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

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.

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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Piketty's determinism?

In this review of Piketty’s book, Capital, we argue that Thomas Piketty’s determinism (which suggests that inequality is set to continue to rise indefinitely and that interest and growth are on a preordained trajectory) is wrong. Things don’t have to be this way. Thomas Piketty’s approach, we argue, arises from his fundamentally neo-classical approach to interest as the marginal product of capital.

On our worldview, substantial and sustained interest rate changes follow from progressive governments taking control of money. The level of output and employment is then a function of interest so obtained.

By Ann Pettifor and Geoff Tily, first published in Real World Economics Review, Issue no.69, 7th October 2014

Feeding the vultures

By Jeremy Smith, 13th October 2014

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Photo: Judge Griesa and vultures in Buenos Aires graffito – acknowledgment to wander-argentina.com

A slightly abridged version of this article is published in today’s Morning Star newspaper .  It is the latest in PRIME’s series on Argentina’s debt, the US courts’ persistent bias in favour of the vulture funds – now stretching to finding Argentina “in contempt of court” for daring to pass its own laws – and the crying need for an independent, impartial international process for deciding on sovereign debt disputes.

Paul Singer is one of the USA’s richest billionaires, owner of Elliott Associates and its Cayman Island “vehicle” NML. He financially backed Mitt Romney in the 2012 Presidential election, and is (says Fortune magazine) “a passionate defender of the 1%”.

His speciality is buying up distressed sovereign debt (bonds) dirt cheap, and then, through “vulture funds” like NML, relentlessly litigating to enforce judgments for the face value of the original bonds, plus compound interest. This usurious outcome is only possible because states and their (usually poor) peoples, cannot – unlike companies and individuals – go bankrupt.

Argentina’s economy collapsed in 2001 due largely to the foolish policy of tying the peso one-to-one to the US dollar, with full convertibility.  With IMF support, it borrowed large sums at ever-increasing interest rates to defend dollar parity – to no avail.  GDP fell 25%, and the peso’s value with it.  But external debts were payable in dollars.  Unable to pay, in 2002 Argentina defaulted.

Between 2005 and 2010, 93% of Argentina’s creditors accepted a deal to receive new exchange bonds paying about 30% of the original. Singer, on the contrary, bought up chunks of defaulted original debt on the secondary market at around 20% of face value.

Argentina since 2005 has paid exchange bond-holders their interest as and when due. No question. Until, that is, last month when it “defaulted” again – thanks entirely to decisions by the US Courts (the original bonds give the New York courts’ jurisdiction) that give extraordinary preference to Singer’s financial interests. How come?

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UK Wages - some being much more equal than others

By Shaun Richards, 13th October 2014

As the credit crunch has progressed the issue of wage growth and in particular the lack of it has moved ever more centre stage in economic analysis especially in the UK. It is hard to believe now, but the Office for Budget Responsibility (OBR) forecast wage growth of around 5% back in the summer of 2010. Not only was that the stuff of fantasy, but I also feel that such forecasts encouraged the Bank of England to think that above target inflation would only have a minor adverse effect on the UK economy.

Instead as I warned back then, it had a much more major effect, which was made most public in the way that real wages went strongly negative and became a drain on the UK economy. Actually the OBR seems to have such thoughts automatically programmed into its systems, as its current forecasts have annual wage growth rising to 3.8% in 2018. I would love that to be true but we have to face a current reality which at the very minimum questions that notion:

Pay including bonuses for employees in Great Britain was 0.6% higher than a year earlier. Pay excluding bonuses for employees in Great Britain was 0.7% higher than a year earlier. [from ONSContinue reading… ›

There is a ‘magic money tree’ – it’s investment

By Michael Burke, 13th October 2014

Supporters of austerity have long argued that there is no viable alternative because of persistent government deficits and rising debt. David Cameron put it starkly arguing that ‘there is no magic money tree’.

However these assertions contain two important fallacies. First, it is evident that, if government is increasingly indebted it must be the case that the private sector is also an increasing owner of that government debt – government cannot be a net debtor to itself. Therefore rising government debt represents a transfer of incomes, from the public sector to the private sector.

Secondly, economies can grow. Otherwise human society would still be in its most primitive phase. Therefore there is no fixed amount of output in the economy, or the monetary denominator of that output.

