From an FT email this morning:
The world economy is beset by feeble growth and a recovery that is “weak, uneven and in danger of stalling yet again,” according to the latest Brookings Institution-Financial Times tracking index. The publication provides sober reading, highlighting sluggish capital investment, falling industrial production and declining business confidence ahead of the spring meetings of the IMF and World Bank this week. The IMF is widely expected to revise its 3.4 per cent forecast for growth in 2016 down again.
What more can I say?
Neoliberalism is failing, I guess.
There is no other conclusion that explains this.
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I date the moment of failure – the point of ‘Peak Debt’, when bank monetary claims based on debt exceeded the capacity of the US population to pay them – to the collapse of Lehman Brothers. There now remains below the waterline a burden of property-based debt which is structurally unrepayable (with the problem worsening with Austerity & Automation hollowing out general purchasing power) & being systemically ‘extended & pretended’ so that the system is bleeding dollars.
It’s as though the visible wounds on a car crash victim have long healed, but internal bleeding continues. To the extent that the necessary transfusions of dollars are not created by the Fed by QE, then they must come from elsewhere (ie so-called Eurodollars), and this is why we see dollar strength.
There is no solution for this structural global problem by using deficit (debt) based currency created by intermediaries. We must migrate the system to a system (clearing union) of generally acceptable credit instruments (aka currency) based directly (People to Asset) on the use value over time of productive assets.
http://ftalphaville.ft.com/2012/02/24/896381/guest-post-post-modern-fiscal-theory/
I remain unconvinced that there is anything but debt based money
A credit instrument is a promise issued in exchange for value from the acceptor. It is returnable in payment for value to be supplied by the promissor.
If the acceptor has a right to demand delivery of value then it is either a debt instrument (delivery of money/currency) or a derivative instrument (delivery of money’s worth). If he has an ownership right to a flow of value it is an equity instrument.
The point is that a credit instrument – with no additional debt/derivative obligation – requires trust on the part of the acceptor that the promissor will fulfil his promise, and that is why we see trust/risk intermediaries aka banks.
It is completely straightforward for a land-owner to create and issue credits returnable in payment for rental value or for a generator owner to create an issue credits returnable in payment for the use of energy.
I argue that the former is a generally acceptable credit (currency) in a locality, while the latter is a generally acceptable credit anywhere.
The only question is within what protocols (frameworks of trust) such credit instruments may be created, exchanged, returned and settled. And like the credit instrument, these protocols have been around for millennia, but have been largely forgotten.
They are making a rapid return because: (a) they are complementary, and are ‘what works’; and (b) the intermediaries who do not use such risk and production sharing protocols & instruments will be at a disadvantage to those who do.
This is deeply dangerous: linking money to an artifical base when money and credit are always only worth the promise implicit in them could crisis economic crisis as harmful as the gold standard did
I think Chris is talking about money be backed by a ‘real’ value such as energy. he makes some great points at the end of his article:
‘Firstly, resolution of unsustainable mortgage (land-based) debt into a new generation of stock based upon rental values in a debt/equity swap on a massive scale.
Secondly, transition to a sustainable economy through direct ‘energy stock’ investment and the Big Trade of the 21st Century will be the exchange of intellectual value for the value of energy saved: Nega Watts and Nega Barrels.
Adoption of an Energy Standard leads to a new calculus forming the basis of all economic decisions. Dollar Economics becomes Energy Economics.’
This would need massive levels of consensus that, at present, seem unlikely given the benighted state of politics-but the notion of a ‘new calculus’ is utterly vital and it can be nothing but energy in the end.
Sorry – but that’s as bad as using the gold standard and completely misunderstands what money actually is
I agree that there is pretty much only debt based money. Consequently the thing that has to change is the relationship between creditor and debtor. In the current model creditors mostly enjoy a free lunch. The creditors have to take the hit, otherwise you amplify the rentier economy, debt servitude and inequality.
Chris, how does your credit instrument work with a carbon tax (fee and dividend) which is recommended by James Hansen?
Chris- the obsession with property and its bubbling can be traced back to about 1976-James Galbraith points out that banks and the financial system in general realised that property was the only thing left that could be sweated with a good return-as big bucks was no longer possible based on real production.
