s and 60s. Once this came to an end with the onset of the first global post-war recession in 1974-5 it might have been suspected that the “cult of the equity” would have a limited shelf life. By that time, however, the economies of the US and much of the industrialised world were already too closely tied to the fate of the overly powerful financial sector – on which the livelihoods of many millions had in any case come to depend – for there to be any question of calling this model into question. Instead it was determined, if only by default, that policy would be directed towards maintaining the value of financial securities and the buoyancy of financial markets at all costs.

     Over the subsequent four decades the constant refrain of official propaganda has been that prosperity would be revived – and reflected in steadily rising stock market values – if only appropriate policies of market liberalisation (including globalisation) were pursued, thus supposedly permitting renewed growth of investment and output (GDP). The fact that, despite the general implementation of such policies, the sustained recovery in growth has persistently failed to happen has been constantly glossed over by mainstream commentators as well as governments – even to the point of ignoring or denying the reality of a steady long-term decline in real global GDP growth rates since the 1970s. At the same time, as in previous world financial crises – such as that precipitated by the Wall Street Crash of 1929 – an increasingly dominant part has been played by speculative investment, which essentially means the buying and selling of existing assets rather than creating new productive capacity. Such activity – defined by defenders of the status quo as “wealth creation” but more aptly characterised by Lord Turner of the Financial Services Authority as “socially useless” – has been greatly facilitated by the great liberalisation of financial markets that has occurred since the 1980s. Indeed it was precisely thanks to this liberalisation – involving the removal of restrictions which had been put in place in the 1930s to prevent the very type of dangerous risk taking that had led to the Wall Street Crash – that the global stock market boom of 1982-2000 was able to happen in spite of persistent stagnation in output.

     Ignoring these growing symptoms of economic failure and systemic dysfunction since the 1970s, propagandists for the ruling élite, particularly under the Thatcher régime in Britain, have promoted the idea of “popular capitalism” and a “property-owning democracy”, concepts that were quite easy to sell politically in the 1980s as the sustained stock market boom was taking hold and belief in more state-centred ideologies was weakened – not least by the terminal failure of the Soviet model. However, since the start of the new century, which coincided with the end of the market boom, it has become more and more obvious that investing in financial securities of any kind offers no secure route to a prosperous retirement for anyone – all the more so as the world is faced with many years of global economic stagnation before its huge debts can be unwound or written off.

     The reality of bleak investment prospects was evidently grasped – even before the onset of the GFC in 2008 – by the Pensions Commission reporting to Britain’s Labour government in 2005 on how to resolve the mounting “pensions crisis”. For it was forced to recognise that the sacred promise of the private funded pensions industry – that it could guarantee an adequate level of retirement income to contributing individuals – was soon to become a thing of the past. Yet rather than drawing the obvious inference – that the model of funded pensions was always doomed to failure and was thus an idea whose time should never have come – the Commission felt politically compelled (in the interests of the City institutions) to pretend that people should still be encouraged to save for their retirement through funded schemes, albeit ones that would offer no guarantee of any level of pension. At the same time the Commission was forced to recognise that non-funded (pay-as-you-go) pension schemes such as the vast majority of occupational schemes in the public sector were inherently more viable than funded ones, although subsequently successive governments (egged on by the City and with little resistance from the unions) have done their best to undermine them.

     As the global outlook darkens further, both market players and the authorities are becoming ever more shameless and irresponsible in their efforts to avert systemic collapse by rigging markets – through “quantitative easing” (money printing by any other name), manipulating LIBOR, stock markets and energy and other commodity markets – or turning a blind eye to other forms of fraud (mis-selling of payment protection insurance and interest rate swaps). Yet this struggle to hide the reality of a generalised collapse in the market worth of corporate assets – and indeed of the entire capitalist profits system – is now increasingly revealed to be as futile as it is criminal. Hence, as investors become an endangered species, thousands more City traders may well already be wondering, as they leave their office in the evening, whether their passes will still work when they return the next day.

