I owe thanks to those who drew my attention to a new paper published by James Galbraith in the last few days. The blurb from the Levy Economic Institute of Bard College in the USA says:
In the paper, James Galbraith first demolishes arguments for the loanable funds model of banking, still beloved by most macroeconomists and so absurdly untrue that it is shocking that they can still teach this nonsense to most undergraduate students.
What he then argues is that there is no such thing as a market rate of interest. Firstly he says that is because there is no free market in money given the barriers to entry that banking has. More importantly, that is because of the power of central bank regulation on this issue.
As a result he suggests that the aim of all interest rate policy should be to keep rates as low as possible. This, he argues, was Keynes' preferred option. As Galbraith summarises this:
Interest was the return to the provider of funds, typically the idle rentier. Thus, a low rate of interest and a high rate of investment would yield, in the long term, a “euthanasia of the rentier”—leaving capitalist society in the hands of its active elements, namely businesses, their workers, consumers, and the government—perhaps requiring a “socialization of investment.”
Galbraith makes it quite clear that he is on the side of this euthanasia of the rentier. He argues that regulation has to deliver the active economy that we need.
As he then notes, since Keynes' death, everyone has rowed back from this critical idea. Having reviewed the failures resulting from doing so, Galbraith asks:
The analysis above leaves an open question. Apart from the illogical and the illusory, are there solid—if not necessarily defensible—reasons why the Federal Reserve would raise interest rates?
He offers two. The first is this:
Two possibilities come to mind. The first is venal. The Federal Reserve works, in the main, for the largest banks, and since 2008 it pays interest directly on their reserves. Thanks to “quantitative easing,” the policy of buying at-risk assets such as mortgage-backed securities from the private sector and warehousing them in special purpose vehicles, the big banks are flush with reserves. Paying interest gives them income; paying more interest gives more income. In return for this, nothing is demanded. As smaller banks with unstable deposit bases are hit by runs, the biggest banks can (and do) ride to the rescue, consolidating their hold on the banking system as a whole. All of this must be very well appreciated by the big bankers.
I think this is highly likely to be true.
His second explanation is this:
The other possible reason is global and strategic. Although legal responsibility for the dollar rests with the Treasury, not the Federal Reserve, power over the dollar exchange rate rests largely with the central bank, its interest rate, and their effect on capital flows. Although the topic rarely surfaces in public, there is little doubt that preserving the centrality of the dollar as the global reserve asset is a paramount US policy goal. So it was when Paul Volcker assumed office in 1979, flying back from an IMF meeting in Belgrade to announce the first “Volcker shock,” and so it remains today.
US hegemony is, then, core to interest rate policies. It is, once again, very hard to disagree.
As Galbraith notes, the first of these issues is relatively easy to address. The second is much harder. Doing so would, as Galbraith puts it, "shatter the illusion of American prosperity."
How does he conclude? Like this:
In sum, there is no alternative, consistent with minimum economic functionality, to a policy of low interest rates. Keynes was right. ... But such a policy cannot be effective, in fact no policy can be effective, without a radical restructuring of the US economy as a whole. For this, definancialization, effective control of the speculative/predatory elements in the financial classes, and acceptance of—what is inevitable—a multipolar financial world are the key first steps. There is little doubt, at this stage, that the adjustment will be quite harsh at first. Adjustments typically are. But after forty years in the pursuit of a failed strategy, an easy path forward is not realistic.
Once more, I agree. As I have said here recently, to survive we have to break from the model of economics that we have that has been driven by the power of advertising to promote consumerism, all of which exists with the ultimate goal of firstly making us unhappy and secondly of keeping us in debt.
That model was always bad for well-being.
Now that model is also destroying the planet.
We have no real choice but change. But as is becoming very apparent, politicians are finding it very hard to deliver against that need because of their own indebtedness to big business and the financial hierarchy of power.
There can only be one winner here. The trouble is power is on the side of losing.
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Very interesting. Thanks for that; need to read with care. The second issue, the US as reserve currency. The basic question I would ask is; what replaces it? What happens? Note that the PRC effectively pegs the renmenbi to the US dollar. Whatever happens, it will not be a market.
There is no market….
It is all rigged
After many years observing ‘the market’ I totally agree – this ‘market’ is just a big boys gambling table, a means to top up wealth for the wealthy – their ‘hole in the wall’.
I also agree with your final statement – politicians are under-utilising their power because they don’t believe it exists or they are looking after those who pay their campaign contributions.
And lets face it – it’s much less work to go with the established flow than change it. Such is our political class today.
As for Galbraith – it’s nice to have some intellectual back up for our suspicions.
I see comments here starting “I am not an economist” or “I’m not a climate scientist”. They know what they are not. Do you ever get the feeling that the people with a bit of humility are the ones who are listening, while the political class who think they’re oh so smart are taking no notice of your ideas.
Have you ever read the Sermon on the Mount?