If we’d turned to a ‘new calculus’ in 1976 then we’d be in a very different place now. Bill Mitchell’s view is that Callaghan’s speach to the 1976 Blackpool Conference marks Labour’s ‘conversion’ to neo-liberalism:
‘British Labour Prime Minster James Callaghan’s speech to Labour Party Conference held at Blackpool on September 28, 1976 was laced with pro-Monetarist assertions that have been used by many on the Left as being defining points in the decline of the state to run independent domestic policy aimed at maintaining full employment.’
See: http://bilbo.economicoutlook.net/blog/?p=33043
Indeed so.
In my view the current ongoing land bubble – and associated issues of unaffordability of housing & fragility of the banking system – cannot be resolved unless and until we address BOTH tenure of and investment in land.
My UCL ISRS submission to the Scottish Land Reform review group addressed both.
https://blogs.ucl.ac.uk/resilience/2013/01/16/submission-by-chris-cook-to-the-land-reform-review-group/
This submission covered not only new (in fact ancient) frameworks for tenure and investment, but also the use of credit instruments based directly on land use.
Richard is right to be concerned about risks, and land-based credit instruments, carry risks: but then so does land-backed – intermediated by banks – credit aka mortgage loans.
Since I was for six years a Director of a global energy exchange risk & reward are a subject in which I have considerable experience.
In my opinion, if managed by professionals with a stake in the outcome, and subject to democratic oversight/supervision, such frameworks and instruments offer de-centralised and dis-intermediated means for optimal investment in and tenure of land in a way which entirely strips out parasitic economic rent. The outcome is not dissimilar to Real Estate Investment Trusts (REITs) with units returnable in payment for rentals. Or an optimal and non-toxic form of equity release.
Land Value Tax (albeit gradually introduced for residental land) would take all the fizz out of the property market. It’s needed for many reasons, including the fact that you can’t hide land offshore. I liked Henry Law’s recent blog: http://www.landvaluetax.org/latest/offshore-capital-my-foot.html
In response to Chris’ FT post and follow up discussion. Quoting from the FT post
“Adoption of an Energy Standard leads to a new calculus forming the basis of all economic decisions. Dollar Economics becomes Energy Economics.”
Economists have tried to use the energy – money analogy before but it does not work for two reasons:
1. Energy is conserved whereas money – linked to the productive activity in an economy – is not.
2. Not all kinds of energy are the same. Some kinds are useful others are not.
The ‘value’ is not in the unit of energy but in the means by which that energy is converted to perform a useful task. Oil is pretty valueless without the engine or the boiler!
I also agree with Richard that linking the money supply to any commodity is not the answer. There is no reason to limit the supply of money as it is simply a means of exchange. You just have to be careful about the conditions under which it is created, which means the subsequent relationship between creditor and debtor. You also have to be careful about the subsequent distribution which as Richard knows is addressed by taxation.
Small point and not trying to be clever I would prefer to speak in the past tense as I’ve seen so much pain and suffering amongst colleagues and clients in the public sector……
‘Neoliberalism HAS failed’. It was 2008 and all that in my view.
It’s just that not enough people have realised it yet. There is till a lot of wishful thinking about ‘self correction’ ‘ and ‘moderation’ etc., and then things will be ‘good’ again (for whom I might ask?).
Satyajit Das has called it right too – the FT excerpt above is explaining the new normal? Perhaps this is what normal (the normal economy) looks like when you take out ‘irrational exuberance’ from the ‘free market’ and continue to hobble the public sector and Government money.
The only way out now is to tax wealth more effectively (as well as addressing other issues that help the top 1% cream off most of the benefits) so that any injection of Government money into the economy benefits as many people as possible.
Surely?
Agreed it has failed
But this need not be the new normal
I totally agree that this avoidable – yes indeed.
For growth, we need confidence that all of us are playing in a fair game. Especially that the intentions of the law are enforced by the law makers without prejudice.
The lawmakers especially need to be above any personal favour and corruption. For investment to take place each one of us needs to invest in ourselves and be happy to grow. In that growth sure, there is more tax to pay. But with confidence, that the Tax money is spent correctly to encourage others to invest also, say in education and health.
this is why the Tax system has to be fair to all the players.
This is what it is not
How ironic if it transpires that neo-liberalism – by which I mean the political and economic model successive governments have been weeded to since 1979 – ends up being as big a threat or force that undermines our cherished way of life as Soviet communism ever did?!
That’s happened:
3 Million in Greece without healthcare
Emigration from Ireland after bank bailouts
11% of Latvian population leave because of austerity
Suffering and death in the UK due to sanctions and benefit cuts.
Population of Portugal reduced due to Austerity
Over 50% youth unemployment in Spain and general unemployment there higher than 30’s depression levels.
