QE and Neoliberalism have reversed decades of progress and set us back on a dangerous path.
he damage done by Neoliberalism to all but the richest of the top 1% is so crushing that it has brought a mild mannered people to the edge of uprising.
The income divide between rich and poor
Notice the difference between more centre left and centre focused European economies and the Neoliberalists. Notice how most of the wealth derives to the few at the top.
The inequality doesn’t stop at incomes, look what has happened to the UK in particular, in terms of pensions for the elderly.
Germany and Spain pay retired people almost three times as much, that’s 300%. UK is bottom of the barrel yet again. Any wonder pensioners are leading the Brexit revolt, misled that foreigners and EU are to blame.
Now for the biggest, most blatant lie of all.
Remember the sham about immigrants coming to the UK because of our generous benefits? I don’t think so, in fact I never did, but you probably believed our government, after all why wouldn’t you?
After looking at this chart ask yourself, would you travel across all these generous countries to starve in the UK?
In fact, the most generous nations of all include Latvia, Lithuania and Slovenia; people with the funny accents that are all described as “poles” around here, whose home countries have in-fact far greater security and far lower cost of living plus of course good, well managed EU re-training funds.
Three political movements of today are a result of this social malaise
It is noticeable that this malaise is at its most acute by some margin in the seats of Neoliberalism, the stomping grounds of the rich privileged white man. United Kingdom, United States and to a lesser extent Australia, Ireland, New Zealand, the ex-British colonies.
Far right Populism
“Brexit and populism is like this: these people aren’t hurting, so I’m going to mess with them so they’re hurting as well.”
The above statement, which sadly I can’t assign to the author though I tried, sums up Trump, Brexit and the many other groups supporting populist movements. Don’t be fooled though, these movements are mostly not activated, funded, nor run by poor people looking for revenge, but quite the opposite, they are hijacked by far-right super rich who simply want to dispense with the niceties and take over altogether.
Imagine the Sans Culottes and the Noblesse marching through Paris to behead the honest workers and business people of France urged on by their peers in pink tights. That is Brexit.
Trump’s America is less dishonest, believe it or not, he promised a wall and he’s building it. They voted for Xmas in full knowledge and he’s shoving sage and onion where the sun don’t shine. Best of luck to both, it’s an honest transfer.
Centre left socialism
This seems more a theoretical movement than a serious attempt at anything new or a radical solution.
The Tony Blair government of the past was claimed by some to fit this bill, but in reality, he steered much further right. Many rightly have fond memories of this era for economic reasons and anything other than the Iraq business. Since then we have veered a long way right and the changes needed to even get back to there would seem long and arduous. My own feeling is that a new start makes more sense, though there is an element of it that was right as in combining the responsibility to the weak with a pragmatic approach to supporting the economy.
Nevertheless, for whatever reason, centre left parties across Europe have been losing some ground in recent years, though far from dead.
Progressive Capitalism based on Modern Monetary Theory
This is a modernisation of Keynesian theory, i.e. that state engendered GDP is on an equal footing with private sector GDP and the state has a duty to generate jobs and prosperity and indeed should use it as a tool to generate extra economic activity.
In my previous article I gave a detailed explanation of Neoliberalism and why it has caused our current problems, arguments that lead to some unavoidable conclusions.
The most telling argument in favour of MMT is the one that simply says:
How can it be bad to print money and create prosperity for the needy first and then the rich, yet be considered OK to print money and give it to bankers to create bubbles for the rich, bubbles that in fact damage the livelihoods of the needy further while draining their safety net and denying their rights?
Of-course it can’t be right at all. The reality would seem to be that those who make policy are part of the class who have no wish to pay inflated wages and salaries to workers and middle classes, but would rather like to see their own assets appreciate. Hence QE is good, for certain people and Inflation that might result from overzealous Keynesianism, or MMT is bad for those same people because of instead of inflating asset bubbles it inflates the living standards of workers, at least in their limited view of the world.
Why do I say they are wrong?
Because they forget that only through a rich diverse economy do they make money and via the same does the value of money in the trust fund hold. Even London Property bubbles must eventually pop without a healthy economy supporting it. Russian and African runaways with bags of cash must eventually peter out and their trust funds will go up in smoke.
Because only with motivated healthy happy work forces will their businesses flourish beyond the very short term and people are strange beasts that don’t respond well to starvation especially when others nearby are feasting.
With some important but very achievable adjustments to Neoliberalism and a few modernising changes to Keynesianism, we can create a winning formula called MMT and it can be what we want it to be and be safe for as along as we cherish and protect it. No longer.
QE needs to retire and gave way to MMT.
While the UK is busy tumbling myths and questioning truths, here is a far more important idea that everyone needs to get their heads around.
For once it is so simple you don’t need to be an Economist, in fact that’s a definite advantage.
So what is MMT?
Modern Monetary Theory describes a variant or distant cousin of QE, whereby the government prints money in the same way only instead of giving it to banks, uses it to fund services like NHS, pensions, education, re-training for adults and funding high quality affordable homes and decent transport. Every pound spent, regardless of who spends it, grows GDP and is equally valuable to the economy, so there is nothing inferior in any way about this. in fact is far more valuable, because it grows aggregate demand and hence drives GDP, something QE fails miserably at.
The new nurses, carers, Police, Teachers, Civil servants, Builders and all the other employees will spend their earnings in shops, bars, restaurants, builders, garages and employ other people driving a strong healthy and robust economy as well as providing desperately needed services and infrastructure. Likewise the unemployed, sick and retired will spend their few extra pounds in the same way. None of that money will end up invested in developing economies, or in tax havens.
