Summary
This blog post is, in effect, an essay of almost four thousand words. I did not intend that when I started to write it. If I had known it would be that long I might have used a different style. But as I wrote it just kept growing. That is because what I think it is about is vital, in the sense that the issues I address cannot be avoided.
What I am suggesting is that whatever we think or do we are heading for the most almighty economic crash. The things that we have treated as stores of value - which are mainly shares and both commercial and residential property - are massively overvalued now. And there is nothing we can do to prevent the value of them crashing because the Ponzi style financialisation that has gripped western economies - and those of the US and UK in particular - for the last forty years was always heading for a massive crash, and now it has arrived. The genie is out of the bottle and it will not go back in again.
But that is not to say that our government (and other governments) are left powerless in the face of this. They are not. They can still make a decision about which factor of production - labour, business (enterprise), banks (capital) or landlords they wish to favour in the crisis to come.
If they favour people and business and sacrifice landlords (whos assets will survive, come what may, albeit at considerably less worth) and banks (which will inevitably need to be nationalised) then more people and many more businesses might make it through the coming crisis. If they favour landlords and banks - as the UK government is at present - then the chance that much business at all will survive this is pretty remote. And in the end, nor will the banks or the landlords either. That's my bleak prognosis. And either way, pension funds and pensioners are in deep trouble: most will now be dependent on the state, which means much more generous provision has to be thought about now than we have ever previously imagined.
I didn't enjoy writing this post. I'm not suggesting it's a fun read. It is not. And yet, I do see hope. Our economies have been blighted by the curse of financialisation. I would not have chosen to end it the way that it's going to happen. But wise governments will realise that the end of financialisation is now nigh, and act accordingly.
And some won't.
On that decision rests the fate of millions of people.
I wish I thought I could rely on our government to make the right choice. Time alone will tell if they will.
The lockdown threat to business viability
At the beginning of May 2020 it is very apparent that life is not returning to normal. Plans to end lockdown do, according to the Financial Times, include staggered working hours; rules to require social distancing in the workplace and shops; a ban on workplace canteens; a requirement that employers provide extra car parks (seemingly overnight) so that employees need not share lifts to work; a reduction in the number of people allowed to share lifts and a great deal more that makes it apparent that whatever work might be like after lockdown it will be nothing like what it was before it.
It is easy for the government to say this. And the rules could, possibly, be enforced. But the consequences need to be thought through, because they are staggering.
Of course it is theoretically possible that some companies could actually survive the substantial new costs that this way of working will impose. But I stress that the word ‘theoretically' is doing a lot of work in that sentence. That is because the reality is that in all likelihood almost none can, or will. Our economy is not geared to work in this way. And by geared I do not mean physically, where it is apparent that our capacity for adaptation is already quite phenomenal. Instead I refer to financial gearing, interpreted broadly.
The financial burden on business
Like many households, a great many businesses are massively debt-burdened. They have both significant financial borrowings and / or substantial rent payment commitments. That is because they are both under-capitalised in many cases and do not own their own properties, with rent in that case pretty much representing interest on an expensive loan that they might have had to take if they were to have bought their property instead.
Importantly, these obligations are fixed at present. The government might have shrunk official interest rates to near enough zero, but the reality is that in the actual economy that is not the case. The burden on businesses to repay loans, interest on those loans, and rents, might have been subject to some minor concessions for strictly limited periods at present, and then only for some lucky businesses, but for many the obligations will be ongoing. And there has been not a hint, so far, of long term support on these issues. Instead new government-backed loans under coronavirus schemes will just add to these debt mountains.
What this will mean is that companies working with reduced efficiency and increased costs in markets where demand will be reduced will be under enormous stress. They will, absolutely inevitably, suffer reduced profitability from their trading activities, but will nonetheless be facing fixed financial obligations created in an entirely different era and market and, quite crucially, legally these obligations are not re-negotiable in most cases.
It does not take a financial genius to realise that this is a situation that literally cannot work. The vast majority of businesses cannot now survive if they are to meet those financial obligations. We are seeing this on High Streets already, where refusal to pay rents is becoming commonplace, but the problem will now extend to every industrial estate, office block and workshop in the country.
The tiny minority of businesses with no borrowings and their own, paid for, freehold premises might make it through this crisis. In addition, micro-enterprises working at home and with almost no employees might also do so. But with the lockdown conditions that are going to be imposed, the rest cannot. It will be as simple as that. I cannot be more blunt: on this occasion comments based on the extrapolation of obvious heuristically derived conclusions that reduce analysis of a situation to its barest essentials are both necessary and true.
The choice the government has to make
In that case it is also true that in the economy to come some fairly stark decisions have to be made if it is the plan of the government that we survive this crisis. Of these the most important (as ever when the reality of these situations is faced) is whose interests are to be prioritised?
Is it labour, and the need to preserve jobs, that has the highest priority?
Or is it enterprise, meaning that the preservation of trading entities becomes the core goal?
Alternatively, assuming that this can be done, is banking to be pre-eminent to prevent a crash? In other words, is capital preserved?
Finally, might instead the interests of landlords feature most highly?
To go right back to this most basic of economic questions, which factor of production is to have priority? Unavoidably, that question does, of course, have implicit class connotations attached to it.
Right now it seems quite clear that the government is setting its priorities in the reverse ordering of the above list.
To be precise, landlords have not really been asked to make any sacrifices to date: their interests and income streams appear to have survived almost unscathed to date.
Banks on the other hand are already subject to massive support for which they did not pay and are also now enjoying significant effective additional funding for loans from which they will make money. Quantitative easing has also helped them, and it's back on the agenda.
Business loans, most especially to larger companies are getting through, but as loan capital those funds simply defer the day of reckoning that is to come because, as yet, the government is quite unable to differentiate cash flow, liquidity and solvency, let alone loans from capital. As such the wrong support is being provided, and the stress is growing as a result.
And furlough just disguises the fact that more than 6 million people are now likely to be unemployed in the UK. When the self-employed whose businesses have failed are added in it could be much higher.
My point is that this ranking of priorities - so natural to a political party established to support the interests of unearned wealth - is fundamentally misjudged now.
The choices that have to be made
We need to be prioritising work at present.
And we need to keep trade alive.
At the same time we also need to preserve the operational aspects of banking, as best we are able, because we cannot survive without it: those systems are the plumbing on which the economy runs. And because we have done no real banking reforms since 2008 that may yet require nationalisation of the whole banking sector fails as the property market collapses, and with it all the collateral on which banks have relied for around 85% of their loan books.
But I stress, even if we are concerned that the property sector might collapse that is not a reason to priorities the interests of landlords. They have to be at the bottom of the pile for support right now. In other words, the government has everything the wrong way round.
The lack of any alternative
There are practical reasons for this. As I have said since this crisis began, even if every landlord fails now, the properties that they own will still be there: in other words, even if their financial capital disappears, their physical capital does not. What that means is that the economy can survive the failure of landlords more than it can survive anything else because whatever happens to the current owners of these properties they will still exist. We cannot say that of any other part of the economy.
In that case what is required now are statutory rent holidays. The rest of this year should be required, at least. And thereafter rents should be reduced, drastically, and by law, and right across the board. Eighty per cent cuts may be appropriate. It may be more. Whatever is necessary to ensure business can survive must be done.
I stress though that I am not seeking to wipe out the rentier: I have also argued, and repeat that argument now, that if, as I think appropriate, there should be long-term statutorily enforced rent holidays and then mandatory rent reductions I would match that with a right to bank loan holidays, and a right to a statutory reduction in loan liabilities so that the sum secured on a property cannot exceed its market value, whatever that might be in the future. To be fair over time to all involved, this would have to be subject to periodic reviews. This is hardly a concept landlords are unfamiliar with. Rentier insolvency is not my aim: rent reduction is so that businesses and people might survive.
I should add that because such a programme of liability reduction would make no sense for landlords alone if not matched by a similar scheme for owner-occupiers, who I predict will see the value of their houses crash in the near future as it becomes apparent that there is no market for them at anything like recent prices, then they too must have a statutory right to owe no more on a mortgage than can reasonably exceed the market worth of their property. This might again be subject to periodic review, but the key point is that mortgage interest holidays (with waiver happening on sale) could be made available on sums owing in excess of this sum. Again, my aim is simply: it is to keep people in their homes, and solvent.
And there is no point putting off these essential adjustments. Businesses that must decide if they are solvent or not must know about such arrangements now. Nothing less will do.
Bank lending
Statutory bank (and other) loan deferral arrangements of two years, at least, have also to now be in the mix for survival now. Interest only arrangements must be allowed in the meantime. And even that must be subject to the right to roll it up as part of the balance if it is necessary for the borrower to get through this. Again, nothing less will do if the government wants people and business to survive.