21 November 2012

Energy: The Ultimate Case of Capitalist Dysfunction

In the last instalment we described how since the 1970s the capitalist economic model has become progressively more maladjusted in a world of transformational technological change which is tending to make it as obsolete as the feudal model based on pre-industrial technology became at the start of the Industrial Revolution two centuries ago. However, a glaring difference between the situation now and at the start of the 19th century is that throughout the world the class with a vested interest in the survival of the existing (capitalist) order is still overwhelmingly dominant, whereas 200 years ago the then ruling élite (the landed aristocracy) were increasingly being challenged by the rising bourgeoisie.

Because of their continued dominance – based on their disproportionately huge share of global wealth and income – this group still retains almost total control of the political agenda via its virtual monopoly of the mainstream media (even though this position is now being progressively eroded by the growth of the internet and social media), not to mention the persistence of corrupt structures of political party funding and lobbying which ensure that money talks loudest in public discourse. Hence it is all too easy for big business to disseminate propaganda favouring its interests in the channels that most strongly influence public policy.

Thanks to this influence it has been possible for the very substantial vested interest comprising the global energy industry – representing not only the major oil companies but leading OPEC states as well – to conduct a sustained campaign of misinformation to try and discredit the overwhelming scientific evidence that man-made global warming – resulting primarily from exponentially growing consumption of fossil fuels – is a reality which may pose an existential threat to human society in much of the planet. While the strength of the evidence is such that this campaign of denial has only been partly successful, it has undoubtedly had the effect of sustaining a high degree of “climate change scepticism” among the global public, thereby weakening and delaying moves towards radical change in the pattern of energy use.

Furthermore, to the extent that the giants of the energy industry – and the rest of the traditional corporate sector (including big finance) – have found it necessary to “go green”, by promoting low-carbon forms of energy supply, they have not done so in ways best designed to serve the public interest. Thus rather than support policies designed to limit or phase out particular types of operation, such as coal-fired power generation, corporate interests have given priority to the seriously deficient mechanism of “cap-and-trade”, based on the idea that it is possible to reduce global production of carbon emissions by means of a market mechanism, namely trading in permits to pollute within an officially mandated emissions ceiling. Although this system has had some marginal benefits – mainly in facilitating investments that limit the growth of emissions in developing countries through the Clean Development Mechanism (CDM) – the overall experience of carbon trading to date (largely confined to the European Union) suggests it is highly unlikely to lead to significant reductions in emissions or promote the most cost-effective choices. Indeed it has been shown there is a danger of it having precisely the opposite effect if the incentives are badly calibrated. An example of this is provided by a widely used coolant gas whose by-product in the form of a waste gas resulting from the manufacturing process produces a massive amount of global warming – the destruction of which is accordingly assigned an extremely high value in terms of carbon credits saleable on international markets under the CDM. Hence the unintended result of this incentive has been a huge increase in output of the coolant gas in China and India – far beyond the demand for it simply in order to make profits from the excessive credits available on the harmful by-product (see Profits on Carbon Credit Drive Output of a Harmful Gas by Elisabeth Rosenthal and Andrew W. Lehren. New York Times, 8 August 2012).

Such counter-productive distortions illustrate the perverse rationale of the global ruling élite in trying to ensure that any new initiatives or activities aimed at limiting potentially harmful forms of production and consumption must as far as possible be designed to provide opportunities for the investment of profit-seeking capital and should extend rather than restrict the scope for market trading of assets and resources.

But arguably the most pernicious way in which the profit-maximising model works to subvert and defeat the public interest in the effort to rationalise global energy production and consumption is its tendency to promote those investments and technologies which are the most profitable for the private sector but which constitute the least cost-effective allocation of resources from the public’s perspective. This is reflected in the extent to which publicly supported programmes of research and investment (heavily influenced by corporate interests) tend to

  1. Give low priority to supporting energy conservation – notably in respect of the design and refurbishment of buildings – which has the potential to meet up to half the requirements for emissions reductions in the industrialised world by 2050 at a far lower capital cost than would be absorbed by investment in renewable energy sources on a scale sufficient to achieve the same outcome. (This problem has clearly been exacerbated by the privatisation of so many energy utilities, giving them a vested interest in expanding rather than restricting demand – as confirmed by the fact that the utilities most effective in supporting energy-saving investments in industry are those which, as in Canada, have remained largely in public ownership);

