Just Money

Ann Pettifor, the economist and critic of modern finance, explains clearly what money is, where it comes from, and how it is currently controlled. She shows how an improved understanding of money and finance can build more just and productive economies.


PRIME is an economic think-tank that promotes understanding of the nature of credit, and its role in determining macroeconomic outcomes. Fundamental to our approach is an implicit and explicit restoration of ethics in relation to money and credit.

Labour views economy through the wrong end of a telescope

By Ann Pettifor, 11th December 2014

“There is no path to growth and prosperity for working people which does not tackle the deficit”. Ed Milliband, 11th December, 2014.

The Labour leader has finally succumbed to a baying media pack that insisted he commit himself to an economic goal set by Labour’s opposition: namely “tackling the deficit.”

I am no politician, but such capitulation to  economically illiterate commentators, is surely both politically unwise as well as economically nonsensical. The reason it is politically unwise is that Mr. Milliband is succumbing to the Chancellor’s flawed and frankly dishonest framing of the public deficit as the biggest challenge facing Britain’s economy. But while Mr Osborne must be delighted at luring his opponents into a debate that cannot be won, he is plainly very, very wrong.

The biggest threats facing the people of Britain, and therefore the economic issues upon which they will decide their votes, are as follows. First, the broken banking system – still not fixed seven years after ‘credit crunched’ in 2007, and still not lending at low rates to the real economy, in particular SMEs. Simmering public anger at a greedy and fraudulent banking sector has not diminished.   Second, a vast overhang of private debt, and the threat to the solvency of households, SMEs and corporates posed by a rise in interest rates. The “Alice in Wongaland” economy is not sustainable, and we all know it. Third the threat posed to all British voters by falling wages and spiralling deflation. Few of us understand deflation, but be sure it poses a very grave threat.  Fourth, the threat posed by climate change.

By overlooking these threats, and focusing on the public deficit, Labour  is not economically credible, and will fail to win the confidence of voters.

This is particularly so because Chancellor Osborne has proved beyond doubt that governments  - even his ruthlessly focussed Treasury – cannot control the budget deficit. We argued as much back in July, 2010, when Professor Victoria Chick and I published “The economic consequences of Mr. Osborne”.  We wrote then that: “the public sector finances are not analogous to household finances. A household can reduce its deficit by cutting its spending, but the public sector is too important for that. What happens to the public deficit depends on the reaction of the economy as a whole.” By focussing on the deficit, Labour emulates the Coalition in viewing the economy through the wrong end of a telescope.

The plain fact is that the deficit is a function of the health of the economy (its share falls when the economy (i.e. employment) is expanding, and rises when the economy is failing). Because it is a function of the expanding or contracting”cake” that is the economy,  government is not able to control  its size – as George Osborne has found to his cost. Why would his opponents want to repeat his errors and failures?

Instead of promising to cut the deficit, Labour should be promising the people of Britain policies for investment in e.g. green infrastructure and nationwide high-speed broadband – investment that will generate skilled, well-paid employment, for all, including the millions of under- or part-time or zero-hours employed. Furthermore, because all expenditure  (both public and private) is income for someone else – both those in the public and the private sectors will gain from such public investment.  The investment to boost current private and public incomes can be financed by borrowed or printed money. Because the investment will generate income for both the private and public sectors -and tax revenues for government – the investment will pay for itself. Its not rocket science!

By raising wages, Labour could turn back the threat of deflation.  And by tackling both the broken banking system and the overhang of private debt – Mr. Milliband could offer the electorate a credible exit from the chronic, ongoing crisis of globalised capital.

If Labour were to do that, the deficit would take care of itself. ”


In the wake of the Autumn Statement...

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December 8th 2014

With the Autumn Statement on Wednesday December 3rd, it was a busy week at Prime Economics.

Ann Pettifor appeared on Adam Boulton’s two-hour weekday evening news show on Sky on Monday December 1st alongside Spectator Editor Fraser Nelson to discuss the Chancellor’s pre-Autumn Statement infrastructure announcements.