I am well aware if the implications of what I am saying. No one need post here and say ‘you're being so unfair to poor, honest landlords'. I am saying that such appeals count for nothing now. That is because unless something like this happens then landlords are going to face a disaster in any case. That is because, to reiterate a point already made, right now most businesses in the UK cannot be profitable unless major costs and cash flow outgoings are immediately removed from their overheads. And since very few have the capital to survive any significant losses the reality is that unless rents are firstly frozen and then cut, alongside bank loan payment deferrals, then most (and I mean, the majority) of UK businesses are going to fail.
In that case the 30% effective unemployment that we see today is both going to become permanent, and grow. That would be unavoidable. And I promise you, landlords and banks are both going to lose heavily, come what may whatever happens as a result.
Jobs and businesses have to be in the lifeboat — bankers and landlords have tp be left behind
So, to return to my theme, the essential challenge facing government is to choose priorities. It can choose landlords and then banks as the priority and the result will be the real economy will almost completely fail, at catastrophic cost.
Or it can choose people and then business as the priority instead and as a result reduce the payments due to landlords and banks. In that case a great many businesses might survive the crisis as it unfolds, because the pressure on them will be greatly reduced. Effectively, if they could then just cover their marginal costs they might be in a vastly better position to survive, and many will. As a result the jobs that they provide will also be retained. But that will be impossible if rent and bank obligations continue.
The choice appears to be between seeking to preserve the appearance of value and wealth that is implicit in our overinflated property values at present, which also underpin all UK banking, or seeking to preserve the ability of this country to make a living.
But, and I cannot stress the point enough, the choice is illusory. In reality, the value implicit in land has already disappeared. It is folly to pretend otherwise. The only reason no one has yet begun to realise this is that we have a completely frozen property market at present. When that reopens prices will, as a matter of fact, tumble. And so too will new rents. All I am saying is that old ones have to follow suit: if we want an economy that generates income in the future then the blunt fact is that we now have to trash our balance sheet. Or rather, we have to accept that it has already been trashed and now deal with the consequences.
Landlords
So what will become of landlords? For small ones, I have argued for state support, just as I have other unemployed people. I can see no special case that might be made for such landlords now, especially since what I suggest will preserve some of their asset value, and an income stream, albeit a much reduced one.
For larger landlords, the suggested arrangement will massively reduce the balance sheet value of the enterprise. But because of the matching loan suggestions it does not guarantee insolvency. It is very likely that these landlords will survive, but with vastly smaller market worth, and with their focus in the future being upon service supply, rather than asset accumulation. In that case, again, I see little reason for special treatment.
Banking
The real issue is, then, not for landlords but for banking, without which we cannot survive. 85% of UK bank loans are supported by property collateral. Whatever happens (and I cannot stress this enough) property values are going to collapse across the board very soon. It may be worse for business property than private property because of changes in work patterns and the number of business failures that the UK is going to suffer come what may, but it is going to be universal.
And so bank balance sheets are going to collapse. It's just a case of when, and not if. The value that underpinned them has gone. Let's not pretend otherwise. That just puts off planning for the inevitable.
Let's also be clear that banking cannot survive this in its current form. The losses are many, many times greater than any capital that they possess. They are greater too than GDP of the country in all likelihood, and by some way. This is not, then, a matter for the private sector to deal with. Every single bank in this country, and across the world in all likelihood, will be insolvent. No bank will survive without nationalisation. And the only way the losses can be managed is by wiping them out by the issue of perpetual bonds of the type that I have referred to on the blog today, which will then be subject to QE and thereafter be forgotten forever.
I stress that can be done. The balance sheets of the banks can be restructured. That is possible. But only by states willing to act, and who appreciate the need to do so now. The rearrangements will look to be drastic, but they can be managed.
There will, however, be real costs. First, it will not be possible to guarantee all bank deposits. Some amongst the wealthy will take a haircut (which refers to a writing off of value).
There should also be a refusal to settle claims against banks where the beneficial ownership it arises from cannot be proven. And if the claim is from a tax haven there should also be a considerable haircut, come what may.
Pensions
But it is not in banking where the biggest haircuts will occur. Those will be in pension funds. This is where the crisis will really be felt.
I have written, many times, on the economic stupidity of sending vast sums of cash to be saved in financial assets, month in and month out, creating an apparently never ending Ponzi style growth in value because the money coming in always exceeded the money going out when the stock of assets (shares and commercial land) is deliberately constrained. It was inevitable that one day the pretence that there was any value in this system would disappear, and the whole edifice would collapse. That day has arrived.
There is, supposedly, £6 trillion of pension wealth in the UK at present. I suspect that a very great deal of that will now disappear. I also stress that if what I suggest does not happen then it is likely that almost all of it will disappear: only the bank and land based assets need vanish into thin air if what I suggest is done. In either case, the haircut is going to be massive and is bound to be reflected in the pensions of current and future old people.
There is, quite literally, no way to avoid this. Yet again, the pretence of value on which the whole edifice financial capitalism has been built has been shattered: coronavirus will have killed it.
So what to do for pensioners? I am afraid that they, like so many who have until recently been in work, will have to fall back on the state: there is simply no alternative. But, and I stress this, it cannot require that people be reduced to living on the basic state pension: that is an impossibly low sum which it is repugnant that we pay at present. But as for so many others, incomes of pensioners will fall in a great many cases. And the sums that they hoped to leave to next generations may collapse. But if (and I have to keep repeating that this is a massive 'if') the government acts to preserve jobs now pensioners have a hope of surviving. If the government does not act in that way pensioners will then be amongst the many whose literal risk of survival will be at risk.
Looking forward
Finally, let me be a little more forward looking to conclude. There will be a time to restore value after this crisis and the shockwaves it creates are dealt with.
The problem that this crisis will have eventually highlighted is the fact that we have focused our attention on what has, in effect, been the creation of balance sheet wealth during the course of the last 40 years. This has not been generated from work, or from the investment of resources in the creation of real value. It has instead been generated by encouraging the flow of ever-increasing sums of money for what has been called investment (but which has actually been saving) towards a limited range of financial and property assets whose availability has been shamelessly restricted in supply, so guaranteeing almost perpetual increases in value. That sham, for that is what it has been, has now been shattered. The genie cannot be put back in the bottle. And nor can anyone now seriously believe that value can be created in this way, ever again.
We have, then, to understand that value creation does not come from for financialisation, or balance sheet manipulation of the type we have got used to. It does, instead, come from work, which produces value as a consequence of the inherent worth of the activities undertaken. And, if (as most societies think desirable) one generation is to look after its predecessors when they reach old age then what I have long described as the fundamental pension contract must be respected. This contract, which is implicit within society, and not legal, is that one generation (the older one) will through its own efforts create capital assets and infrastructure in both the state and private sectors which the following younger generation can use in the course of their work. In exchange for their subsequent use of these assets for their own benefit that succeeding younger generation will, in effect, meet the income needs of the older generation when they are in retirement. Unless this fundamental compact that underpins all pensions is honoured any pension system will fail.
This fundamental pension contract does then also respect that value comes, not from financialisation, but from the creation of value through work which is not transferred between generations through the transfer of ownership of savings products, but is instead transferred through the creation of real added value resulting from actual investment activity.
We can rebuild society. It can be sustainable if we respect the constraints that our planet puts upon us. We can transfer value within it. We can sustain populations. But we can only do these things if we simultaneously recognise that there is no magic way to do so: financialisation as a source of value creation was, and always will be, a myth. It is work, and work alone, that generates value, and even then it can only do so if we respect the constraints that nature imposes upon us.
The crisis that coronavirus can has created will be fundamental, and could be existential, quite literally. But it need not be the latter if we take action now. What it does require is that we accept that it is not a few working in financial markets that create value in our society, letting them claim that they are the masters of the universe. That is not true. Instead what we have already learned from the coronavirus crisis is that it is care that is the most valuable commodity that we can create, whilst friendship and community are the things that we value most. Each requires effort and so too does all value creation. Nothing can shortcut this, but we've been sold the myth that there was a fast-track, and that has proved to be untrue.
To survive our government now have to make a choice. They can seek to preserve the myth. They can pretend that the asset values that the myth created are still real and seeks to preserve them. Alternatively, they can face reality. They can give up the pretence that there are assets of worth left within very large parts of the financial system. They can take the necessary steps to deal with the consequences. And they can, as a result, seek to preserve jobs and the businesses that help create them whilst building an entirely new basis for banking and pension provision.