  2. Prioritise those forms of renewable / low carbon energy production that require relatively high levels of capital investment, thus providing outlets for the maximum amount of excess capital (surplus value) which will otherwise continue to weigh down corporate balance sheets and financial markets. The advantage of such outlets to investors is that the public interest in curbing carbon emissions is seen to justify high levels of public subsidy to energy utilities. This explains why the strategy of the UK and other OECD governments puts heavy emphasis on conventional nuclear and wind power despite – or perhaps precisely because of – the fact that they not only absorb high levels of fixed investment but are of such doubtful cost-effectiveness at market prices that projects can only be undertaken with the aid of a more or less indefinite state subsidy guaranteeing investors’ returns. (To the implied extra financial costs, moreover, must be added the environmental costs associated with both wind and nuclear power, which may be huge if scarcely quantifiable).

The criminal irresponsibility of pursuing such damaging strategies is apparent once it is understood that far more rational and efficient approaches to providing for future energy needs – while at the same time meeting the challenge of global warming – are increasingly available. Yet the existence of such options could scarcely be grasped from information provided by the mainstream corporate media; hence there is little awareness of the potential benefits to the planet, to consumers and to taxpayers alike from applying alternative technologies that have lately been developed. These should include:

  • Design / adaptation of buildings (to be encouraged through regulation and / or fiscal incentives) so as to make them self-sufficient in energy for space and water heating. This would be achieved both through a) extraction of heat from the sub-soil (geo-exchange) and b) improved building materials and insulation;

  • Development of small-scale electricity generation based on local / domestic installations (mainly solar), largely eliminating fossil-fuel dependence for power generation as well as minimising distribution costs (expensive national grid networks would become increasingly redundant);

  • Improvements in energy storage systems – batteries, hydrogen-based fuel cells using renewable energy – which could also render electric-powered transport systems much more competitive.

The adoption of such economically and socially desirable technologies would be greatly accelerated if more official support were provided to enhancing their commercial competitiveness. Given the active (if covert) hostility to such innovation from the existing corporate sector – for the reasons mentioned above – this would require the allocation of public resources to properly targeted research and development along with appropriately designed incentives to users – e.g. tax breaks for the capital cost of retro-fitting buildings for geo-exchange. The cost of such support would be a small fraction of that currently being devoted annually to subsidies to nuclear and wind energy.

While the overall scale of potential savings – in terms of reduced expenditure on investment in infrastructure as well as fossil-fuel consumption – is difficult to quantify a priori, particularly bearing in mind the continuing rapid pace of innovation, it is likely to be vast, especially once the qualitative benefits to the environment are factored in. One such saving might be the cancellation of the proposal for the mandatory installation of “smart meters” in all homes in the European Union projected to start in 2014, the benefits of which will probably far exceed the costs of at least 150 billion as consumers become less and less dependent on mains electricity supply thanks to the type of changes in supply sources outlined above. This prospect is of course what terrifies the existing energy corporates the most, which is why they and their political allies will continue striving to distort the debate with misinformation so as to foist wasteful investment and excessive use of fossil fuels (not to mention uranium) on the public for as long as possible. Equally, for those who have long sought to place some check on the enormously opaque and unaccountable power of the global energy conglomerates and OPEC this gathering revolution in the sector represents a welcome opportunity to advance economic democracy by empowering consumers and local communities alike.

14 August 2012

The tide of history and capitalist denial

Marx and Engels famously explained in the Communist Manifesto (1848) that the emergence of capitalism – or as they then called it “the bourgeois mode of production” – as the dominant economic model during the Industrial Revolution was the inevitable result of the adoption of new technology (steam-powered mechanisation) which totally superseded and marginalised pre-industrial technology. Although not all their contemporaries welcomed this development as much as they did – as a transition to the proletarian revolution they eagerly anticipated – few then or since have seriously disputed their analysis of how it came about.

Despite this implicit general recognition that capitalism became dominant largely as a result of a technological revolution some 200 years ago the ruling global élites of today – and the vast majority of economists and analysts directly or indirectly in their pay – seem unwilling or unable to draw the moral of what this implies for economic development in the 21st century. Hence they are apparently refusing to recognise that what the first industrial revolution did to the handloom – or indeed the “second” industrial revolution of a century later did to horse-drawn transport – the so-called Third Industrial Revolution of today has begun to do to the established manufacturing and other technologies inherited from the post-World War II era or earlier.

