The Potential for Economic Collapse

Two entries in Pluralistspeaks that relate to the political economy of early 2013.

Friday, 8 March 2013
Forthcoming Economic Collapse

Friends and I were discussing the future of benefits this afternoon. The probable truth is, we don't know what is going to happen. So many are reliant on benefits just to survive, and marches are going to take place regarding the vicious and discriminatory 'Bedroom Tax'.
Before reading the following, remember (for those who know) that I am a Europhile. The problem with the euro is a problem of inadequate regional policy, and a democratic deficit at the European Parliament whereas, instead, we have the executive arm of governments meeting up at the Council of Ministers producing a legislature at European level. The idea that Spain and Germany are radically different economically and culturally is so, but not so different from say the pound between London and Newcastle and the urge of the Scots or some of the Spanish to be independent and in the EU is as strong as say cultural differences around the continent. Nevertheless I think that shortly the UK could go bust and we will be out of the EU within ten years.
Here is why. (Forget what the government says about employment and the rest. Firms take on cheap labour instead of investing in capital, and many people now work for less money than by which they can live. Every scheme, every sanction, every disability benefit, means the person is not counted as unemployed. People seeking work and partnered to workers are not counted as unemployed. The figures are fiddled. Also, forget what is says about the debt, for what matters is government deficit.) With its commitments, the deficit of the government is reaching about 900% of GDP. Our deficit is worse than all countries except Japan and Ireland. The government can afford the debt because the interest rate is so low. Should the interest rate rise to, say, 4%, the government would go bust. It could not finance the debt.
One means by which the government is keeping interest rates low is by Quantitative Easing. Normally, a government sells bonds and the price falls so that they get purchased. As a bond gets cheaper - but its repayment value stays the same - the interest rate thus rises. The trick is that the Bank of England has been buying these bonds, and thus overpowered the price mechanism. Keeping prices high, interest rates have remained low. Now the Bank is not allowed to destroy the bonds or tell the government not to bother to pay it back. To do that would amount to printing money, and that is forbidden by the EU Maastricht Treaty.
This time the bank has not done any Quantitative Easing. Though, there is now talk of negative interest rates for banks - forcing banks to pay for reserves they keep, as financed by QE. The idea is to force banks to pass on reserves by lending to business. Instead they have been repairing balance sheets. That's not the problem. You cannot push string.
But once there is demand in the economy, there will be a difference between the real cost of buying money and the rates of interest in the banking system. Interest rates rising will fuel bond buying but rates will rise because of the demand for money. The problem is that there is a dam wall in the banks now holding back money. In old fashioned terms, we have had plenty of money in the system but not velocity of circulation. Once the velocity of circulation gets going the money could flood out of the banking system in a vicious circle. Interest rates will be up and down as money starts to pour out - expect inflation to rise, the interest rate rise to inflation, and then the money velocity to rise to inflation to draw on money volumes to push the interest rate down again to cause more pull on the money. Inflation will chase interest rates will chase inflation in a mad spiral of unbacked money.
On the back of austerity - reduced production and formerly depressed prices - the result could soon be hyperinflation. If it doesn't seem right, or logical, watch the pound go down. That will be its measure. Instead of seeing gold and silver prices rising, see them as being flat and the currency falling. That change of perspective is a guideline for what has been going wrong.
Probably there is worldwide general inflation ready to kick in, and, if you think about it, the property bubble was suppressed inflation, as were all those derivatives of insuring against the crash (you cannot - not a bell curve), as is worldwide Quantitative Easing just another bubble.
We have one of the worst Chancellor's of the Exchequer ever; he is a boy doing a man's job and lacks economic insight. The IS LM curves of this economy now have a Keynesian shape, whereas he has been acting like a monetarist. The Japanese at least have had economic and infrastructure development during the last twenty years of their stagflation. We are having cuts, and cuts hitting those most likely to spend. Inflation on top of austerity is worse inflation: it is money backed by few goods and services. The spiral gets faster and faster.
There is no answer to the forthcoming disaster without State power. So I'm making predictions. An economic collapse will cause social breakdown and the British won't stand for unfair austerity any further. We see these strains now in Greece, Italy and Spain. Despite it underpinning our liberties and leading towards a continental identity, the UK will probably be out of the European Union within ten years.
The kind of Sovereign State power needed will not be possible inside the EU. Bonds will be scrapped and even privately held debts will be cancelled. The government will nationalise many financial institutions. The Greeks nationalised pensions and so will we. The banks went bust and governments bailed them out - so now governments go bust and the banks will bail them out, via bank takeovers. The State will have to direct people to work and direct consumption: private institutions like railways, power, water etc. will all come under public control, distributing to all. Housing will be taken over regarding repairs to the stock and much building and renting become the norm.
What I am suggesting here is the collapse, probably in the UK and then in other countries, of the liberal capitalist economy and its 'civilisation' and its replacement by a more social system where rights and responsibilities will have to come through criticism in the political system. The choices will be between UKIP type nationalism and of the Conservative Party, and otherwise State and co-operative approaches of the left and communal left. Whoever is in power, the last market consensus will have to be dropped in favour of a State power consensus.
Creditors will simply lose their money. They will be told to stuff it, and then creditors will start to lend again with adjusted interest rates. We all need a Jubilee like debt clearance. The United States will probably object, but the dollar itself is hugely over valued and the US is rather like the Roman Empire was. Although flexible in terms of change, it does not have a manufacturing base and won't without its own State power.
Normally (!) the financial system collapses and there are a few years when the money supply vanishes, people go bankrupt and then the economy starts up again in real fashion. This time bail outs have kept money sloshing around. This unburst liquidity is now very dangerous.
Let's hope the above does not happen. But any more austerity and it will happen. Governments must now exercise State power and act over and above the financial system. They must now direct projects to get people working and consuming, and direct the flows of finance. Let's be clear. Added value can and does happen in the public sector as well as the private sector. We now need this via investment; we need to understand what Keynes was getting at and that we are a community of people and not a set of individualist property owners. Yes to maximising liberty but yes also to use the levers of power.