Alternatively, they can crash what remains of the economy that provides us with work in a vain attempt to preserve the interests of the rentiers who have dominated our economy for decades. That attempt would, however, be in vain: there is now nothing left to save.
The only difference between the two routes is that one preserves some value, and the other preserves none at all. Whatever we do we face the most staggeringly difficult economic decisions, but some at least have good outcomes, and others have none.
What will our government do? Who knows……
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And Labour? What do you make of Labour? Alas I see no prospect under KS of them trying to push the Gov in the kind of direction you describe.
You’ve been very critical of the Gov’s various assistance schemes for not going far enough but I can’t help thinking 1) that Labour as now constituted would have done less, and 2) that the Gov would not have done what it did without pressure from JC and JMcD and others.
I can see the Gov not going the way you hope, and I can see Labour supporting them.
I waiting to see
If I don’t like the direction of travel I will be saying so, I can assure you
a very good read,should straighten a few out, i fail to see any government even thinking along these lines,you can see by the mess we are in and that was before the virus, it will just collapse,then we have have a public inquiry or two seems to be there only answer,i have no faith in any of them.
Ouch! That has blown that feeling of contentment that a productive afternoon in the garden brings.
I agree entirely that policies need to favour people and businesses not banks and wealth. I agree entirely that current policies deal with liquidity not solvency. I also agree that the policies you suggest might work…. but could the following work, too?
UBI of £25,000 p.a. starting today.
Minimum wage raise to £20 and hour.
Rent controls. Any rent coming due for renegotiation cannot go up.
Interest rates kept low. Easy – the government controls rates.
Credit controls. Mortage lending as a share of all lending to be limited. Lower LTV ratios and lower salary multiples for loan size.
Exchange controls. Probably needed under your scenario, too.
In short, could the rebalancing between wages and asset prices be achieved more easily by a serious dose of inflation and financial repression? Would these policies achieve the same as yours? Which would be easier to implement?
Oddly enough, I was chatting with a friend earlier today about what to invest in to preserve our comfortable lives. Apart from “canned food and ammunition” we couldn’t think of anything. But, what scares us most is inflation and financial repression (low rates, exchange controls etc.)….. so on that basis, that might just be the correct policy!
Interesting idea
Oddly, 6 million are on a UBI right now…
Not for long the chancellor says the nation is addicted to furlough programs and wants to cut it off now. In others words “get the lazy feckless people off govt money”. Not my inference his words apparently, well the times article says the uk has become lazy. So the tories are back to type, calling people addicted to govt money is just another way of saying people are lazy
A great read Richard… But certainly didn’t help a sound night’s sleep!
Clive UBI of £25k could potentially equate to 50% of gdp in a worst case scenario, so not very sustainable!
For personal wealth preservation you could do worse than looking at precious metals (silver & gold) and even Bitcoin. In a world with a near infinite quantity of derivatives it is likely that finite assets will preserve their value.
The coming decade will quite possibly see financial turmoil on a level not seen for many generations, potentially including hyperinflation and complete monetary collapse of some fiat currency.
What is the actual value in gold?
It is just another, even if enduring, ponzi
Rare earth metals all now have significant intrinsic value beyond being nice and shiny, because of their usefulness within modern semiconductor technology.
Admittedly, whilst Au is fairly useless mechanically and doesn’t play well with Si, it can be of significant value for contact passivation [against corrosion], making contact to next-generation materials, as well as a variety of nano-tech applications.
A similar example is Pt (although arguably already intrisically valuable as a catalyst), but that’s even more expensive (and keep your eye on the value of Pd!)
Clive Parry.
If you do decide ammunition is the way to go, can I suggest that you don’t over invest?
If we get to a point where you will need to use any of it, you will only really need one bullet!!!!
I agree with what you have written. I have had similar thoughts but not in the same depth and detail.
If we take the sensible path I will not be able to pass on the present value of our house to our children but my grandchildren may be able to afford a house based on their earnings. At the moment the prospect of then being able to do so seems remote unless they become pop stars or Premier League footballers.
Precisely
And I want to see future generations have opportunity
House values without the ability to get a mortgage would be about 1.5 times average earnings of £30,000. That’s on the assumption no one would lend. I believe that in this new world companies and individuals simply stop paying any outstanding amounts due. They soon realise no one wants to snatch back the car, office block ,or house. It’s back to paying on the nail for goods and services . Trust disappears. The pain will be staggering. To put it into prospective think Egypt, then and now, or after Rome fell, civilisation went backwards for 1,000 years. Debt has allowed governments, companies and humans to bring forward decades of potential future growth. We had the good times , it’s payback time.
“..after Rome fell, civilisation went backwards for 1,000 years”
The Roman Empire was essentially a Raubwirtschaft and thus doomed to fail when it ran out of plunder. On its collapse the peasants were doubtless generally relieved at getting to keep some of the prosperity that they worked for instead of having it confiscated to fund a huge war machine.
-That’s surely an actual development of civilisation.
Thank you, Richard. RegrettabIy, I think you’re right.
What is just as worrying is the people who will be left still standing. All the supermarkets – we have to hope anyway, together with public transport companies which the government seems to have agreed to subsidise as required into the future.
But then we are left with the ‘digital disruptors’ such as Facebook and Google who will be inordinantly more wealthy than they are now and especially Amazon (which sells both of @ Clive Perry’s canned food and ammunition) and is likely to be sucking out what little ‘wealth’ remains.
A thorough in depth analysis thanks. I have also thought that the whole property valuation is simply unsustainable but because the banks have that as collateral there is no way on earth they would allow a serious property crash.
But we have an ‘administration’ of loonies who are planning to crash out of the EU at the year end and hang the consequences so as you say they will try the reverse best scenario first.
It surely must be a matter of time before the population wakes up and turns on them? How many thousands dead and many more to come. A supine press and national broadcaster who toes the government line, distractions with babies etc. The country relished the fall of the Berlin wall, Ceaușescu being put up against (another) wall, Tianenmen square, Mussolini etc but they just roll over and accept their nearest relations being left to die in a remote care home because of their governments incompetence?
Food riots will be the first sign of revolt I expect. I’ve started a veg patch in the hope it will feed us.
All the collapsed banks and distressed assets will be bought at massive discount by disaster capitalists and the country will resemble Russia after the fall of Soviet Communism. That’s what my mate thinks. Is he right?
I am hoping they will be nationalised
If not it’s going to be even worse…..
So we go for 1950’s style Toryism in the name of political expediency? I hope so, and that would fit with the ‘Red Tories’ pledges to the North.
Thank you Richard. As a thought experiment, I would go one step further backward. If you took money and debt completely out of the equation, what were people doing immediately before coronavirus? And how much of that could they be doing afterwards? In most crises, the answer would have been, exactly the same. Everything would still be in place, but the destruction would have been inflicted by the financial system.
This time many jobs will really have gone. They will no longer be needed. We cannot go back to where we were, whatever we do with money and debt. Perhaps the silver lining is that the ground will have been cleared for the green new deal. Even though it is more likely to be laid waste by predatory capitalism.
You’re as gloomy as me 🙂
It is 0720 on a sunny morning. I REFUSE to be gloomy (yet). You are right – we cannot go back to the jobs the way they were…… and that is fantastically GOOD news. We have a chance to carve out better, more fulfilling, useful jobs; greening the economy, caring for each other etc..
It’s scary for many people – I have older relatives scared for their health, younger ones furloughed and being made redundant, middle-aged ones worried about their children and parents and powerless to help. The point is that we can’t stop it being scary…. but we do need to offer the hope of a better future.
The problem is that our current set of leaders think that a return to “business as usual” is a good thing. The fact they think this means they need to get out more and see how people really (used to) live.
Agreed
For the last two years you have been predicting a financial crash because of inflated values but it is now coronavirus that brings you to say there will be a crash
There always had to be a trigger point
Your comment makes no sense
… not just Richard predicting the crash, it’s been utterly obvious to those who cared to look. There’s a crash on average every 4-7 years, for reasons already explained by Richard and others, QE just delayed (and made worse) the inevitable,
That’s a great essay. Thanks. Maybe yet another idea to add to an already overloaded list – an occasional ‘long read’? You’re your own worst enemy!
“What will our government do? Who knows……”
I think we do know. It will do whatever it takes – in the short/medium term – to protect the assets of its core constituency, both benefactors and voters.
In an earlier blog you suggested there could be a GE before 2024. personally I don’t believe there’s any chance of that but if the current Johnson-led administration fails to live up to what’s expected of it by the wider party then there could be a Tufton St inspired revolt (I’ve always felt that a shadowy person to ‘watch’ – long before Dominic Cummings entered the stage – is Matthew Elliot) and a subsequent change of leadership.