What more need slap us in the face – the greatest victory of the neo-libs is the reduction of populations to quivering, fearful, dumbed down, narcoleptics.
It’s the Iron Heel.
“as big a threat or force that undermines our cherished way of life as Soviet communism ever did?!”
“As big a threat”!! No way – a FAR, FAR greater threat, or rather actuality.
For the “communist threat” to have been real here in the UK, one of three things needed to happen:
1) A successful Soviet invasion of Europe, including Britain, or
2) A successful victory in the propaganda aspect of the Cold War, or
3) A genuinely successful pro-Soviet “revolution” in the UK, either including the military and police, or encompassing a “working class” victory over those forces.
Frankly, it is hard to choose which of these is more unlikely, given that the accomplishment of 2) by the Soviet Union would have made 1) unnecessary and 3) almost inevitable, where neither 1) nor 3) strike me as having been remotely feasible.
By contrast, neo-liberalism has silently captured business, academia, Parliament and the whole narrative of hegemony, such that proponents of anti-neoliberal thinking are routinely characterised as either dinosaurs or “flat-earthers”.
Given such overwhelming hegemony they COULD pass laws redefining day as night and vice-versa, and HAVE induced a “majority” (at least of those voting) of working people (= everyone NOT in the 99%) to vote against their real interests, and will continue to do so successfully, until the 99% are properly informed and educated in how the economy and politics really work, could work and SHOULD work.
Neo-liberalism has failed, as will all non-democratic forms of economic and political systems, because eventually they no longer deliver social benefit and improvements to the majority of people.
As we now see, what is being delivered is economic stagnation, existential levels of pollution, increasing inequality, massive corruption, global instability and violent insurrection. By any logical definition, that is a failed economic and political system.
Aditya Chakrabortty hits the nail on the head today in the Guardian, the Panama Papers are just another example of how un-democratic the current financial, economic and political elite really are.
“Because at root, the Panama Papers are not about tax. They’re not even about money. What the Panama Papers really depict is the corruption of our democracy.”
http://www.theguardian.com/news/commentisfree/2016/apr/10/money-offshore-corrupt-democracy-political-influence
^ Truth
I think you could make a case the neo-liberalism is as big a threat to global stability as other more obvious threats. As Michael Hudson writes – an additional danger of neo-liberalism is one of disguise – the parasite that eventually kills the host.
I wonder if amazon includes risk in setting a price of £999.11 for his book?
http://www.amazon.co.uk/Killing-Host-Financial-Parasites-Bondage/dp/1568587376
Charles,
Re energy, the difference between unit of account and unit of currency is not easy to grasp.
A unit of energy currency is a prepay credit instrument returnable in payment for use of a form of energy. The holder of a prepay energy credit may not demand either delivery of energy (that would be a futures, derivative, instrument) or delivery of £ sterling (a debt instrument). He is simply entitled to pay the prepay credit issuer for energy supplied with the credit instead of £ sterling.
There are several possibilities eg carbon fuel credits of different types; an electricity credit (these already exist – being given by naughty energy companies to the Trussell Trust to hand out to address fuel poverty) – even a heat credit (returnable in payment for an MMbtu).
These units of energy currency (generally acceptable credit) have nothing whatever to do with the unit of account which may be used to keep score of exchange transactions, which may be the £ or other fiat currency unit, or an energy unit. A unit of account is a conceptual standard unit of measure for value, as a metre is a standard unit of measure for length and a kilogramme for weight.
It is possible to run out of units of currency, but it is not possible to run out of units of account. Units of electricity (KwH), heat (MMbtu) or carbon fuel currencies (eg litres of diesel) all have an energy equivalent in Joules, and have both an energy cost of production and a £ cost of production.
Energy accounting – keeping score in energy – is the only OBJECTIVE form of accounting there is. All other forms of accounting are more or less subjective.
The point is that ‘least £ cost’ economic decisions will give rise to very different economic outcomes to ‘least carbon fuel cost’ economic decisions, which are basically what the Danes have been successfully doing for 40 years to great effect.
Carol,
The difference between my proposal of a carbon fuel levy and energy dividend and the Cap & Dividend proposal is that the latter pays a dividend in £ sterling, whereas the former pays the Energy Dividend in energy credits returnable in payment for energy use.
Moreover, the £ Energy Pool fund collected from the levy would be used to invest in projects using ‘Energy Loans’.
