I have an article co-authored with Andrew Baker of Queen's University Belfast on the web site of Sheffield Political Economy Research Institute this morning. Under the title The Coming Crisis: systemic stabilisation and the investment state we argue that:
A new ‘investment state' is needed to provide stability in the new uncertain political economy of shadow money, financial instability and demand deficiency
I admit that this is not the lightest of reads. Through a discussion of shadow banking and the shadow money it creates we suggest that:
We live in an era characterised by a confusing evolutionary dynamic relationship between financial innovation, the state and patterns of investment that we barely understand. At the core of this conundrum is the little understood issue of shadow money. Shadow money is a promise to pay backed by high grade collateral, usually government bonds, which means that government debt now plays a key role in the stabilisation of the financial system. [T]his complex dynamic requires a new political bargain. We call this bargain the investment state, — a compact between the state and financial markets and between the stabilisation and investments arms of the state.
The net outcome is we require three things. First, more government debt as collateral to keep financial markets going. Second, we need a commitment to QE to ensure that collateral retains value in times of financial stress. And third, this requires a willingness of financial markets to invest in bonds used to fund new national infrastructure.
The aim is simple even if the argument is not: it is to reconcile the undoubted need for new bonds with the need for infrastructure investment whilst paradoxically embracing the need for QE that I have espoused. I think we have squared that circle. Comments welcome.
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This would be a very good place to start, a huge investment in renewables and rapid divestment in fossil fuels.
Action required now, immediately and on a massive scale for the sake of our children, grandchildren and future of all species.
I’m really not sure what more evidence is needed for the world to act as one on this issue – but in true human fashion we are behaving more like lemmings!
http://www.thecanary.co/2016/05/17/2016-smashes-tenth-temperature-record-can-no-longer-deny-one-simple-truth-images/
Venezuela?
Oh come on!
Schoolboy humour again?
If you’re going to impersonate me then at least learn to spell my name!
I am lost as to what this is about: sorry
‘his requires a new social contract, or political bargain between the state and financial market actors, in which financial markets are obliged to fund public investment projects in return for public backstopping of shadow monies. ‘
I think this is key. The Government grants extraordinary privileges to these institutions yet there is no quid pro quo -an absolutely scandalous situation that is quite incredible where we allow these institutions to direct the economy undemocratically.
The article makes a good point by saying ‘he state’s role in this system is already being forced to evolve by market dynamics. Economics is beginning to catch up. Party politics lags further behind.’ Politicians are the most out of touch, another scandal.
You are right to say that Government money does not work in a vacuum – it has to work in concert with the private sector who have to be involved.
Your suggestions as outlined will need to be robustly policed by the Government given how much of our private sector is actually foreign owned and where the private sector view on investment will be quite different I’m sure.
I just worry about the lack of a perceived courageous state and the lack of courageous politicians needed to make things work.
I’d like to know what Labour or The Greens reaction to this is.
Richard, isn’t the term ‘shadow money’ in effect the same as the expression ‘near money’?
If so, why not use the latter as it is an accepted in use expression. But I might be wrong here.
No, fundamentally different
Shadow money is defined in the paper and is in effect created by repo transactions and is not what I consider near money (which represents close to liquid assets) to be, at all. Given that repo is designed to unwind rapidly, usually overnight, it is quite different from near money as it is much more liquid
This shadow money is needed based on security as otherwise companies, without any form of deposit guarantee, are wholly exposed to banks on short term deposits when all bank deposits become the property of the bank in question. Repo overcomes this at the same time providing the liquidity banks need to settle their own liabilities
The UK government is already borrowing and printing on quite a scale, and on a massive scale if compared to any of the period from 1997-2008. So is this an argument that government should do even more of what they are already doing fiscally and spend the extra on infrastructure?
Yes
Because there is spare capacity in the economy to do it and demand for the bonds to pay for it
Given the above, perhaps in future you should acknowledge this – that you want even more borrowing and even more QE and even more debt interest to repay than we currently have.
But who would determine what additional infrastructure this extra nominal money gets spent on? Government committees with records of understanding investment returns are thin on the ground.
Shall we have some sanity in this?
It’s called government
And it’s controlled approximately democratically
And debt interest right now is negligible but under-used capacity is not
Can we please recognise the need for action without paranoid constraints that are not real?
Mahela has a point. I looked at the burden of debt interest on the UK economy, and it works out at about 11 days’ GDP. That may be negligible to a Professor, but I think most non-Professors would like that to be 0 and to have an extra 11 days doing things that are of value to them, rather than spent servicing the money lenders.
You ignore who gets the money
That debt underpins many private pensions
You want them to be reduced, ot go bankrupt?
The money is not lost
Indeed, some is directly recovered via tax, of course
I’d rather spend 11 days playing cricket, than working my fingers off to support private pensioners.
OK, so we’ve established you’re selfish
The people who do not make it to pension age often the poorest in society. Organising a welfare system around that principle would be better than organising it around pensions.
Some abandon the old?
Sorry, but that is not going to happen
Not leat because in the UK the vast majority reach retirement age
Well worth watching the video included in this article, a good example of where we are heading to with the “Dis-Investment State” of private providers taking over all aspects of public provision, in this case the NHS.
http://www.thecanary.co/2016/05/20/disturbing-video-shows-exactly-jeremy-hunt-store-nhs-video/
And this is a clear indication of the direction of travel for private higher education.
http://www.independent.co.uk/news/uk/cambridge-university-most-expensive-degree-in-world-a7040521.html
While the boss of a small university gets a £60k pay rise (to £285k)!
Oh yes, the private sector mentality is now firmly established amongst the ivory tower brigade!
http://www.bbc.co.uk/news/uk-england-cornwall-36341618