I find Johnson a difficult politician to pigeon-hole. While assuredly a better journalist than mayor and political leader, he doesn’t seem to be an extremist or ideologue. As a critic of the Marquess of Salisbury (allegedly) remarked: “he trims his sails according to the wind.” Hence it’s possible he might be persuaded to advocate more progressive policies than the hard-core Tory establishment would like – which would signal the end of his premiership. Furthermore, maybe his brush with the Grim Reaper coupled with the birth of a new son could inspire him to take a more empathetic view of society. Of course this is just wild speculation. I have absolutely no insight into the depths of his soul.
However, based on what we do know from the historical track-record of Conservatives in power, it’s odds-on they will fail to recognise the very grave systemic and post-Covid-19 problems facing the nation and thus eschew such recommendations outlined by you. And even if they do vaguely understand it’s most unlikely they’ll initiate any policies that jeopardise the wealth aspirations of the oligarchs who not only prop them up but some of whom actually sit on their benches.
I regret to say therefore that it’s looking as though a Tory government will push an already weakened nation further along the slippery slope to Gehenna.
You may be right
And I was nit happy with the essay – it was rushed and needs editing but I wanted the idea out
They take time
As Pascal said “I would have written a shorter piece but I did not have time”. I do think an abridged version would make a fantastic article for the Daily Telegraph – their readers need to hear it.
Volunteer abridger needed please….
In haste I have reduced it to circa 2,500 words simply by removing the excrescences of writing quickly. More can be done, but perhaps easier to rework from here. I did take some liberties, moving things around. Feel free to bin if not liked. I stopped because I need to do other things. See below:
The lockdown threat to business viability
At the beginning of May 2020 it is very apparent that life is not returning to normal. Plans to end lockdown, according to the Financial Times, include staggered working hours; rules to require social distancing in the workplace and shops; a ban on workplace canteens; a requirement that employers provide extra car parks (seemingly overnight) so that employees need not share lifts to work; a reduction in the number of people allowed to share lifts and a great deal more that makes it apparent that whatever work might be like after lockdown it will be nothing like what it was before it.
Of course it is theoretically possible that some companies could actually survive the substantial new costs that this way of working will impose. Our economy is not geared to work in this way. And by geared I do not mean physically, where it is apparent that our capacity for adaptation is already quite phenomenal. Instead I refer to financial gearing, interpreted broadly.
The financial burden on business
Like many households, a great many businesses are massively debt-burdened. They have both significant financial borrowings or substantial rent payment commitments. That is because they are both under-capitalised in many cases and do not own their own properties, with rent in that case broadly representing interest on an expensive loan that they might have had to take if they were to have bought their property instead.
Importantly, these obligations are fixed at present. Official interest rates may be almost to zero, but not in the actual economy. The burden on businesses to repay loans, interest or rents, may be subject to some minor concessions for strictly limited periods at present, but for many the obligations will be ongoing. And there has been not a hint of long term support on these issues. Instead new government-backed loans under coronavirus schemes will just add to these debt mountains.
What this will mean is that companies working with reduced efficiency and increased costs in markets where demand will be reduced will be under enormous stress. They will suffer reduced profitability from their trading activities, but will nonetheless be facing fixed financial obligations created in an entirely different era and, legally these obligations are not re-negotiable in most cases.
This is a situation that cannot work. The vast majority of businesses cannot now survive if they are to meet those financial obligations. We are seeing this on High Streets already, where refusal to pay rents is becoming commonplace, but this extends to every industrial estate, office block and workshop in the country.
The tiny minority of businesses with no borrowings and their own, paid for, freehold premises might make it through this crisis. In addition, micro-enterprises working at home and with almost no employees might also do so. The rest cannot in the new, imposed lockdown conditions. It will be as simple as that.
The choice the government has to make
Some fairly stark decisions have to be made if it is the plan of the government that we survive this crisis. Whose interests are to be prioritised?
Is it labour, and the need to preserve jobs, that has the highest priority?
Or is it enterprise, meaning that the preservation of trading entities becomes the core goal?
Assuming that this can be done, is banking to be pre-eminent to prevent a crash? Is capital preserved? Should the interests of landlords feature most highly? Landlords have not really been asked to make any sacrifices to date: their interests and income streams appear to have survived almost unscathed to date.
Banks on the other hand are already subject to massive support for which they did not pay and are also now enjoying significant effective additional funding for loans from which they will make money. Quantitative easing has also helped them, and is on the agenda.
Business loans, particularly to larger companies are getting through, but as loan capital those funds simply defer the day of reckoning, because as yet, the government is quite unable to differentiate cash flow, liquidity and solvency, let alone loans from capital. The wrong support is being provided, and the stress is growing as a result.
Furlough disguises the fact that more than 6 million people are now likely to be unemployed in the UK. The self-employed whose businesses have failed increase the number.
The choices that have to be made
We need to prioritise work. We need to keep trade alive.
We need to preserve operational banking, because we cannot survive without it: the plumbing on which the economy runs. Even if we are concerned that the property sector might collapse that is not a reason to priorities the interests of landlords. In other words, the government has everything the wrong way round.
Banks
Statutory bank (and other) loan deferral arrangements of two years, at least, will be required. Interest only arrangements must be allowed in the meantime. And even that must be subject to the right to roll it up as part of the balance if it is necessary for the borrower to get through this. Again, nothing less will do if the government wants people and business to survive.
Right now most businesses in the UK cannot be profitable unless major costs and cash flow outgoings are immediately removed from their overheads. And since very few have the capital to survive any significant losses the reality is that unless rents are firstly frozen and then cut, alongside bank loan payment deferrals, then the majority of UK businesses are going to fail.
The 30% effective unemployment that we see today is both going to become permanent, and grow. Jobs and businesses have to be in the lifeboat — bankers and landlords have to be left behind.
The essential challenge facing government is to choose priorities. It can choose landlords and then banks as the priority and the result will be the real economy will almost completely fail, at catastrophic cost.
Or it can choose people and then business as the priority instead and as a result reduce the payments due to landlords and banks. In that case a great many businesses might survive the crisis as it unfolds, because the pressure on them will be greatly reduced. Effectively, if they could then just cover their marginal costs they might be in a vastly better position to survive, and many will. As a result the jobs that they provide will also be retained. Â But that will be impossible if rent and bank obligations continue.
The choice appears to be between seeking to preserve the appearance of value and wealth that is implicit in our overinflated property values and which underpins UK banking, or seeking to preserve the ability of this country to make a living.
The choice is illusory. In reality, the value implicit in land has already disappeared. It is folly to pretend otherwise. The only reason no one has yet begun to realise this is that we have a completely frozen property market at present. When that reopens prices will, as a matter of fact, tumble. And so too will new rents.
The real issue is banking itself, without which we cannot survive. 85% of UK bank loans are supported by property collateral. Whatever happens property values are going to collapse across the board very soon. It may be worse for business property than private property because of changes in work patterns and the number of business failures that the UK is going to suffer come what may, but it is going to be universal.
And so bank balance sheets are going to collapse. It’s just a case of when, and not if. The value that underpinned them has gone.
Banking cannot survive this in its current form. The losses are many, many times greater than any capital that they possess. This is not, then, a matter for the private sector to deal with. Every single bank in this country, and across the world in all likelihood, will be insolvent. No bank will survive without nationalisation. And the only way the losses can be managed is by wiping them out by the issue of perpetual bonds, which will then be subject to QE and thereafter be forgotten forever.
The balance sheets of the banks can be restructured. There will, however, be real costs. First, it will not be possible to guarantee all bank deposits. Some amongst the wealthy will take a haircut (which refers to a writing off of value).
There should also be a refusal to settle claims against banks where the beneficial ownership it arises from cannot be proven. And if the claim is from a tax haven there should also be a considerable haircut, come what may.
Landlords
What will become of landlords? For small ones, I have argued for state support, just as I have other unemployed people. I can see no special case that might be made for such landlords now, especially since what I suggest will preserve some of their asset value, and an income stream, albeit a much reduced one.
For larger landlords, the suggested arrangement will massively reduce the balance sheet value of the enterprise. But because of the matching loan suggestions it does not guarantee insolvency. It is very likely that these landlords will survive, but with vastly smaller market worth, and with their focus in the future being upon service supply, rather than asset accumulation.
Even if every landlord fails now, the properties that they own will still be there: in other words, even if their financial capital disappears, their physical capital does not. What that means is that the economy can survive the failure of landlords more than it can survive anything else because whatever happens to the current owners of these properties they will still exist. We cannot say that of any other part of the economy.