As well as abolishing poverty, MMT achieves the actual goal which QE aspires to, but fails to achieve in that it puts more money in the money supply . Remember MS, MMT works by putting money in the hands of people who really need things and spend the money instead of placing it in tax havens like their rich cousins might. That among other things is why Friedman was wrong and MMT is right. By the way, if you get hooked on Economics, you will find that John Maynard Keynes had worked most of this out a long time ago.
· MMT employs lots of people in good jobs.
· GDP goes up and we get the desired 2% GDP growth then ease off a little with MMT and use the increased tax take instead till we see signs of a downturn again.
· Managing it is easier and more controllable than the crazy central bank system we currently have with negative interest rates and voodoo KPIs.
· If we were a little bolder, we could abolish all taxation and make HMRC get a proper job.
All the funding needed can be printed in the same manner and have precisely the same net affect on the system only be better directed towards providing good services and providing good jobs which ultimately feeds business and GDP. I would enjoy that very much and I doubt I’d be alone.
What’s wrong with MMT?
Ask a Banker and he won’t say, I’ll lose my gravy train. Ask a politician and he won’t know what you are talking about and won’t want to take the risk, or upset his banker supporters.
The main argument you will hear is that it will cause runaway inflation, but that is utter unfounded nonsense and here’s why.
The argument is that increasing money supply can cause inflation and it could in theory. It did in Weimar Germany and in other failing states, but there’s a huge difference,
People who are consumed to the hilt don’t buy much more, only those in need go shopping or those with spare cash as opposed to mounds of capital. We have seen this in recent decades as central banks failed to spark any inflation. In order to spark demand-pull inflation there has to be limited supply, otherwise supply increases, prices remain stable no inflation happens.
The global marketplace and internet. have fixed in-elasticity of supply and hence inflation because new supplies are found and shipped in within weeks, especially if you are part of a large trading block like USA or EU.
Furthermore, vendors in large stores and eCommerce keep the same price bands as a pricing strategy, but reduce the quality or quantity in these price bands when their costs rise.
Today much of inflation happens by way of a little more air at the top of your cornflakes box, more synthetic in your clothes and so forth.
For those areas of potential inflation that might slip through the loop we described above, its important to understand that primarily it is sudden growth in demand before supply can catch up that creates this type of inflation. The main cause in the past has been rapid growth of consumer credit or the “short term debt cycle” with the result that people suddenly had available cash again, but the factories were still on slow down. Its a short term problem that can extend and cause great problems, but the solution for those with a risk management function is to avoid sudden growth in the money supply via sensible policy and controls on the financial sector.
The final desperate argument is that the rating agencies and bond vigilantes will downgrade your currency if you over borrow. Well that might happen until they learn about MMT and see you doing well, but there’s a simple MMT solution to a devalued currency in the short term, print a little more and you won’t ever need the bond market again.
Furthermore, if you had suggested to the bond vigilantes in 2006 that the UK would print 1.1 trillion in a decade, they would have predicted total collapse of sterling, but it didn’t happen. In reality, if shorting was banned, nobody would suffer other than hedge funds and this problem would disappear entirely.
As I say continually, the only value in 98% of the literature of Economics in 2019 is to set exams or pass exams. It has more in common as a science with software engineering, where the entire paradigm shifts every year and you invent or starve.
If anyone is suggesting that current price discovery is valuing currencies correctly they are deluded or most likely lying. The dollar is probably worth 30p IMHO, but that matters not a jot as long as everyone is happy to exchange it. The very wealthy are a little nervous of this because they worry that their next egg will be devalued but the harsh reality is that nothing devalues a nest egg like a deep recession.
If you are not convinced by these arguments ask yourself this, what was Milton Friedman’s argument for using QE in the first place? That’s right, you are catching on, he said it would create inflation and hence stimulate the economy.
But it doesn’t, does it? What that tells you is Friedman, Thatcher, Osborne, Hammond, Bernanke, Draghi et al were very happy to create some temporary inflation if they could, because they were confident they could keep it under control with other tools and those same tools will work for MMT. You might also wonder why, knowing it didn’t create much inflation, they kept on doing it and inflating assets. Yes, they and their supporters owned those assets and indeed, most likely even invested in them just as they were about to inflate. What do you think?
The economy has been hijacked since the Thatcher era, initially out of misguided zeal for an untried formula that first seemed to be working but quickly became addictive and dangerous. It was Heroine for a headache.
Later, self-serving politicians bombarded the public and the Modern Press with jargon to the point where nobody dared be heard to suggest anything other than Neoliberal economics does work. You may have noticed, I don’t scare easily. At some stage, I suspect that many began to believe their own press. Let’s face it the political classes require neither great intelligence, nor sincerity to succeed in their chosen profession.
The current government from Cameron forward knew precisely what they were doing. These are members of the Bullingdon club who burn high denomination notes in front of the homeless for fun and live from a trust fund hidden on a nice tax-haven.
Running down wages and salaries reduces their business costs, while controlling new planning applications and pumping the banks with money to invest has inflated their assets beyond even the obscene and in the process creating a perfect environment for the top 1% while gradually starving the remainder. David Cameron was reported at the time he came to power as being one of London’s foremost purchasers of property and although many suggested a period of deflation was in order, nobody predicted it. What we have now is the final throws of this grab. They used Brexit to try and get their ill-gotten gains on which little or no tax will have been paid out of sight of the new European powers due to be enforced beginning in 2021.
Allowing all of that past history to cloud our judgement would be foolish. We need a reliable (under scrutiny) team to move forward with a new policy to get rid of poverty, deflate asset bubbles gradually to a sensible level and focus business on creating value again and creating jobs instead of gambling on bubbles. That sort of a policy would be called MMT in my book, it matters not at all what you call it as long as it starts soon.