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The need is to fix the system, not just to provide ‘sticking plasters’

Food Bank Cupboard stocked with tinned and packet foodImage by Staffs Live (CC BY-NC 2.0)

“The test of our progress is not whether we add more to the abundance of those who have much; it is whether we provide enough for those who have too little.”

Franklin D. Roosevelt

 

It feels lately that we, like Lewis Carrol’s Alice, have fallen down a rabbit hole into an immensely troubling surreal situation with seemingly no idea how we are going to extricate ourselves.

Whether it is the distressing daily reports of Covid-19 deaths, the disturbing video accounts of the huge pressures on our NHS or care services, the political upheavals taking place across the Atlantic and elsewhere or the most serious challenge of all, climate change, it seems ever clearer that we are in Antonio Gramsci’s ‘time of monsters’ in which ‘the old world is dying and the new world struggles to be born’.

What that world will look like remains to be seen, but recent political events would seem to suggest that we still have some way to go before the ‘old world’ breathes its last. The pandemic, combined with the consequences of forty and more years of Neoliberalism Central which has infected every aspect of our lives and dominates political decision making, has created not only public disillusionment, but also petrification as our institutions sit in their blinkered bunkers holding on for dear life to all they knew.

Whether it’s the existing and growing union between government and global corporations, policy decisions which have increased inequality and poverty and encouraged charity, volunteering and philanthropy to take up the reins of public provision, or the promotion of sound finance as a vital component of good governance, the old structures are embedded in our consciousness.

It wasn’t always like this.

During the second world war, William Beveridge was appointed to investigate social security in Britain and his report, published in 1942, identified five major problems which prevented people from improving their lives. These were:

Want (caused by poverty)

Ignorance (caused by a lack of education)

Squalor (caused by poor housing

Idleness (caused by the lack of jobs or the ability to gain employment)

Disease (caused by inadequate health care provision)

It was recognised that government had a role to play in addressing those five ‘evils’ and as a result of the Beveridge report, the post-war government set up the social security system and pursued policies which aimed to address them including full employment. It may not have been perfect, but it changed people’s lives for the better.

Over recent decades, that connection between the state and publicly paid-for provision, management and delivery of services has been broken. Responsibility for such provision is increasingly being shifted into the charitable/voluntary sector, whilst at the same time, the dominant orthodoxy of individual responsibility has led to shaming and blaming people for their situation as the government takes a back-seat role.

Food banks have become a normalised feature of Britain, as Therese Coffey, the Tory minister for the Department for Work and Pensions, indicated last year when she referred to people using food banks as ‘customers’ and suggested they were a ‘perfect way to help the poor’. It implies that government has no role at all in ensuring the economic well-being of its citizens, and worse, that the 14 million Britons who do not have enough to live on are there through their own lack of moral fibre!

When charities buy into this picture and act as mitigators for a rotten economic system (which drives the poverty and inequality, that drive, in turn, the consequences including hunger, homelessness, and illness), they are not aiming to fix the system, but to provide sticking plasters. As such, it demonstrates how they, too, have been captured by an ideology and accept it without question.

This was made shockingly clear in a paid-for content article in this week’s Guardian. The CEO of the Bethany Christian Trust, when talking about tackling the problem of food insecurity said: ‘if by giving someone a meal we’re sitting them down with people they can talk to about debt counselling, mental health issues, addiction, domestic abuse, or whatever help they might need, then that plate of food can work so much harder’.

Rather than starting with the political roots of these problems, charities increasingly view them as issues to be solved through improving the capacity of the individuals themselves to manage the challenges they face.

Quite simply, this facilitates the shifting of blame onto people, rather than highlighting the failure of the government to make provision for its citizens and is classic neoliberal text. As Neil Valley suggests in his article in the New Internationalist ‘The Self-Help Myth’.

‘The pervasive rhetoric of personal responsibility has transformed the role of government and society in the neoliberal era. Where once the role of government was to safeguard the general happiness of the majority of citizens, albeit to varying degrees, its primary role now is to facilitate the conditions where each citizen can take on more and more individual responsibility, absolving the state from its responsibility towards its citizens.’