In that case what is required now are statutory rent holidays, at least for the rest of this year. Thereafter rents should be reduced, drastically, and by law, and right across the board. 80% cuts, or more may be appropriate. Whatever is necessary to ensure business can survive.
I am not seeking to wipe out the rentier: I have also argued, and repeat that argument now, that if, as I think appropriate, there should be long-term statutorily enforced rent holidays and then mandatory rent reductions I would match that with a right to bank loan holidays, and a right to a statutory reduction in loan liabilities so that the sum secured on a property cannot exceed its market value, whatever that might be in the future. This would have to be subject to periodic reviews; hardly a concept landlords are unfamiliar with.
Rentier insolvency is not my aim: rent reduction is so that businesses and people might survive. Such a programme of liability reduction would make no sense for landlords alone if not matched by a similar scheme for owner-occupiers, who I predict will see the value of their houses crash in the near future as it becomes apparent that there is no market for them at anything like recent prices, then they too must have a statutory right to owe no more on a mortgage than can reasonably exceed the market worth of their property. This might again be subject to periodic review, but mortgage interest holidays (with waiver happening on sale) could be made available on sums owing in excess of this sum. My aim is simple: keep people in their homes, and solvent.
Pensions
It is in pension funds, not banking where the biggest haircuts will occur. There is, supposedly, £6 trillion of pension wealth in the UK at present. I suspect that a very great deal of that will now disappear. I also stress that if what I suggest does not happen then it is likely that almost all of it will disappear: only the bank and land based assets need vanish into thin air if what I suggest is done. In either case, the haircut is is bound to be reflected in the pensions of current and future old people.
What to do for pensioners? I am afraid that they, like so many who have until recently been in work, will have to fall back on the state: there is simply no alternative. But, this cannot require that people be reduced to living on the basic state pension: that is an impossibly low sum which it is repugnant that we pay at present. But as for so many others, incomes of pensioners will fall in a great many cases. And the sums that they hoped to leave to next generations may collapse. But if the government acts to preserve jobs now pensioners have a hope of surviving. If the government does not act in that way pensioners will then be amongst the many whose literal risk of survival will be at risk.
Looking forward
This crisis has focused our attention on the creation of balance sheet wealth during the last 40 years. This has not been generated from work, or from the investment of resources in the creation of real value. It has been generated by encouraging the flow of ever-increasing sums of money for what has been called investment (but which has actually been saving) towards a limited range of financial and property assets whose availability has been shamelessly restricted in supply, guaranteeing almost perpetual increases in value. That sham has now been shattered.
Value creation does not come from financialisation, or balance sheet manipulation of the type we have indulged. It comes from work, which produces value as a consequence of the inherent worth of the activities undertaken. If one generation is to look after its predecessors when they reach old age then what I have long believed is the fundamental pension contract, must be respected. This contract, which is implicit within society, and not legal, is that one generation (the older one) will through its own efforts create capital assets and infrastructure in both the state and private sectors which the following younger generation can use in the course of their work. In exchange for their subsequent use of these assets for their own benefit that succeeding younger generation will, in effect, meet the income needs of the older generation when they are in retirement. Unless this fundamental compact underpinning all pensions is honoured, any pension system will fail.
Value comes from the creation of value through work, which is not transferred between generations through the transfer of ownership of savings products, but is iransferred through the creation of real added value resulting from investment activity.
We can rebuild society. It can be sustainable if we respect the constraints that our planet puts upon us. We can transfer value within it. We can sustain populations. But we can only do these things if we simultaneously recognise that there is no magic way to do so: financialisation as a source of value creation was, and always will be, a myth. It is work, and work alone, that generates value, and even then it can only do so if we respect the constraints that nature imposes upon us.
Thanks!
Copied
Richard
Thanks Richard and Johnn – have saved and printed to read more carefully. Lots in there
And just as I was thinking of getting started back into the market! I wonder if the individual deposit guarantees will hold? Better start looking at the nitty gritty.
I do have a question not explicitly covered in your prognosis – is this a worldwide outlook?
Are for instance the EU or the equivalent European economies to ours in a similar bind – i would think yes (except as always the Swiss;-)
What about the emerging economies – especially the superpowers of manufacturing and energy, China and Russia?
I suspect less so, depending on their investments in our economies.
It has been coming – it started with the big bang and Maggies purse and loddsamoney culture and will end with a bigger bang and a no money culture. I expect creativity to go exponential! We will at least get that silver lining.
Emerging economies are going to have it worse
Their starvation is going to be rampant
And developed economies will fall like dominos: once banks fail somewhere they fail everywhere
Is your prediction motivated by envy and a realisation that you have created very little and are dependent on hand outs and charity? Economic activity has ground to a halt of course financial markets and all financial assets including property are going to be affected..if a global pandemic hit the earth AT ANY TIME IN HISTORY then the effect will be wholly negative.. so your prediction over the years is completely meaningless unless you of course predicted Covid 19..will your rear view mirror and detachment from reality I wouldn’t be surprised if you did in fact claim to “see Covid 19 coming”. Of course the digital age has allowed business to not completely ground to a halt. And never underestimate the power as desire of the individual to fight back and bounce back and not lie down in defeat. This is what underpins the world economy and why, at some point we will return to some semblance of normality. Obviously science will ultimately dictate when we finally move on from this difficult time.. of course you see the crisis as an opportunity to promote your political ideology. It seems however, aside from a few on here, no one is taking any notice.
I am going to ignore the juvenile elenenrsof this because anyone with an iota of intelligence can spot just how stupid they are
I instead suggest you read my pos5 9n job preservation this morn8ng
Now try an intelligent response to it
And I mean, intelligent, which requires reason based on facts
Mr Gilbert,
“Economic activity has ground to a halt of course financial markets and all financial assets including property are going to be affected.”
There, you have done the difficult bit; you noticed there is a big problem. It need not be the case that Richard is right about everything, or even in most cases. What he has done, in the middle of a crisis in which the full consequences are yet to unfold, is to illuminate major issues, and provide trenchant critical analysis. Even if you disagree with him, he provides a wide-ranging and perceptive insight into major, pressing issues. He has done the community a service.
I suggest that if you disagree with him you present you own forensic and well argued case. You seem to think you have one – but I confess, in spite of looking, so far all I can see is animus – and guff.
How can you talk about landlords rent being an intolerable burden on business while not mentioning Business Rates? At nearly 50% of rateable value the government could drop the cost to business by a third if rates were cancelled across the board. I mean not just Retail below £51k but everything.
And the objection cannot be that local authorities cannot afford it. After all your state mandated rent reduction would crush rents which then feed into rateable value lowering the amount councils get anyway. Plus you are constantly pushing MMT and it’s lessons over not needing tax income to fund the state.
If you want to help business why not let them immediately claim back the last five years of corporation tax paid? As an offset against the inevitable losses this year and next? Even quite small businesses post reasonable profits now as part of using dividends for director payment. It would provide a lot of liquidity and have a certain fairness? The more you had paid the Government, the mire you got back?
For the sake of readers I will make clear your past postings make it clear that yo7 are utterly pro landlord and unearned wealth
And readers here know that your representation of MMT is simply ridiculous: that is nit what it says
Whilst they also know l9cal authorities are utterly dependent 8n taxes paid to provide the care in communities that you obviously do not want provided
And readers here know that to refund tax to tax cheats is not what is required now
In other words, they will see you for what you are
Richard are you ok, as i see a few typos in your work and that is not like you. I hope you are well and not to exhausted.
I always make typos! I find it really hard to spot them
Worry when they’re absent
I’m fine
And took (most) of today off
But thanks for asking
Thanks you for your assessment of the impending economic collapse/chaos unless government acts for work and business and not banking and capital. As usual the mass media are totally unaware of the dangers until too late, as with climate change and Covid-19. Once awareness does happen for the population as a whole, will they rise up and force the government to do the right thing? I hope so, maybe workers will take control into their own hands and we will have some sort of modern form of anarcho-syndicalism and companies will be run by workers who will take over and run them for the common good – or is the cider going to my head?
The track record of your proposals is not good….
I kniw how bad trade unions are as employers, for example
I am all in favour of workers on boards
I am not a clause 4 socialist
Bill Hughes. The owners of mass media are fully aware of the disaster Richard foresees and would like our leaders to negotiate through for the benefit of the people. It’s not that the media are unaware, they don’t want the people to know what is coming until it’s too late to take avoiding action.
Thanks Richard,
Sensible words. Sadly the tories through perceived personal interest will always favour the rentier and the parasitic finance sector over all else. It will be an awful mess.