IMF answer

The question posed is therefore, how can a cash-strapped government grow the economy and improve its own fiscal position? The IMF has arrived at an answer. In the latest widely-read World Economic Outlook (WEO), the IMF devotes an entire chapter to the merits of public investment in infrastructure, which it defines as transport, power and other utilities and communications systems. The paper ‘Is it time for an infrastructure push? The macroeconomic effects of public investment’ can be found  here (pdf).

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Cameron & tax - low politics, high ideology

By Jeremy Smith, 2nd October 2014

The more we look at Prime Minister David Cameron’s tax reduction “promises” in his conference speech, the more they spin before our eyes. On the one hand, they are sold as huge gains for 30 million employed tax-payers.

Even the Financial Times journalists were taken in at first: “David Cameron pledges sweeping tax cuts for low and middle earners”, the headline shouted at us

On the other hand, their financial and fiscal impact is made to seem positively Lilliputian by contrast, to be easily digested. How has this trick been performed?

Let us look at each of the two main promises.

  • First, the basic income tax allowance will be lifted from £10,000 today to £12,500 from 2020 (n.b. 6 years away).
  • Second, the 40% tax threshold will be raised from around £42,000 today to £50,000 from 2020.

The Institute for Fiscal Studies estimates the cost as being in total £7.2 billion, made up of £5.6 billion for the first “promise”, and £1.6 billion for the second.

But these IFS numbers assume something quite different from the surface spin – namely that the basic tax allowance and the 40% threshold will in the meantime have been lifted annually in accordance with inflation, so that the real underlying ‘promise’ is seen as roughly this:

The basic tax allowance will be raised from £11,620 to £12,500. The tax gain per tax-payer would thus be not 20% of £2500, or £500 per person, but 20% of some £900, or around £180 (the IFS estimate £160).

Similarly with the 40% threshold. Instead of being raised by some £8,000, which would have meant a gain of around £1600 per person, if the current c.£42,000 gets an annual cost-of-living uplift, the final annual gain per affected tax-payer would be 20% of around £2,000, or £400 (the IFS say £430).

But if we take Mr Cameron at his word as spun, the tax give-away is far higher than £7.2 billion. The cost to the Exchequer of a straight uplift in the personal allowance of £2500 would cost something in the region of £10 billion (we assume 20 million tax-payers at £500 each, but note that Mr Cameron refers to 30 million who will gain – i.e. the entire workforce, which is patently absurd as many work for less than £10,500).

Next we add in the cost of the 40% uplift, of say £1500 per person, which we guesstimate at £2 billion – around 15% of taxpayers (4.5 million) pay the 40% rate, but many will be at the lower end and would only partly gain.

So overall, from the perspective of Mr Cameron’s big “selling” of the tax reductions, the tax take would be reduced by something like £12 billion, if not more.

From all this foggy confusion, smoke and mirrors, we know we’re in the realm of low politics, not breathing the pure air of macroeconomics!

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Catalonia v the Spanish State - where now?

By Jeremy Smith, 30th September 2014

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Messrs Rajoy and Mas – picture with acknowledgment to La Voz Libre

To no one’s great surprise, the Spanish Constitutional Court, on application from the Spanish government of Mariano Rajoy, has issued an injunction prohibiting the Government of Catalonia from proceeding with its planned consultative referendum vote on independence, du to be held on 9th November.

The Catalan Law “authorizing a non-binding consultation on independence and participation” lays down the question to be posed to the people of Catalonia:

“Do you want Catalonia to become a state? If so, do you want this state to be an independent one?”

In Spanish,

“¿quiere que Cataluña se convierta en un estado? Y, en caso afirmativo, ¿quiere que este estado sea independiente?”

The date and the questions are the result of the agreement reached by the  Catalan President and the leaders of several political parties on 12th December 2013.

Two years ago almost to the day (1st October 2012) I wrote a long article on the Catalan situation, citing the key provisions in the Spanish Constitution and the possible tactics the Catalan government might adopt.  I also forecast that – even if there were ever a vote in favour of independence – the assumed easy path for Catalonia in the European Union would be, well, not so easy.

I reckon what I wrote then is mostly valid today (save perhaps my reflections at the end on the future of the Eurozone)… so here are some extracts:

“It is the word ‘nation’ that lies at the heart of a very modern constitutional fissure between the Spanish state and the people (or “nation”) of Catalonia, a fissure that has deepened and widened as a consequence of economic crisis. We are at the start of a power struggle whose outcome is hard to predict – but which may have an impact not just on people in Spain, but on all Europeans.

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