Then step in charities to fill the gap in service provision and provide the mitigating support for the rotten toxic system which has created the need in the first place and designates those in receipt of such support as customers rather than victims.

The increasingly pervasive narrative, which is being driven further by the pandemic crisis, is that charities and the voluntary sector should be at the heart of our local communities to ensure that vulnerable people don’t fall between the cracks, rather than publicly paid for, managed and delivered state provision.

It was, therefore, all the more disconcerting this week to read the proposal in the left-wing publication The Tribune that a National Food Service should be set up. Whilst its aims to serve the public good rather than private profit are indeed laudable, one has to question the logic.

Of course, one could not object to the removal of private companies delivering public services, given that the tentacles of private profit are growing exponentially as government distributes contracts to its friends and large corporations with few strings attached, whilst at the same time the coffers remain largely bare to serve the needs of those who have for decades been at the sharp end of government policies. The resulting poverty and inequality have been highlighted during this crisis.

The proposal, however, seems to suggest that we mitigate for the crisis of capitalism being played out in the growth of hunger through mutual on the ground action, rather than dealing with its root causes – government policy driven by ideology. We don’t need a plan to ‘respond’ to this fundamental crisis of capitalism, we need a plan to change it; to put public purpose and the interests of citizens, not to mention the planet, at the heart of all government policy.

Over the last few decades, working people have borne the consequences of a toxic economic ideology underpinned by the notion of monetary scarcity, which has led to the reduction in their share of their productivity, which has translated into lower wages, insecure employment and underemployment and a decline in living standards. Poverty is the direct result. The constant repetition of these ideas via politicians, think tanks, economists and the media has led us to believe that this is the inescapable default.

Government, far from serving its citizens, has overseen through its employment and other policies, huge disparities in wealth and access to resources, allowing, for example, chief executives of big corporations to earn many more times that of their employees, not to mention garner political influence as a result.

To add to this picture is the decimation of our post-war public and social security infrastructure, which existed to provide health and social care through various publicly paid for institutions, to ensure that those in need had access to shelter, food and warmth, in times of personal tragedy, sickness, unemployment or economic collapse. When this infrastructure was built, the profiteers had no place in this model and nor should they today.

Whilst the human suffering continues to play out across the nation, the government cynically continues with its U-turns on policy in the vain attempt to keep its MPs and the public on side. Last week, as noted in the MMT Lens, Boris Johnson told MPs that ‘most people would rather see a focus on jobs and growth in wages than…welfare.’ This week, with his signature tune U-Turn, he has indicated a potential rethink of ending the £20 a week Universal Credit uplift, saying he wanted to ensure that ‘people don’t suffer as a result of the economic consequences of the pandemic’. You couldn’t make it up.

Yes, indeed, to more jobs through the implementation of a Job Guarantee, to drive better wages overall and restore the government’s role as the price setter and rebuilding public service provision. But in the meantime, let’s ensure while the consequences of the pandemic continue to cause economic and social pain, that all people have enough to pay their bills and keep food on the table without worry, stress or having to get into debt to keep their heads above water. We have witnessed the power of the public purse, let us not allow that knowledge to be polluted by the restoration of household budget politics.

It is regrettable that politicians, journalists, institutions and think tanks, in their weekly forecasts of doom and gloom, continue to build up the narrative of money scarcity and a future price to pay for this massive round of government monetary intervention. A narrative that will be used to justify eventual hard decisions or another round of austerity in some form or another.

Whilst the livelihoods of many people lie in the balance, not just for now but in a rapidly changing world, we still have to endure the false notions of tax rises to pay for government spending and the penchant for sound finance. Such narratives suggest, not only that people must suffer, but also that the cost of saving our planet from climactic destruction will be too high.

The fact that the government continues to find huge sums of money to support businesses and yet quibbles over a few pounds to working people, suggesting that it is unaffordable should surely be a public conversation starter!

As the chancellor opines that there are some hard choices ahead, one of his treasury ministers clearly of the deficit dove variety, softens the blow by suggesting that the need for tax rises to tackle the record levels of government borrowing could be delayed at least until the economy ‘bounces back’. As if somehow increased tax revenues equate to the capacity to spend or pay down the national debt.