My sector (aviation) lies in tatters and it looks like the furlough period will end soon because we are all becoming ‘lazy’ and enjoying it too much apparently! I am anything but comfortable as I watch my qualifications go out of date and my license lapses! It’s a case of “on yer bike” as a well known Tory used to say, but to where?
The end of the furlough period will see not only large scale redundancies but also sweeping changes to terms and conditions for those who survive – a race to the bottom, and in my industry that affects safety.
I understand a bail out for polluting industries like my own is more than a little controversial and this is why as an alternative the U.K. govt need to implement a managed transition (the private sector simply won’t do this). The government are about to have a lot of spare resources on their hands and must look seriously at a national job guarantee in the aftermath of cov19.
There’s work to be done and people ready and willing to do it if we want to meet our climate objectives, but the pay, terms and conditions must be set at a humane level. If that pulls people away from companies paying poor wages through zero hour contracts then so much the better.
Agreed re conditions
And good luck
This is going to be tough
Thanks Richard.
I think this drama has a long time to run and you have to be mindful of the fact that the Tories are going to resist any measures that result in a diminishing of their power and wealth. That means there is going to be a fight but who is the fight with? The Labour Party is not an opposition. Keir Starmer is their poodle and most of the PLP are Tory Light anyway so what we will see is what we saw when the PLP supported austerity votes and cuts in benefits. There is no one in parliament who thinks other than neoliberal thoughts so who leads the opposition army? Answer, no one. Richard, your analysis may be correct but the outcome will be increased inequality and everything that goes with a police state. You may have been critical of Corbyn but at least he’s opposing this lot. You may live to wish that he was still in charge of the LP because there doesn’t seem to be any leadership at the moment.
I like Jeremy
But he is no leader
And you do not know what Starmer is going to do as yet
And nor do I
I am nit that hopeful but I am waiting to see
In the past I have been very frustrated with Corbyn. But taking the recent leaked report on anti-Semitism (which I have read all the way through) was Corbyn allowed to lead by his party?
I think not.
And I have just left the union that has employed one of those who went on to undermine him at Labour HQ and joined another and told my old union why.
A leader cannot lead with one arm tied behind their back.
If Corbyn failed as a leader, then his party failed him and us too. The failure is collective.
That failure is the Labour Party’s itself – a shame on them for all history. This country needed relief from austerity and a psychopathically ideological Tory party. And yet some in Labour at the top of the party chose to fight amongst themselves instead. This has caused untold damage.
Responsibility cannot be pinned to one individual. I think that that is now axiomatically wrong. It’s been six of one, and half a dozen of the other.
I completed on our first family home in February 2020 after determined saving for 14 years because I didn’t want a mortgage bigger than 50% of the property price. I am relieved to be in that position, but feel sick at the thought of how much of my hard saving will be written off.
Sorry….
Thanks Richard,
I agree with Scott that a job guarantee would appear to be the obvious solution for the twin problems of high unemployment and a large list of societal needs to provision. Your essay highlights the fact that monetary policy is in a state where it can’t influence the future for the better. It is on the ropes and exhausted. Fiscal needs to take the ascendancy, at least for the foreseeable future. Publicly owned banks, at least some, will hold any surviving private banks to an ethical framework in the same way a job guarantee will force private sector employers to focus on pay and conditions for workers.
The wealthy will only be a bit less wealthy though. They’ll still have the relative power and influence. I don’t see the Government or media changing their tune anytime soon. It may take a bit of suffering to get people angry enough to form groups strong enough to take on the establishment.
[…] pressures business will face after coronavirus to a friend last night. They asked for an example to illustrate the post I have written on this issue, making clear why reductions in rent and finance overheads are needed now if most […]
With the exception of this horrible virus I welcome this new world that we will be entering post virus. For too long now we have relied on an economy that just buys and sells over priced property to each other while taking on far too much debt as we buy endless pointless dross.
Firstly this virus will not be the cause of the coming economic crash, that was always on the cards and C-19 will just be the trigger, if it had not been the virus something else would have triggered it in the next 5 years.
I am not seeing a hopeless dark future, I am filled with optimism and hope that we can start building much better society that revolves more around peoples quality of life and looking out for each other.
I am not without hope
But there is going to be pain on the way
“Your pain is the breaking of the shell that encloses your understanding. It is the bitter potion by which the physician within you heals your sick self. Therefore, trust the physician and drink his remedy in silence and tranquility.” Khalil Gibran 🙂
Anyone hear this? Some bosses are saying the govt is not paying them their workers furlough wages, in but in reality they are. In other words they are lying to their workers and keeping the cash instead. My postman told me this. If true how can the government catch these bad bosses? Obviously the people who are not getting their wages paid for by the government will have to sign on for Universal credit while their bosses are picking the cash. Also i imagine each employee who supposedly get this the furlough payment should be paying tax and Ni out of it. If so the govt can check why a employee was paying them or not and at the same time collecting universal credit! I see some people going to prision for fraud if true.
Some fraud is inevitable
I suspect it will be easily located
I agree with what you’re saying, to the extent that means anything. But I find the question regarding whether or not the government will prioritise action that helps the majority over the super-small class of super-rich people they feel affinity for (to act for the many, not the few, one might say), quite absurd.
The people who control the country don’t care about the wellbeing of the majority and I’m dubious they’d have a clue what to do if they decided to change their attitudes.
The only hope is that by spreading information like this, people like you are increasing the public’s awareness of what a corrupt mess this is.
But my point in writing was to make clear that there is a choice
And that in retrospect we can say that the wrong one was made
We have to understand that to create change
That makes sense. You are making sure the lovely people in charge have an opportunity to weigh all the options.
It works on both levels then.
I think you’re probably bang on with this.
At the danger of making it even longer, it would be good to mention the international context. We need another Breton Woods, with some kind of global consensus on how to handle this. As Michael Hudson says, a debt that can’t be paid, won’t be paid. From a global perspective, this is just getting started.
My fear is that the catastrophic handling in the US leads them on a path to war.
[…] have argued that valuations are going to collapse after coronavirus, and balance sheets with […]
Very chilling scenario but, I think, realistic rather than pessimistic.
At a global scale, why should a relatively few, very wealthy individuals (less than 1% of the population) who nobody voted for be permitted to hold all the power and wealth? I believe they have more wealth than the combined income of the poorest 50%. No matter how inventive or hard working they are, their inventiveness and endeavour is not inherently worth that much more than their lowest paid workers, nor does it entitle them to profit to excess from their customers. This is obscenely disproportionate. Our political systems have perpetuated and supported this. Why is this tolerated?
Most old wealth was amassed through the exploitation of others. Think of peasants working the land and factory workers generating huge wealth for the few whilst living in penury themselves. Think slavery and the gross injustices of Empire building during the Industrial Revolution. Much of it unearned and subsequently inherited, generated ruthlessly and often cruelly on the backs of others. New super wealth has been created by new forms of exploitation, gig economy, zero hours contracts, profiteering by overcharging for goods and services. That’s a double whammy because the lowest paid form the majority who then pay excessive prices for said goods and services.
Don’t get me wrong, I’m not proposing communism which has failed but so has the current form of capitalism. There needs to be a new world order and that wealth must be more fairly distributed. Coronavirus has sharpened the focus but we have the far bigger, underlying impact of climate change and destruction of our environment which will dwarf it by comparison.
The way forward must be global, fairer and greener.
Write off. Reset.
The write off and reset have to be linked
Thanks, Richard.
I’m bound to say I read this last night and went to bed a bit depressed to be honest, although I agree with you almost entirely.
I suspect nothing you or I desire will come to pass with a government loaded with self-interest and greed.
That will, sadly, make things worse than they could be.
After a good nights sleep and as an optimist, I hope we can steer a reasonable path to a new fairer society.
Allan
I too am an optimist
The Government’s main constituency is Wealth.
Next question?
[…] By Richard Murphy, a chartered accountant and a political economist. He has been described by the Guardian newspaper as an “anti-poverty campaigner and tax expert”. He is Professor of Practice in International Political Economy at City University, London and Director of Tax Research UK. He is a non-executive director of Cambridge Econometrics. He is a member of the Progressive Economy Forum. Originally published at Tax Research UK […]
I am glad you remain open minded about Keir Starmer – he is leader of the opposition and we have to work with those that are in place. I would urge some contact with him to help influence his thought process. If he really ‘got’ MMT and Green New Deal it would help change the landscape, particularly if he was able to articulate a positive vision for the country. Part of the MMT argument is that direct financing by gov’t already happens, that austerity mark II would make things much worse and that there are shovel ready labour intensive projects available. Lord Deben was trying to make the case for green investment this morning.
There is a small window in which a new narrative can arise and one that can capture public hope.
