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.