When asked by Adam Boulton: Are you saying that the deficit is not a problem? Pettifor replied ‘It’s not a problem at all’ - explaining that the government’s debt is not like an individual’s private debt, as, unlike private individuals, the government has a central bank that can purchase government bonds at ‘virtually negative’ or very low rates of interest, and thereby help finance the deficit. The UK government’s interest bill has scarcely risen over the past few years, argued Pettifor, because Bank of England rates are so low. And it is wrong to suggest, Pettifor said, that we’re going to pass on a huge burden of debt to future generations… ‘The income that (investment) generates will pay for itself’ – thanks to the multiplier.

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Pain, No Gain: the Austerity Scam

Austerity Scam

2nd December 2014

On the eve of the Autumn Statement, PRIME is pleased to publish “Pain, No Gain: the Austerity Scam” by John Weeks (Emeritus Professor of Economics, SOAS, University of London) which explains just why the deficit is not a problem – indeed is a necessary part of the solution – for the UK economy.

Gavyn Davies wrote last week in the Financial Times:

“All parties explicitly support balancing the current budget in the next parliament. Deficit spending is clearly still deemed to be politically untenable in the UK.”

Alas, “all parties” are wrong. An emphasis on “cutting the deficit” via reductions in government expenditure as the core of policy may provide useful cover for those whose real agenda is the political one of reducing the size and role of the state, but it is not a sensible or effective economic policy. It should certainly not feature as the central policy for any party with a social democratic mission.  And the Coalition Government’s austerity strategy has paradoxically – yet logically – failed to reduce the deficit as a percentage of GDP as planned, with a gap of some £50 billion between what was planned in 2010 for the current year, and what is now the case.

As Professor Weeks puts it,

“Chancellor Osborne cannot blame Labour for his woes. They are self-inflicted. The public sector balance remains deep in the red because of the stagnation of public revenue over the four years of Coalition government. The chart shows that the Brown government left Mr Osborne an improving budget balance, because the UK economy was in the early stage of recovery.

This nascent recovery that Labour bequeathed the Coalition demonstrates the old saying, ‘no good deed goes unpunished’. Far from building on hesitant improvement, the Coalition government embarked on recession generating budget cuts. These failed miserably in their aim of deficit reduction, and Mr Osborne attributes his failure in great part to what Labour bequeathed to him in May 2010. The truth is the reverse.”

Click here to download the publication.

And you can now listen to John Weeks discuss the austerity scam in his recent interview on Share Radio.

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Capital, wealth and cannibalism.

It’s really aggravating when someone can cogently express points that one has gnawed at inchoately for weeks. John Kay’s column in the FT – The capitalists sold the mills and bought all our futures  (Nov 25, 2014) – is one such aggravation, and is superb.

Kay deals elegantly with Thomas Piketty’s analysis and the definition and calculation of wealth, or patrimoine as defined in the French edition of his book, Capital in the 21st Century. I have felt convinced that Piketty, like a good accountant, has underestimated the vast wealth of today’s capitalists, while he has conscientiously (“heroically” writes Kay) totted up all the tangible wealth that there is to count. But wealth, surely, is far more than just the ownership of tangible assets.

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Workers and non-workers in the EU: access to benefits?

By Jeremy Smith, 12th November 2014

Tuesday’s much-publicized European Court of Justice “Dano” judgment clarified that – on the facts of that case – Romanian single mum Ms Dano was not automatically entitled via EU Treaties or legal provisions to non-contributory benefits under German social security rules. We thought it might help PRIME readers to understand the situation better if we set out the relevant EU Treaty provisions, and summarised the key points of the case. In reality, the case is more about EU legislation than the Treaties themselves.  And while the European Court in effect decided that the claimant was not entitled to the benefit on this occasion, this depended on the German court’s finding that she  was not seeking work.

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A good day to bury bad bank (and Bank) news?

By Shaun Richards, 12th November 2014

Today the Bank of England should be taking centre stage with its forecasts for UK economic performance in and at its Quarterly Inflation Report. Unfortunately for the Bank, some of the demons of its past have hit the news wires only a few hours before it was due. Here we have the relevant announcement from the UK Financial Conduct Authority:

The G10 spot FX market is a systemically important financial market. At the heart of today’s action is our finding that the failings at these Banks undermine confidence in the UK financial system and put its integrity at risk.

Okay, and so the action is?

The Financial Conduct Authority (FCA) has imposed fines totalling £1,114,918,000 ($1.7 billion) on five banks for failing to control business practices in their G10 spot foreign exchange (FX) trading operations: Citibank N.A., HSBC Bank Plc, JPMorgan Chase Bank N.A., The Royal Bank of Scotland Plc, and UBS AG.

