Friday 8 March 2013

Forthcoming Economic Collapse

Friends and I were discussing the future of benefits this afternoon. The probable truth is, we don't know what is going to happen. So many are reliant on benefits just to survive, and marches are going to take place regarding the vicious and discriminatory 'Bedroom Tax'. Before reading the following, remember (for those who know) that I am a Europhile. The problem with the euro is a problem of inadequate regional policy, and a democratic deficit at the European Parliament whereas, instead, we have the executive arm of governments meeting up at the Council of Ministers producing a legislature at European level. The idea that Spain and Germany are radically different economically and culturally is so, but not so different from say the pound between London and Newcastle and the urge of the Scots or some of the Spanish to be independent and in the EU is as strong as say cultural differences around the continent. Nevertheless I think that shortly the UK could go bust and we will be out of the EU within ten years. Here is why. (Forget what the government says about employment and the rest. Firms take on cheap labour instead of investing in capital, and many people now work for less money than by which they can live. Every scheme, every sanction, every disability benefit, means the person is not counted as unemployed. People seeking work and partnered to workers are not counted as unemployed. The figures are fiddled. Also, forget what is says about the debt, for what matters is government deficit.) With its commitments, the deficit of the government is reaching about 900% of GDP. Our deficit is worse than all countries except Japan and Ireland. The government can afford the debt because the interest rate is so low. Should the interest rate rise to, say, 4%, the government would go bust. It could not finance the debt. One means by which the government is keeping interest rates low is by Quantitative Easing. Normally, a government sells bonds and the price falls so that they get purchased. As a bond gets cheaper - but its repayment value stays the same - the interest rate thus rises. The trick is that the Bank of England has been buying these bonds, and thus overpowered the price mechanism. Keeping prices high, interest rates have remained low. Now the Bank is not allowed to destroy the bonds or tell the government not to bother to pay it back. To do that would amount to printing money, and that is forbidden by the EU Maastricht Treaty. This time the bank has not done any Quantitative Easing. Though, there is now talk of negative interest rates for banks - forcing banks to pay for reserves they keep, as financed by QE. The idea is to force banks to pass on reserves by lending to business. Instead they have been repairing balance sheets. That's not the problem. You cannot push string. But once there is demand in the economy, there will be a difference between the real cost of buying money and the rates of interest in the banking system. Interest rates rising will fuel bond buying but rates will rise because of the demand for money. The problem is that there is a dam wall in the banks now holding back money. In old fashioned terms, we have had plenty of money in the system but not velocity of circulation. Once the velocity of circulation gets going the money could flood out of the banking system in a vicious circle. Interest rates will be up and down as money starts to pour out - expect inflation to rise, the interest rate rise to inflation, and then the money velocity to rise to inflation to draw on money volumes to push the interest rate down again to cause more pull on the money. Inflation will chase interest rates will chase inflation in a mad spiral of unbacked money. On the back of austerity - reduced production and formerly depressed prices - the result could soon be hyperinflation. If it doesn't seem right, or logical, watch the pound go down. That will be its measure. Instead of seeing gold and silver prices rising, see them as being flat and the currency falling. That change of perspective is a guideline for what has been going wrong. Probably there is worldwide general inflation ready to kick in, and, if you think about it, the property bubble was suppressed inflation, as were all those derivatives of insuring against the crash (you cannot - not a bell curve), as is worldwide Quantitative Easing just another bubble. We have one of the worst Chancellor's of the Exchequer ever; he is a boy doing a man's job and lacks economic insight. The IS LM curves of this economy now have a Keynesian shape, whereas he has been acting like a monetarist. The Japanese at least have had economic and infrastructure development during the last twenty years of their stagflation. We are having cuts, and cuts hitting those most likely to spend. Inflation on top of austerity is worse inflation: it is money backed by few goods and services. The spiral gets faster and faster. There is no answer to the forthcoming disaster without State power. So I'm making predictions. An economic collapse will cause social breakdown and the British won't stand for unfair austerity any further. We see these strains now in Greece, Italy and Spain. Despite it underpinning our liberties and leading towards a continental identity, the UK will probably be out of the European Union within ten years. The kind of Sovereign State power needed will not be possible inside the EU. Bonds will be scrapped and even privately held debts will be cancelled. The government will nationalise many financial institutions. The Greeks nationalised pensions and so will we. The banks went bust and governments bailed them out - so now governments go bust and the banks will bail them out, via bank takeovers. The State will have to direct people to work and direct consumption: private institutions like railways, power, water etc. will all come under public control, distributing to all. Housing will be taken over regarding repairs to the stock and much building and renting become the norm. What I am suggesting here is the collapse, probably in the UK and then in other countries, of the liberal capitalist economy and its 'civilisation' and its replacement by a more social system where rights and responsibilities will have to come through criticism in the political system. The choices will be between UKIP type nationalism and of the Conservative Party, and otherwise State and co-operative approaches of the left and communal left. Whoever is in power, the last market consensus will have to be dropped in favour of a State power consensus. Creditors will simply lose their money. They will be told to stuff it, and then creditors will start to lend again with adjusted interest rates. We all need a Jubilee like debt clearance. The United States will probably object, but the dollar itself is hugely over valued and the US is rather like the Roman Empire was. Although flexible in terms of change, it does not have a manufacturing base and won't without its own State power. Normally (!) the financial system collapses and there are a few years when the money supply vanishes, people go bankrupt and then the economy starts up again in real fashion. This time bail outs have kept money sloshing around. This unburst liquidity is now very dangerous. Let's hope the above does not happen. But any more austerity and it will happen. Governments must now exercise State power and act over and above the financial system. They must now direct projects to get people working and consuming, and direct the flows of finance. Let's be clear. Added value can and does happen in the public sector as well as the private sector. We now need this via investment; we need to understand what Keynes was getting at and that we are a community of people and not a set of individualist property owners. Yes to maximising liberty but yes also to use the levers of power.


Jonathan Clatworthy said...

Absolutely right Pluralist.
My view is that people are looking for economic solutions when we should be looking for moral solutions. No economic theory is going to reverse a deteriorating situation caused by too much confidence in economic theories.
In peace time, societies usually polarise, with the rich getting richer and the poor getting poorer. This is because money brings power and power brings money. Three things can reverse this: war, revolution or deliberate government policy to redistribute wealth and power. But the greater the polarisation, the more power the ultra-rich have and the harder it will be for any government to redistribute.

Pluralist (Adrian Worsfold) said...

I don't disagree but does economic theory have no role? I know economics has a dodgy reputation but there must be some analysis possible.