The experts at the Institute of Fiscal Studies and other think tanks then put the fear of God into the public that £40bn in tax rises might be necessary to put the public finances back onto a sustainable footing. Thus, making that public even more cautious about the government’s future spending plans. Self-fulfilling prophecies come to mind.

And then, just this week, when people thought that the vast round of government spending signified a change of approach to managing the economy, Rishi Sunak told Conservative MPs that he will be using his March budget to begin the process of restoring ‘order’ to the public finances through implementing higher taxes.

To those Tories who would like to see the Universal Credit uplift continue beyond April, he gave a reminder of its high cost which represents, according to his calculations, an equivalent of 1p on income tax plus 5p per litre on fuel duty. Thus, further reinforcing the idea that the provision of higher welfare benefits means collecting tax from elsewhere to cover it.

The ‘someone, somewhere will have to pay for it’ model of the state finances will no doubt be used cynically to drive further wedges between the haves and the have nots and justify the further decimation of the already inadequate social security safety net.

According to this narrative, the magic porridge pot is running on empty and needs replenishing in order to pay down debt and avoid a giant burden for future generations.

This tale of supposed coming woe serves to keep people in their place while reinforcing the old myths about how governments spend. It displays both economic illiteracy and a disregard for the lives of those who will lose out as a result, not to mention addressing the biggest challenge of all – climate change.

And then at the ‘left’ end of the household budget scale, we have economists, opposition politicians, unions and other so-called experts, urging the Chancellor to take advantage of low borrowing rates of interest to avoid tax rises until the economy gets back on its feet and restores tax revenues, or reinforcing the false narratives about taxing the rich to pay for the pandemic. The household budget model is endemic and those on the political left keep shooting themselves in the foot repeatedly.

A paper published by the LSE’s International Inequalities Institute last December, using data from 18 OECD countries over the last five decades, concluded unsurprisingly enough that tax cuts for the rich didn’t trickle down; that they contributed to inequality and did little to stimulate business investment.

The authors then went on to suggest that it was time to tax the rich more to repair the public finances. This was backed up in the same month when the Wealth Tax Commission, founded in April of last year, concluded that a one-off wealth tax would raise significant revenue and be fairer and more efficient than other alternatives. To be exact, it suggested that a ‘one-off wealth tax on millionaire couples would raise £260 billion’ The implication being yet again that such a tax could be used to repair the public finances.

Whilst we can’t avoid these false tropes, which lead the public astray and reinforce the messages that government spends like a household, we can challenge them. When Matt Hancock, the Secretary of State for Health and Social Care, bleats on as he did this week about the NHS Pay review body taking ‘account of the extremely challenging fiscal and economic context’ in its decision about future pay rises, we can show the public that such decisions have no connection, either with the current state of the public finances or the future monetary affordability of those pay rises.

We can reinforce the message that curtailing public sector pay won’t increase the ability of the government to ‘set the public finances straight’, any more than the decade of austerity did. It could actually have a negative, indeed disastrous, effect on the economy at a time when it will, without doubt, need continuing government support.

Aside from the fact that public sector and, indeed, other key workers have seen their pay dwindle in real terms as a result of a decade of pay freezes or inadequate employment legislation, and that the pandemic has revealed the vital nature of their contribution to society, all increasing taxation will do is leave less money for working people to spend into both the national and local economies. Also, should that increased taxation fall on corporations, (as is being suggested) who will likely pass that additional cost on through higher prices to working people anyway, it will create a double whammy effect.

Whilst a pay rise will increase tax revenues, it will not increase the government’s capacity to spend. But we see the false narrative again in a study published this week by the London Economic Consultancy. The report claimed that the government would recover 81% of the cost of any pay rise in additional taxes, which would, in turn, have significant ‘knock-on’ benefits for the Treasury. Clearly suggesting that tax funds its spending.

Whether from the left or right of the political spectrum, the public is treated daily to a mishmash of false information dictated by the dominant economic paradigm which masquerades as truth. It’s no wonder that people are confused and feel disempowered or turned off by politics and economics, which they feel do not relate to their lives at all, even though, in reality, these things have everything to do with them.