Friday, 1 March 2013
From Eastleigh to Potential Economic Disaster

That the Liberal Democrats won will bear them up, though the reality is that they held on with a 14.5% drop in the vote nationally (to 32%, the lowest to win a by-election) and it would result in 42 seats nationally taken straight across. It matters because the -14.5% is consistent with the drop in their poll ratings to the 10% they maintain.
My view is that in the north they will still be hammered. The Tories are also regarded as arrogant failures, -14% here (both had 19% swings to UKIP). Cameron spoke with forked tongue in India (more students as immigrants) and indeed today against capping bankers bonuses; and the drop recorded in immigration is a fiddle because it is based on reducing the student intake, easy to do, though meaning a drop in income for universities. UKIP came close to being first, and would have been other than for the postal vote, and though I don't care for what they stand for their candidate was far more coherent than the Liberal Democrat's. He praised Nick Clegg, whereas in what he didn't know and did know recently he demonstrated his ability to lie again.
Cameron is in trouble, but the one thing the Tories could do for power is sign a pre-election pact with UKIP to have an in-out referendum and act upon it for the next election. Without that the Tories won't win, and it is possible Labour will win but not with a majority. They'd be calling on the 42, but surely not Nick Clegg. If they had that, the Tories would split, because many would be in Europe if sceptical. It needs an out of Europe party to have a cast iron referendum. Surely Cameron is in trouble now, and if he is so is the coalition.
The Liberal Democrat gave a pathetic, written, badly presented speech as the winner, but on mentioning fairness someone shouted out, "What about the bedroom tax?" Quite so. This is why the Liberal Democrats are down 14.5%, because they went into the election with a manifesto and then stood on their heads and even loved aspects of their governance with the Tories. They lied, and misled.
On BBC 1 Question Time the filmaker Ken Loach said something significant. He said UKIP are a renewing party from the right, and what is needed is a renewing party from the left. At one time the Liberal Democrats were that, but they ruined it via the Orange Group being in the leadership and finding such bedfellows with the Tories. They've ruined it. But a win may well prevent a complete meltdown in the future.
The policies aren't working. What people don't realise is the danger we face of hyperinflation. We have a situation now where the loss of the AAA rating could affect bond prices downwards, though the Bank of England by buying government bonds is keeping the prices up/ interest rates down and passing money into the banking system. The money is parked, as the banks have sat on it, but if the economy inflates to get itself moving, the money parked could become a flood all at once and some activity and a small inflation become hyperinflation.
We've had suppressed inflation for a long time now - in property, and that bubble burst, in credit and that has been pulled back, and now in the financial instruments at bank level. Austerity doesn't work, because it rams the brakes on and causes less production and less ability to handle sudden movements in money. The Chancellor of the Exchequer is utterly cluesless, a boy from privilege doing a man's job, and Cameron is a PR man also over-promoted. The biggest mistake of the Liberal Democrats is to have ever had anything to do with these people; the so-called stability of government should have been measured from the beginning and not the road ahead.
For in the short term the bedroom tax and other benefit losses will massively deflate the economy; there are people either underemployed or doing workfare yet counted as employed (the figures are just fiddled - like with immigration), and there are now coming huge job losses from local authorities. This could combine with money moving that leads to an inflationary burst, and the shit we could be in soon just doesn't bear thinking about.
In 1990 communism collapsed and the fact is that in 2010 capitalism largely collapsed. It collapsed because it all went east and the west consumed on the credit. But we now have monetary policies that feed the banks, governments effectively going bust instead, and the money policies could result in chaos.
What we need soon is a combination of State power with economic direction, with spending and State provision, strengthening of individual rights and financial redistribution, and declarations that debt is ended (rather in the Jubilee sense) with creditors having to take it on the chin. Yes, they might be reluctant to lend again, but they will and at real rates of interest. There's a lot of starting again necessary.



Adrian Worsfold

Pluralist - Liberal and Thoughtful