In fact this seeming resistance to change cannot be ascribed to today’s leaders of capitalism being either insensitive or ideologically resistant to technological change. Indeed it is their proud claim that the capitalist economic model has been the most crucial factor in bringing to fruition the unprecedented advances in human wealth and welfare made possible by technological change in the last 200 years. On the other hand they have long been aware that technological innovation is very much a two-edged sword from their perspective, threatening the viability of existing investments while at the same time offering outlets for investment in new products. That is why large corporations have always sought to control and (if necessary) restrict the rate of innovation in such a way as to maximise the rate of return on both their existing and new investments. Their ability to do this was for a long time enhanced by the fact that ability to compete in many areas of manufacturing still depended on large-scale mass production, requiring substantial capital investment – a reality which constituted a serious barrier to the entry of new competitors. Such was the basis of the model of corporate management dubbed the “planning system” by J.K. Galbraith in the 1960s, which enabled multinationals such as General Motors to maintain global market dominance throughout the immediate post-war period and beyond.

Increasingly since the 1980s, however, this privileged position of traditionally dominant global corporations has started to crumble in the face of competitive forces they can no longer control. While there are diverse factors contributing to this tendency, none has been more significant than the accelerated pace of technological change involving electronics, digitisation and advanced materials (such as carbon fibre). This is because

  1. The new technologies often require relatively small amounts of investment in fixed capital (compared with traditional factories based on mass production). Hence existing producers heavily invested in older technology tend to be more vulnerable to competition from start-ups which correspondingly find fewer barriers to entry.

  2. The speed of innovation can be such that investments in new technology are increasingly perceived as too risky – i.e. liable to be rapidly superseded by the latest “new thing” – particularly as the rate of return demanded by investors has been pushed ever higher by the cyclical forces of the competitive globalised market.

The effect of these forces has been to drive the investible funds of capitalists away from the dwindling opportunities in productive investment in favour of either a) purely speculative investment (e.g. the mergers and acquisitions boom facilitated by the great financial liberalisation of the 1980s or the more recent real estate and other bubbles much assisted by the repeal of the US Glass-Steagall Act in 1999) or b) investment in utilities or public infrastructure where competition is typically limited and high returns can be more or less assured by collusion with “captured” state regulators. These distortions, underpinned by the “moral hazard” stemming from states underwriting the financial sector as “lenders of last resort” and the political corruption enabling private investors to plunder the public sector at will, have been behind the huge misallocation of resources leading to the ongoing implosion of the financial markets since 2008.

In considering how the world is to emerge from this disaster we must look beyond the immediate problem of the financial crisis, which can only end – as argued in the first instalment of this blog – with generalised debt default and mass destruction of capital values. In order to prevent such a calamity ever occurring again it will be necessary to ensure that a future economic model is structured so as to avoid recreating the unnecessary and distorting treadmill of mindless accumulation which has brought us the ultimate capitalist catastrophe. At the same time we must respond to the ever more pressing need to limit, if not reverse, the threat to the biosphere posed by the compulsion perpetually to expand production and consumption – on a finite planet with a still exponentially rising population – inherent in the existing capitalist model. Fortunately the possibilities opened up by recent technological advances – including those referred to above as the “Third Industrial Revolution” – give us the chance to meet the needs of the world’s population at much lower cost and with less use of scarce resources than at present.

Yet while this is good news for the planet and the global community as a whole, it is clearly bad news for those still dominant groups who would restore a world of capitalist “business as usual”. Naturally their central preoccupation remains to maximise the opportunities for investing their capital at an acceptable rate of return. But as such opportunities continue to shrink – not only under the impact of changing technology but because the financial sector’s scope for reckless speculation has inevitably been curbed in the wake of the crisis – the perception has grown that almost the only promising outlets are ones in public infrastructure (whether nominally privatised or not) where competition is limited and / or the level of returns can be effectively guaranteed by state subsidy. Quite apart from the potential added burden to taxpayers at a time of extreme fiscal stringency, such pressures are clearly tending to result in huge misallocations of resources compounding those that have already brought the financial sector (and the entire global economy) to its present ruinous pass.