[…] By Richard Murphy, a chartered accountant and a political economist. He has been described by the Guardian newspaper as an “anti-poverty campaigner and tax expert”. He is Professor of Practice in International Political Economy at City University, London and Director of Tax Research UK. He is a non-executive director of Cambridge Econometrics. He is a member of the Progressive Economy Forum. Originally published at Tax Research UK […]
The government needs to move into job creation mode. Rishi is insinuating that the workforce is “becoming addicted to state aid” but that is because the state took away their ability to to earn a living. No one has deliberately given up work to take state aid it has been thrust upon them by the state. To that end the state needs to become creative in how it is going to promote a viable economy in this new era not simply castigated those now without the ability to earn.
Youth unemployment – This will inevitably increase dramatically. In the past we have had YTS as a state benefit. The state need to pay our young people to be educated beyond school not charging them as it currently does. A huge rise in teaching capacity in further education is needed to provide jobs for educated people to pass on their knowledge but now made unemployed by the state and those taking up the education need to be paid whilst getting that education. When the situation improves we shall have a better educated workforce, a greater knowledge base and potentially a more dynamic economy.
State investment – Governments love big ticket projects. You only have to look at HS2 to see that. HS2 is now not needed if it ever was. It would only ever have sucked more people into London and the South East rather than improving work in the North. But opportunities abound for investment. In green energy, a state backed pharmaceutical drug developer, hospital building (42 I think we were promised), medical training, STEM education for anyone who wants to learn, and many more.
Investment in private enterprise – Many people want to invest their time in their own enterprises. One of the biggest things holding them back is the risk. Currently unless people are supremely confident they risk losing their house if a business enterprise fails because banks insist on reducing their risk at the expense of the enterprise. A state sponsored investment bank is needed with local branches which could invest in smaller enterprises. Most banks now will not invest small sums which would be enough for local businesses get up and running and asset suppliers won’t let small businesses invest in equipment without collateral. An investment bank with sufficient skills could allow many smaller businesses to be established with the risk weighted towards the state not the individual allowing people to support themselves who are currently not supplied with capital by the outdated financial institutions we have today.
I am sure there are other measures the government could do which would stimulate a new economy but it requires vision. I am not sure they have that vision.
1) If your business is people, then people are your business.
Ergo, without people there is no business.
The logic is infallible & unassailable.
2) It is people & their needs that are THE integral/fundamental part of what enable businesses to exist.
If there is no demand, there will be no supply, ergo there will be no business.
3) If people do not have the ability to envisage ,or accessible means (£) to procur, that any form of product/service/information has value to them personally, they will not purchase it.
4) Hence, there will be no accumulation of wealth & businesses that support ‘wealth accumulation’ will cease to exist, because they will have no inherent value to those who previously utilised them & so on…
5) In all matters it is the people that matter above all else, because without people EVERYTHING will cease to function.
The needs of the MAJORITY of the people take precedence in all affairs.
It is the solemn duty of Government to ALWAYS look to the people FIRST.
But they don’t
Well said Samson Mcnab , I think you will agree that the problem we see repeatedly throughout the world is that these two things you mentioned do not actually happen.
“ The needs of the MAJORITY of the people take precedence in all affairs.
It is the solemn duty of Government to ALWAYS look to the people FIRST.”
We need a magic potion that will make these two things happen.
Who will provide it ?
What will it be made of ?
And will we like it ?
It’s called the magic money tree
1) Sadly Richard this has been a recurrent theme throughout history
2) I posit to protect the will & rights of the MAJORITY of the populace going forward; we will need some important changes to the structure of Government
3) This idea has seriously been on my mind for some time. Bring back a modern reincarnation of the ‘Tribune of the Plebs’ from the Ancient Roman Republic
4) https://en.wikipedia.org/wiki/Tribune_of_the_plebs
5) So, the gist is the people nominate a completely apolitical & non-establishment person who has enormous & extensive power to represent & intercede on behalf of the people whenever called upon, or otherwise deemed necessary
Independent of Government (some selection criteria needed) & sworn to protect the people
Effectively checking the power of Parliament, Government & the Crown, ensuring that the will & interests of the people are not idly forgotten; in what has been described as a Plutocratic Kakistocracy rank with corruption & cronyism
6) The modern name for such a position/office could be called the “People’s Commissioner”
7) Imagine the following in a modern setting…
“Ius intercessionis, also called intercessio, the power of the tribunes to intercede on behalf of the plebeians and veto the actions of the magistrates, was unique in Roman history. Because they were not technically magistrates, and thus possessed no maior potestas, they relied on their sacrosanctity to obstruct actions unfavourable to the plebeians. Being sacrosanct, no person could harm the tribunes or interfere with their activities. To do so, or to disregard the veto of a tribune, was punishable by death, and the tribunes could order the death of persons who violated their sacrosanctity. This could be used as a protection when a tribune needed to arrest someone. This sacrosanctity also made the tribunes independent of all magistrates; no magistrate could veto the action of a tribune. If a magistrate, the senate, or any other assembly disregarded the orders of a tribune, he could “interpose the sacrosanctity of his person” to prevent such action. Only a dictator (or perhaps an interrex) was exempted from the veto power.[1]
The tribunes could veto acts of the Roman senate. The tribune Tiberius Sempronius Gracchus imposed his veto on all government functions in 133 BC, when the senate attempted to block his agrarian reforms by imposing the veto of another tribune.[7]…”
8) Thanks for your kind words Terence. The above proposals will go far to solve the predicament.
[…] By Richard Murphy, a chartered accountant and a political economist. He has been described by the Guardian newspaper as an “anti-poverty campaigner and tax expert”. He is Professor of Practice in International Political Economy at City University, London and Director of Tax Research UK. He is a non-executive director of Cambridge Econometrics. He is a member of the Progressive Economy Forum. Originally published at Tax Research UK […]
In your opinion, what would stop them simply pumping asset prices back up through QE and paying for over the medium term through inflation? Given that all countries will be doing this it will be unlikely to be limited by risk of a currency or sovereign debt crisis.
I am no longer suggesting QE in any conventional sense
What is now on the agenda is direct monetary funding (DMF) of government spending by central banks
And banks will have to nationalised this time
If banks are nationalised is it not the case that just as government did with RBS etc they will put money into it but then hive off the business part to just carry on as before
I hope not
Surely we might learn one day?
[…] By Richard Murphy, a chartered accountant and a political economist. He has been described by the Guardian newspaper as an “anti-poverty campaigner and tax expert”. He is Professor of Practice in International Political Economy at City University, London and Director of Tax Research UK. He is a non-executive director of Cambridge Econometrics. He is a member of the Progressive Economy Forum. Originally published at Tax Research UK […]
Maybe we’d have been somewhere different now with real leadership.
https://uk.reuters.com/article/uk-health-coronavirus-merkel/germany-eases-lockdown-as-merkel-hails-end-of-pandemic-first-phase-idUKKBN22I248?il=0
I agree with the gist of this post, in Germany they capped rents and land valuations,which cuts out much froth.As a result they had had no need to bailout their domestic banks post 2008.Granted they had trouble with a couple of their large global banks but that was because they got sucked into the global financialisation vortex, otherwise known as the sub prime crisis.
This will be worse no doubt.
On the banks I would say nationalisation is not needed,simply swallow the liabilities and honour them and take the assets as security. The banks should then operate on a full reserve basis only,paying off the debts to the central banks as and when loans are repaid. Thus endeth the banking problem in one fell swoop,we thus just need to nationalise the money not the banks.
The government should be the only creator of money going forward,it is THE only way we can direct money to where it is democratically and fairly needed….and away from banks obsession with property based loans. Our whole financial system relies on property/share values…lunacy!
We were always going to need a huge disaster like this one to rectify many economic/inequality problems we had,now we have it, we should not waste the opportunity.
We never, ever, need full reserve banking
Because there is no such thing as full reserve banking
Not unless, that us, you not only want a gold standard but that only be gold be used as currency
And then you will crush all life out of the economy
Hardly,
Gold has nothing to do with it.
But if you think private banking is the way forward after what you have just said ,then I leave you to join the dots.
But no hard feelings, I would take nationalising the banks as a second best, though directly running banks should be of no real concern to any government.
I am not saying private banking is the way forward in all likelihood, at least, not as we have known it
But full reserve banking is not even banking and it has no part in a modern economy
Well the current fractional reserve model is hardly “modern”, it is in fact use exceedingly old,an arcahic forever-troublesome system we inherited from the first inception of banks hundreds of years ago. The only reason we still have it is because it suits the banks.