By way of example, imagine a £50,000 energy loan made to a wind turbine project. The investor would purchase (say) 1000 Prepay credits each of MwH at £50 each from the project.
After an allocation of production to the landlord, and an allocation to the turbine operator for maintenance (eg the Enercon Partnership approach) the balance of production would then be used by the project owner to repay the energy loan at the market price in £/MwH. If the supply price rises above £50/MwH the investor makes a profit: if not, he makes a loss.
And yes, I know this requires a reconfiguration of the electricity market – which is a long-standing and unsustainable abomination.
The only way out of this low-investment, low-productivity, low-wage, high-consumer-debt impasse is widespread debt forgiveness. That is what helicopter money effectively would amount to. But I don’t see how it could possibly happen. It would be the end of capitalism, right there. Of course capitalism can take many forms, but all of them involve debt. Once you have a medium of exchange you create indebted relationships, because all exchange involves the creation and satisfaction of a debt. Similarly, the creation of that very medium of exchange is the creation of a debt, and that goes for any medium of exchange, including gold. Not everyone agrees with that, as is well known.
But if there is to be no debt forgiveness, there can only be increasing anger, rebellion, and, eventually, revolution. The outcome of the New York Democratic Party primary is keenly awaited. A Sanders presidency would bring all these issues boiling to the surface.
Very interesting times!
“Growth” is an impossible long term economic proposition. With finite physical and natural resources, pollution, automation no way can the population or productive resources be “fully employed”. The only viable long term economic solution is a steady state economy, a population no greater than the carrying capacity of the land and a basic/citizens income guarantee for all.
I quite agree, in every respect. But it won’t happen until there is a very good reason for it to happen. The next crash will probably be epochal and induce a profound depression from which recourse to the current paradigm will not rescue us. That will be the moment. To the barricades …!
Cripes “It would be the end of capitalism, right there. Of course capitalism can take many forms, but all of them involve debt.”
I think it safe to argue that capitalism has already ended. We now have bankism.
The banking bailout was most unusual in that it involved the US government bailing out the lenders not the borrowers. The UK, as I understand it, had little choice but to bail out the lenders as the borrowers were abroad.
Marx thought it would be excess production that was the seed of capitalist destruction and the money lenders and rent seekers would go down with the capitalists. In fact the money lenders have taken over control of capitalism by rent/interest extraction. Indeed effectively they are the only ones with any significant capital.
Agreed that money involves debt but it doesn’t have to involve interest – indeed it might involve discounts if goods were purchased by the government or others and then offset against monies/taxes due – Ã la tally stick.
Thanks May – good point about interest. Marx’s analysis was spot on, and I find myself moving more and more in his direction as I enter my dotaage. But I also agree with you that he was wrong (in the light of the events that are now happening) about why capitalism in the end would fail – it is increasingly clear that the current paradigm will fail because it fails most people, all the time. People will not put up with it. The early signs are the rise of UKIP and the current fury about offshore tax havens, so damaging to the Conservatives, which might well now shrivel as a result of transparency, or whatever powder puff measures our elites get round to taking. But it’s not really about tax havens – it’s really about inequality and hopelessness, and those things won’t be cured under the current paradigm.
Hey Cripes – “the end of capitalism right there” If capitalism is defined as the deployment of capital combined with labour to add value, I don’t see it personally. If it is defined as dependence on rentier monopoly of finance and the means of life then you have a point.
The medium of exchange – does not have to be debt based, neither does it need to be issued by the commercial banks…. http://positivemoney.org/
Technically there is no need for a medium of exchange at all, at least not currency.
By way of illustration is the story of the traveller in Eastern Europe who goes into a hotel, and leaves a €20 note with the hotelier while he has a look at the rooms to see if they are up to standard.
The hotelier pops next door and pays the baker what he owes him; the baker pops next door & pays the butcher; who nips over the road to pay his account with the local lady of easy virtue; who then trots across to the hotel and pays the hotelier for rooms used by the hour.
The traveller doesn’t like any of the rooms, picks up his €20 note and leaves.
The point is that these outstanding obligations could have been settled A>B>C>D>A simply by sharing information and making suitable accounting entries.
This does not require currency (eg bank issued € credits in paper or electronic form) but it WOULD require a unit of account (to keep score of value exchange); a shared transaction registry/accounting system; and suitable risk management services (aka banking services to manage credit limits) and settlement software (eg Ripple).