The main manifestations of this tendency since the bursting of the real estate bubble in 2007 have been in the form of investment in public infrastructure of all kinds, involving private sector capital underpinned by state subsidy or guaranteed revenue streams. Perhaps the most conspicuous recent example of this in Britain is the proposed high-speed railway (HS2) intended to link London and Birmingham – projected to cost well over £30 billion – the economic viability of which is extremely doubtful. Yet the world is already littered with similar white elephants – including several airports in Spain which will never open and roads and railways to nowhere in Japan and China.

Nowhere have the distorting effects of this tendency raised bigger threats to the public interest – both financial and environmental – than in the energy sector, as it struggles to come to terms with the demands of the low carbon economy of the future. This issue will be addressed in detail in the next instalment of this blog.

Set against the historic trend of technological evolution as described above, such perverse acts of waste and vandalism increasingly appear like desperate attempts to resist the tide of history. The next 10 years will be crucial in determining whether this struggle ends in ruinous global conflict and catastrophe (casting doubt on the survival of the human species) or the beginnings of a new era for global society in which new technology is at last allowed to benefit the community as a whole – both in terms of adequate living standards for all and a rational and sustainable management of the earth’s finite resources – without the need for endless growth of investment and production.

2 July 2012

The Debt Disaster and Keynesian Delusions

It is generally recognised that the most intractable symptom of the global financial crisis which has gripped the world since 2007 is the huge burden of accumulated debt weighing on the economy, particularly in the industrialised (OECD) countries.


While the precise volume of global debt outstanding is hard to pin down – particularly if one takes account of the potentially hundreds of trillions of dollars of contingent liabilities represented by Credit Default Swaps and other derivatives (the actual amount of which can only be guessed because of the opaque nature of the markets) – it is a fact that accumulated debt (public and private) relative to GDP now far exceeds any previously recorded level. A recent report by McKinsey Global Institute (MGI) indicates that total debt (of households and financial and non-financial corporations as well as the public sector) in the 10 largest developed countries (USA, Japan, Germany, France, Italy, Spain, Canada, Australia, South Korea and UK) had risen to an average level equal to at least 300 per cent of GDP by mid-2011 – which is close to double the average ratio prevailing in 19901 , and much greater than anything recorded earlier It is important to note, moreover, that public sector debt accounts on average for no more than about 30 percent of the total debt outstanding – although in most cases its share has sharply increased since 2008 because of the need to bail out insolvent banks (virtually all in the private sector). This aspect of the MGI findings is all the more significant in that it serves to emphasise (if inadvertently) that the deepening fiscal crisis of states is mainly a symptom of the insolvency of the private financial sector, which had been allowed to run up unsustainable mountains of debt prior to 2007, only to dump them in the lap of the state in its capacity of “lender of last resort”. This poses in stark relief the reality that these massive bad debts have now brought the states themselves to the brink of insolvency, with nobody to bail them out as they have bailed out the private sector.



At the same time the cost of servicing all this debt at anything like a commercial rate of interest is also at record levels relative to GDP and is far beyond the capacity of the economy to meet it without either reducing most of the population to absolute destitution or inducing total financial collapse – although for the moment this problem is being substantially concealed by the artificial suppression of interest rates.



With the global economy in this state of debt paralysis mainstream economists are virtually unanimous in asserting the need for a revival of economic growth in order to generate the resources needed to pay down debts to a more sustainable level. Most of them also recognise that the orthodox recipe of cutting public spending to achieve this end will – as even the IMF has conceded – be self-defeating in that it is bound to be negative for growth and thus result in even higher public sector deficits and debt – as has already happened most conspicuously in Greece. Hence they see the only alternative as being to expand public borrowing and indebtedness further in the short term so as finance expansion in investment and output (and employment), while at the same time maintaining interest rates as low as possible with a view to encouraging consumers and businesses to spend – on the supposition that, in line with Keynesian theory, such extreme fiscal and monetary laxity will induce the required GDP growth.



Yet, as has been obvious since the start of the crisis in 2008, such a strategy is doomed to fail by the reality that a) in a situation where levels of public debt are perceived by the markets to be too high in relation to the capacity to service or repay them, further increases in public borrowing must tend to raise the effective interest rate demanded by the bond markets on government debt – because of the increased risk of default – thereby pushing states closer to insolvency, while b) most consumers and businesses are already “maxed out” on debt and thus need to “deleverage” (cut their indebtedness) rather than borrow still more.