This is rather awkward for the Bank of England in its role of supervisor of such markets.

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Central Banking, State Capitalism, and the Future of the Monetary System

By Ann Pettifor, first published on the CFA Institute website, October 2014

The role of commercial and central banks in the process of providing credit may seem to be clearly understood by economists, bankers, and policymakers. But there are common misunderstandings about money creation, equilibrium, public money, central banks, and interest rates. The outlook for the global monetary system is not overly optimistic in the absence of overcoming these misunderstandings and altering the philosophies of bankers.

This presentation comes from the 67th CFA Institute Annual Conference held in Seattle on 4–7 May 2014 in partnership with CFA Society Seattle.

The liberalization of finance after the 1970s led to a significant buildup of debt in many parts of the world, especially in Africa, Latin America, and parts of Asia. The inexorable rise in private corporate, household, and individual debt leads to the question of whether professional economists truly understand money, finance, and credit. Good predictions and sound investments cannot, in my view, be made without a solid understanding of money.

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Vicious loop: rising private debt merging with falling wages, productivity & inflation

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Ann Pettifor of PRIME with Allister Heath, deputy editor of the Daily Telegraph on BBC Newsnight, 17th October, 2014.

by Ann Pettifor, 22nd October, 2014

The Bank of England’s Andy Haldane is a fine economist. He occupies an ideology-free zone. This is highly unusual in central bank circles. He has just made a particularly skilful, and nuanced speech. Many gushed over it. Gillian Tett of the Financial Times suggested that it was good enough to qualify Haldane as a journalist.

But Haldane is not a journalist. He is a central banker. And that makes his ‘Twin Peaks’ speech particularly ominous. For while he bows to his political masters in the Treasury by acknowledging the growth in UK employment, his speech tilts definitively towards gloom. Let’s analyse it more carefully than I was able to do in a brief BBC Newsnight interview (eleven minutes into the show).

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Secular stagnation is the outcome of deliberate policy; it can (still) be reversed

Martin Wolf in the FT  today strikes a  different direction from those secular stagnaters shepherded by Larry Summers towards the cliff-edge of endless doom.  (Larry Summers devised and popularised the term, “secular stagnation”. He has a lot to answer for. His misjudgements, poor advice to the Obama administration, and flawed analysis have been catastrophic for the global economy. Given his record, he should be silenced or ignored, and barred from shepherding anyone, including economists and other naifs, in any direction.  For more on his grave weaknesses see this Forbes article.)

Secular stagnation within a deflationary context, let us be clear, is the outcome of deliberate policy choices. It has not come about by accident. It has not come about for lack of economic understanding, learning or analysis. It has not come about for lack of economic tools – both fiscal and monetary, or indeed for lack of human agency. Instead secular stagnation is the deliberate outcome of policy choices made by those dominant in the world’s most powerful policy-making institutions, including the IMF.

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Our economy: low consumer inflation, high asset inflation, big wage deflation

By Jeremy Smith, 14th October 2014

The latest UK annual CPI inflation statistics, for August 2014, were published today by the Office for National Statistics.  They show annual inflation down to 1.2%.

The last time the annual rate was below this was in September 2009, in the depth of the recession, when it fell to 1.1%.  Assuming that the present lower CPI inflation trend is continued in coming months, as seems probable, we will be back to levels last seen in the late 1990s and up to 2004.  The lowest levels this century were in May 2000 (0.5%) and June 2002 (0.6%).

But there is a very big difference between then and now.  Today, wages are running at an annual increase rate of around 0.7%, still well below CPI inflation.  In the period 2001 to 2008, when the ONS wages dataset begins, total wages were mainly rising annually at around 3-5% – and till the 2008 crisis, never fell below the inflation rate.

The chart below shows the picture clearly for the period 2001 to 2014.  Till 2008, total pay (which includes bonuses etc.) was always above inflation in annual % terms, usually well above. Since then, it has almost constantly been below inflation.  N.b. we have estimated that total wage increases remain at 0.7% (the last figure published by ONS, for July) for the months of August and September 2014.

CPI and wages chart to Sept 2014

ONS today also published their latest house price statistics. UK house prices for the most part maintained their rapid rate of annual increase in August, though in most regions no faster than in July.

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