Sorry Chis, but that does not help your case
Capitalism as we have understood it has relied upon debt, as you know. But the big appeal of capitalism to those who thrive under it is that it enables huge rewards to be screwed out of the system using leverage. As Robert Reich recently pointed out, capitalism in its most basic form is no more than private property plus private contracts.
As regards the involvement of labour as a value proposition to those with capital, this involves also the creation of a means of exchange. This means of exchange will be currency that makes sense to capitalists, however much a fruit-picker would be content to be paid in turnips.
I am aware of Positive Money, but don’t really understand their analysis, which is shared by some people with extremely right-wing opinions as much as those seeking a sustainable economic approach. I take the balance sheet approach, which has been endlessly debated: a person with a bank account with fifty quid in it and no other assets has, on the liabilities side of their balance sheet, a capital worth of fifty quid. You can’t get away from the concept of debt when money is involved – in my view.
My case is that there is no need for central issuance of credit or credit risk intermediation – as distinct from credit risk sharing & management..
The Eastern European illustration is simply a thought experiment demonstrating that currency is not strictly necessary for the creation and circulation of credit based upon the capacity of individuals to provide goods and services.
Of course, there IS a need for currency to provide liquidity, and the question is upon what value such credit instruments should be based.
As things stand, more than two thirds of modern money consists of bank-created credit instruments which are based upon obligations by the borrower, but backed by the use value over time of land. ie most £ is created in the course of mortgage lending.
I believe that within the correct framework agreement for land use, usufruct, and control, it is completely possible to create an ethical and optimal new asset class of ‘People-to-Asset’ credits denominated in £. On the one hand, this will resemble a Real Estate Investment Trust (REIT) with units returnable in payment for land use value. On the other it will be a Community Land Trust which is funded by investor members through rentals prepaid at a discount.
Prepaid rental credits represent an optimal (there is no compound interest) form of Equity Release – which is why this asset class will spread rapidly once introduced – and the outcome will be what I think of as ‘housing-as-a-service’ rather than land bought and sold as a commodity.
Since this is a complementary mechanism it may be introduced – as was US Condominium tenure – simply by agreement between consenting adults, which is precisely what I am doing. What is currency local by definition is simply an outcome of optimal investment in land use.
Energy – my core interest – is another subject, which I am pursuing internationally.
I hesitate to add my comment when there has been a string of erudite remarks but surely the idea of any return to growth or healthy economic times is misplaced?
The challenge must be finding some equitable, long-term, sustainable way for us humans, and countless other creatures, to survive. Surely any new taxation strategy has to include a carbon tax?
A Green New Deal?
Hear hear!
Yes, especially when a debt-based system expands in a compound sense so that it will eventually need several planet Earths to accommodate it, and when it can no longer do so it teeters and, as we are currently seeing, collapses. It’s a cliche, of course, but it is exactly like a pyramid selling scheme. It’s ironic but the Big Bang and the explosion in debt in the last thirty-five years that has for so long made capitalism so popular will, nevertheless, provoke the final cataclysm. I hesitate to be categorical about it, but I really cannot see how it can be avoided.
Interesting historical argument from Paul Mason for tax evasion and avoidance to be brought to an end, before it causes further social destruction.
Smash the mafia elite: we should treat offshore wealth as terrorist finance
http://www.theguardian.com/world/2016/apr/11/smash-uk-mafia-elite-treat-offshore-wealth-terrorist-finance-perugia
The Panama Papers and corporate tax avoidance are discussed in Richard Wolff’s weekly economic update for those interested in this perspective on life:
http://www.rdwolff.com/content/economic-update-efficiency-capitalist-vs-human
Do you equate monetary policy with neoliberalism? It seems to me that the captain of the ship right now is the central banks setting the course rather than neoliberal markets.
No
Central Banks – which (apart from the ECB) are agents, not counter-parties of Treasuries – are as much use as a chocolate teapot at the zero bound of interest rates. The problem is a pervasive shortfall in purchasing power/creditworthiness which austerity and automation is only making worse.
The only solutions are fiscal, since public sector spending/investment is by accounting definition private sector income.
Central banks, if properly authorised, have a role in the current extraordinary conditions. For example, the ECB could take a leading role in the EU by bringing in a full transfer union once political union is achieved and a EU chancellor of the exchequer has assumed all fiscal and monetary control in all member states, then taking all retail banks under its wing by means of public ownership by nation states, taking all money printing capacity out of the hands of private interests, and engaging in wholesale debt write-offs.
This is not going to happen next week.