In their desperation to escape from this impasse the authorities in the US and the UK have since 2009 started to employ a radical and high-risk stratagem – never explicitly pursued by any industrialised country until Japan began to adopt it in 2001. This is the practice of monetising public sector debt with currency electronically created (printed) by the central bank – i.e. to buy up government securities such as US Treasury Bills. This mechanism – officially called “quantitative easing” (QE) – is justified by the authorities as a means of averting the risk of deflation, which could easily lead to outright slump, in a situation where the official benchmark interest / discount rate has already been set at close to zero and therefore cannot be reduced any further. It is hoped by the governments concerned that this process of debt monetisation (printing extra money by any other name) will stimulate effective demand in the economy by expanding the money supply – even though the earlier Japanese experiment along these lines had no such positive impact. What is not stated is that QE is also seen as vitally necessary in order to support the market price of government bonds, thereby keeping down the effective interest rate on them. Failing this artificial support, it would be impossible to conceal from market investors that the unprecedented level of indebtedness throughout the economy (see above) must call into question the solvency of all borrowers, both public and private. Once that happens (as sooner or later it must) the market rate of interest on all debt securities will rise to unsustainable levels as investors perceive the soaring risk of default, precipitating mass bankruptcy, financial collapse and the probable breakdown of civil order.



     The failure until now of the Eurozone authorities to resort to QE – mainly because of German refusal to accept such an unorthodox and potentially inflationary policy – is the main reason the Euro area has seemed on the brink of financial collapse since late 2011. By early February 2012, however, it is apparent that – under the influence of a new and more permissive President of the European Central Bank – mechanisms have been devised for making available liquidity to the many Eurozone banks in desperate need of it, even if there has thus far been no explicit adoption of QE. This has eased some of the pressure both on the banks and on similarly insolvent member state governments who would otherwise only be able to cover their soaring budget deficits by borrowing at impossibly high market rates. However, the threat of a sovereign debt default is still ever present, most obviously in the case of Greece, where in fact such an outcome now appears inevitable – and imminent.



     Those economists, still the overwhelming majority, who hold out some hope that such “extraordinary measures” can facilitate a revival of growth and living standards choose to disregard or play down the significance of the unprecedented burden of debt weighing on all sectors of the world’s major economies. Many of them point out, quite correctly, that public debt in these countries has on numerous occasions in the past been much higher than it is now (e.g. in the UK in the 1940s and 50s) and that this did not prevent them paying down such debt to more normal levels at the same time as permitting a rise in average real incomes. What such die-hard Keynesians ignore, however, is the grim reality that a) overall debt (mainly in the private sector, as noted above) is now at totally unprecedented levels and b) that – in contrast to the situation in the past (such as 50 years ago) there is no prospect of debtor countries growing their way back to solvency, not least because already crippling debt service liabilities severely restrict the scope for expanding consumption and investment.



     The only (slender) hope for the ruling establishment is that QE, by keeping real interest rates negative – i.e. below the rate of inflation – will enable them gradually to shrink the debt burden in real terms down to a more sustainable level. The problem meanwhile with such “financial repression” is that, as the UK Coalition government has already discovered, it has the effect of squeezing the incomes of savers and the lowest paid (already stretched to breaking point by recession and fiscal austerity) while favouring debtors whose profligacy is rightly perceived to have caused the crisis. It is thus likely that such an approach will prove as politically intolerable as it is economically unviable.



     As such realities dawn on mainstream economists and political leaders alike it may be hoped that more of them will soon feel forced to confront what is for them a still more intolerable necessity: the inevitable write-off of all the massive bad debts crippling the world economy and the consequent destruction of capital values on a vast scale. Whether such an outcome would signify the end of capitalism may be debatable. What cannot be doubted is that it would entail drastic and urgent restructuring of the economic order along more collectivist lines and a consequent curtailment of the power as well as the wealth of “the 1 per cent” – or else a cataclysmic global upheaval at least as destructive as World War II. If, as seems all too likely, the latter course is chosen, it may well be doubted whether our species could survive such an apocalypse.




6 February 2012




1McKinsey Global Institute, Debt and deleveraging: Uneven progress on the path to growth

. January 2012