Give it a go. Then come back and try again.
[…] 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 […]
Hegemonic Theory for currency is important to understand. The economist and economic historian Charles P. Kindleberger spent a good part of his life trying to explain it but hardly anybody knows his name let alone his arguments today. Paradoxically Richard though revives part of his argument by saying there’s no such thing as a free market and John P. Warren amplifies this by saying even the People’s Republic of China pegs to the America dollar.
What makes a country hegemonic? I would argue that it’s not just the size of an economy. In purchasing parity power terms China, for example, is ahead of the USA if not nominally measured in US dollars. What I believe makes for hegemonic power are two things military prowess and the degree of democracy and the two things inter-relate.
Deng Xiaoping was responsible for the Tiananmen Square massacre because he wanted to have his own way. For many years the Chinese state had pegged the the prices of basic commodities but because Deng Xiaoping wanted a fast switch to market based prices he went ahead against advice to implement this gradually. Massive inflation triggered widespread protests culminating in protests in Tiananmen Square. Deng Xiaoping sent the tanks in to show who was boss! This would be highly unlikely to happen these days in the United States or the United Kingdom because of the democratic checks and balances built up over the centuries. Indeed in the case of the United States freedom of expression in enshrined in a constitution.
What do these two things military prowess and a high level of checks and balances against over-weaning power. I would argue they signal stability to the rest of the world and especially in relation to the currency of that country. The USA dollar has of course experienced an undermining for several decades because of China currency rigging not just pegging and under Trump and Biden this has prompted a policy switch which is known as “on-shoring”, a return to emphasising the importance of keeping a certain level of manufacturing and research effort on your own turf. I would argue this switch also reveals the flaw in free market capitalism which is it contains an “imperialistic” element that isn’t properly recognised. That element being the belief capital has the right to do what it damn well pleases irrespective of the negative consequences it entails to individuals, countries and planet.
The “imperialistic” element in capitalism is of course largely ignored in most countries including the UK where over the centuries governments have been captured and made to provide subsidies to capitalists. So, for example, in the UK massive amounts of housing benefit and other social welfare contributions are made when the switch should be made to paying an adequate minimum wage if not also coupled to a Job Guarantee scheme. If you look very carefully the failure to see the big picture underlies Sir Keep Samer’s dogma that everything must be costed because the government operates like a household not an agency which must dynamically relate money creation to real resources!
https://www.theguardian.com/politics/2023/jul/23/keir-starmer-excludes-uncosted-policies-in-victory-over-unite-and-activists
Sir Keep Samer needs to watch the cross-examination of Alan Greenspan by Paul Ryan at the House of Representatives’ Committee on the Budget back in 2005!
https://www.youtube.com/watch?v=h0i0m0CyE04
I admire your continuing faith in the checks and balances in our so-called democracies.
Well I read a lot of history and the experiments with fascism and communism in the last century proved far from ideal and liberal democracy flawed though it is I believe to be preferable. I simply see it as a matter to keep pushing to make it more equitable.
Here’s a very recent example of why I prefer the greater advantage to question political decisions found in Western liberal democracy imperfect though it is:-
https://www.theguardian.com/world/2023/jul/26/rumours-swirl-over-dramatic-fall-of-xi-loyalist-qin-gang-china
The idea of a multiplier effect seems to have been forgotten by Starmer and Reeves. I wouldn’t blame an ex-lawyer for not knowing but Reeves is supposedly an economist. The IMF recognise it.
Richard
https://www.theguardian.com/commentisfree/2023/jul/24/liberal-economics-free-social-capitalist-safety-net
This article in Guardian (written by Nesrine Malik) echoes your comments and thoughts entirely.
Obviously there’s always a danger with market capitalism of a regression to fascism or communism and globalisation of trade has facilitated that to some extent.
It’s an excellent article, and as someone who’s now retired & relatively comfortable but spent most of her life struggling sometimes desperately to pay the bills, it reminded me of those struggles.
For most of my working life I was trapped in jobs I found stressful and pointless by a partner who never paid his share (or anything at all, often) but demanded security and used threats and manipulation to maintain control.
Now divorced and subsequently retired, I find I have more disposable income than ever before, because my partner only wanted a cash settlement – once he found he couldn’t get his hands on a lump sum from my pension, he focussed on other assets. If I’d realised he was that stupid I could have escaped years before!
Given the economic turmoil at the moment, it’s not emotionally comfortable, however financially secure I ought to feel.
The Guardian stating 58% of people in the UK now supporting what they call the “Climate Movement”:-
https://www.theguardian.com/environment/2023/jul/25/ditching-green-policies-may-not-be-the-vote-winner-sunak-expects
Starmer and Sunak appear to have missed the boat yet again! How does the country get rid of these not very clued up or wise stick-in-the mud politicians other than getting rid of FPTP that encourages the proliferation of such political dinosaurs?
It is astonishing that the corporate Luddites are winning this debate