As to a full reserve,or 100 % reserve,or whatever you want to call it, it is merely a savings and loan system that can and does work. It will not crush the life out of the economy,as the current system most certainly does, in repeated cycles.
If credit was to dry up, fortunately we have a perfectly good back up with MMT. The government/central bank is more than capable of making up the slack in demand with increased spending,or tax cuts. We would then have more money in circulation(unlike the gold standard). There would be a boost to the economy and folk have more money in their pockets and wouldn’t desperately need to go to a bank for a loan to make ends meet. We would thus benefit from generally way less private debt with the added bonus of less bank loans,smaller banks and therefore more a more stable financial sector. What’s not to like?
Reserve banking worked when we had asset backed money
We do not have asset backed money – except one PoMo’s fantasy land
So we do not need reserve banking of this form
Well, this will come as a surprise to nobody, but the bounce back loan scheme, apart from being named for a cretinous bit of wishful thinking, is absolutely riven with fraud. The average loan amount is £37k against a maximum of £50k, which when you consider average small business turnover, doesn’t quite fit. Also, Twitter is full of people, who having recieved these loans, are now openly boasting about dissolving the company, and never having to repay the loan. Many are being told as much by staff advising them about their application.
Let’s be clear, almost none of this money is going to be repaid, that’s why the banks would not accept the scheme with them taking any of the burden. With 80% of the risk assumed by the state, banks knew they would lose money on these ‘loans’, because in reality they are a giveaway. The only way to get the banks to play ball was for the government to guarantee 100% of the loan, and provide the banks with a £500 fee per loan arrangement.
If 10% of the capital provided in the form of bounce back loans is repaid, I will be flabbergasted. This is Tories buying the loyalty of their business owning base; a financial parachute for them to buy up distressed assets for pennies and carve themselves out a lucrative opportunity in the future.
NHS workers risking their lives get a patronising clap and the opportunity to buy their own celebratory badges. Owners of failed and failing businesses (in many cases not as a result of coronavirus) get a big cash prize.
With respect Ross, that’s complete nonsense
Please don’t call again
Really, Richard?
https://twitter.com/Talenteduser/status/1258143669166714884
Plenty more where that came from.
Oh come on…the account is a trolling spoof
Please don’t call again
This is a site for sensible debate
From January 1st to March 23rd this year over 18,000,000 came into the UK from Covid-19 hotspots.
Guess how many were quarantined
Maybe another alternative here from Ellen Brown,
https://ellenbrown.com/2020/05/02/crushing-the-states-saving-the-banks-the-feds-generous-new-rules/
Indeed..
[…] begin, some background thinking. Three thoughts here. First, if I can reach the conclusions IÂ published on Tuesday about the potentially disastrous future for our economy then I am not alone in doing so. Someone […]
This morning on Radio 4, Alistair Darling told Nick Robinson (responding to the Tory Boy’s statement that there would be new jobs coming out of the lockdown and that the Government could not keep paying people to stay at home) that the Government was not only the lender of last resort to banks but also the social insurance of last resort to the people as well and they needed to deal with this gently. I was quite impressed.
However, what followed was a discussion about it all having to be paid back – Darling agreed but did not go into specifics.
The fear mongering goes on.
I do think that Nick Robinson should be let go. You’d think his own brush with mortality might have made him a more decent human being but apparently not. Once a Thatcherite, always a Thatcherite.
I heard LibDems discussing how to pay for it all last night
It’s deeply depressing
I found Alistair Darling starting off on the right foot but then not really following through – he was right to highlight the 1980s when young people in particular were left to fester. It was a shame he didn’t enlarge on some tangible projects that could repurpose the economy and jobs market. But at least it brought something to the table.
Personally I think that Nick Robinson and many others are open to the counter argument (I have gone from the paying back mentality to seeing things more as they are) and we know that all of this runs against the received world view.
Don’t be depressed – continue to make the case!
Such a shame J.D. Alt’s book “PAYING OURSELVES TO SAVE THE PLANET: A Layman’s Explanation of Modern Money” isn’t available in the UK. It’s the best short and simple and explanation of MMT I’ve come across. It explains MMT twice by text and diagrams. It also conveys the message understanding MMT is the only means for the substantial spending involved in delivering a Green New Deal. Of course a digital version download may be possible:-
https://www.amazon.com/dp/B085RVQ545/ref=sr_1_3?dchild=1&keywords=J.D.+Alt&qid=1588936952&sr=8-3
I’ll take a look
Helen, the book you mentioned is available at the UK Amazon too.
Johnson’s government really don’t like scrutiny.
https://www.mirror.co.uk/news/politics/coronavirus-officials-withholding-evidence-decision-21991206
Health officials are withholding the evidence used by the government when it decided not to follow South Korea’s plan to tackle coronavirus with mass testing.
In February South Korea had the most COVID-19 patients of any country outside China.
But the country managed to stop the virus in its tracks with a hardline system of mass testing, contact tracing, isolation and surveillance.
To date, South Korea has had fewer than 300 deaths from the virus.
Former minister Greg Clarke, who chairs the Commons science committee, said the decision to reject South Korea’s approach “may be one of the most pivotal decisions made in this pandemic.”
It is my understanding that parasites are designed so they don’t kill the host. If they do, they die too.
That is what it seemed like you were saying: that the Rentiers were on a path to destroy the workers and real capitalists (owners of buildings, machinery, inventories) that they have been hosting on (exploiting), and if they don’t consider the workers and capitalists first, there won’t be any rent for the landlords and other monopolists to get.
Sounds right to me. And if we collect the rent to fund the government and social programs, abolish confiscatory taxes, socialize businesses in which there cannot reasonably be competition, and abolish all other government granted monopolies, we can solve our ironic dilemmas, and deal effectively with our crises like the pandemic virus.
Parasites aren’t designed, they evolved through natural selection.
This may seem like a naive question Richard but how does the MMT case get a public airing? ALL the politicians, ALL the journalists in the print, TV and radio media trot out the neoliberal line but MMT never gets a mention. There is no grownup debate on the macroeconomic issue. It’s as the world is going to hell in a handcart while a handful of people around the world are looking on and muttering ‘why don’t they pull that lever?’
It’s a good question
But one day it will happen
My experience is that you have to wait a decade
There’s a while to go as yet
Well, on R4 this morning we had a typical post democracy discussion about the impending prospect of being allowed out of homes.
And we had the usual bollocks about ‘there is a risk to everything we do’ said by people with plummy accents who no doubt have access to private medicine where they can get the tests the rest of the population can’t, lots of laughing and cheery good humour, just like there may have been in the officer’s club before the men walked off to certain death in the trenches in WW1.
I just wanted to say to Robinson and his mates, ‘Look, it’s dead simple – get testing in localities sorted out, issue free PPE where possible (decent face masks – not out of date) and then release the lockdown gradually – but only then’.
We are ruled by an arrogant, uncaring bunch of bastards.
Listen folks: the Tory party wants to kill you, your family and your grandparents. Because it can’t be arsed to look after you. It’s as simple as that.
[…] Another cause for reflection will be the extraordinary times we are living in. I admit that I know how lucky I am to live where I do. But nothing, including the absurd economic forecasts we have seen this week and the incompetence of the political messaging changes the fact that we are still a long way from facing the worst of this crisis: even if a vaccine were to be found right now the economic devastation it will cause still defies most imaginations. […]
I just thought I’d appraise of what is happening in my putative new career as a lockdown period dustbin man.
Those of us who have volunteered at our local authority have had email thanking us for volunteering but also asking us if it would be OK to look at our contracts given our ‘consent’ to re-deployment!!
So what was a voluntary effort by us, is seen as a permission for us to be re-deployed permanently by the Council!
I kid you not. This has actually happened.
So, we’ve been to our Union and to our company lawyer (we are an ALMO) and we’ve been told to stand down and withdraw our offer of help. Our lawyer will advise later. The worry is that some staff will not question this (if not in the Union) and will become victims of a very underhand piece of work.
Throughout austerity, the council I work with has either been letting people go or taking on consultant replacements in certain directorates, as – because of cut backs – they are unable to attract senior officers to permanent posts (poor pay) say in HR.
We suspect that this move is from one of the very many consultants we see at the council house in our city.
I know that I am lucky to have a job (because I have worked hard to make that luck), but I offer this to demonstrate what sort of country we are living in these days.
A country that will abuse volunteering, good will and a plague to save a couple of quid because of austerity which still goes on.
Shocking
Here is Johnsons speech in Greenwich on YouGov:
https://www.gov.uk/government/speeches/pm-speech-in-greenwich-3-february-2020
The bit about ‘bizarre autarky’ occurs early on.
And bizarre it is