While politicians, journalists and economists argue about monetary affordability and who should pay for government spending, people are dying and will continue to die for the want of a government that puts their interests first.

What happens next will depend on a successful challenge through raising public awareness that there is indeed an alternative to the vast disparities in wealth, the rise of poverty and inequality, the whittling down of democracy and increased corporate dominance in our lives. And it starts with understanding how government really spends.

 

Upcoming Event

Phil Armstrong in Conversation with Pavlina Tcherneva – Online

January 24th 2021 @ 4:00 pm – 5:30 pm GMT

GIMMS is delighted to present another in its series ‘In Conversation’.

Phil Armstrong, author of ‘Can Heterodox Economics Make a Difference’ published in November 2020, will be talking to Pavlina Tcherneva.

Pavlina is program director and associate professor of economics at Bard College and a research associate at the Levy Economics Institute. She conducts research in the fields of modern monetary theory and public policy and has collaborated with policymakers from around the world on developing and evaluating various job-creation programmes. Her work on the Job Guarantee spans over 20 years.

Author of the recently published book ‘The Case for a Job Guarantee’, she challenges us to imagine a world where the phantom of unemployment is banished and anyone who seeks decent living-wage work can find it – guaranteed. It will be of particular relevance as we begin to grapple with the economic fall-out of the Covid-19 pandemic but for anyone passionate about social justice and building a fairer economy it should be essential reading.

We invite you to join us for this informal event which we are sure will be both stimulating and insightful.

Tickets via Eventbrite

 

Past Event

Phil Armstrong in Conversation with Fadhel Kaboub – Online

Author and MMT Scholar Phil Armstrong talks to professor of economics and president of the Global Institute for Sustainable Prosperity Fadhel Kaboub about how MMT insights apply to the global south, colonial reparations, the MMT Job Guarantee contrasted with Universal Basic Income, and much more.

 

 

Audio via the MMT Podcast here

 

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The Gower Initiative for Money Studies is run by volunteers and relies on donations to continue its work. If you would like to donate, please see our donations page here

 

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The post The need is to fix the system, not just to provide ‘sticking plasters’ appeared first on The Gower Initiative for Modern Money Studies.

The Covid-19 pandemic shows the need for change. For a real ‘Reset’.

Button with label "Push to reset the world"Photo by Jose Antonio Gallego Vázquez on Unsplash

‘We live in capitalism. Its power seems inescapable. So did the divine right of kings.’

Ursula K Le Guin

The year 2020 will be not be remembered with any great affection. So much suffering, loss of human life and economic uncertainty has left the nation in turmoil. Whilst in normal times we would be welcoming the new year with resolutions and hope for better days to come, the prospects for the future remain very uncertain.

Whilst the government’s handling of this pandemic crisis has been chaotic and indecisive with disastrous consequences, it has also revealed the dire state of our public and social infrastructure for which decades of ideologically driven government policies have been responsible. That, combined with the vast wealth and other inequalities that exist in both rich and poor countries across the planet and the climate tsunami following up frighteningly behind, should leave a bad taste in our collective mouth. It should start to make us question the very foundations of the economic model now turning to sand before our very eyes.

Covid-19 has exposed in the most distressing way the damaging consequences of the pursuit of balanced budget narratives which have allowed governments to justify public sector rationalisation or austerity on the grounds of unaffordability, and overseen a huge increase in poverty and inequality. Successive governments have abdicated their responsibility for the lives of citizens; their responsibility to create a fairer distribution of wealth and real resources and ensure that the public infrastructure meets their needs. Instead, they have plumped in favour of that elusive but all-seeing ‘god of the market’ which, in real terms, has meant ceding control to global corporations who direct the policy orchestra and pouring public money into the pockets of those same corporations with little transparency or accountability.

Whilst the government has found the power of the public purse to manage this crisis, there have been winners and losers throughout which reflect its ideological persuasion. It has only been with public pressure that it has been forced into political U-turns to help some of the poorest people in our communities, whilst leaving still others in distress and without adequate support. The road to Damascus moment still eludes a government which has chosen a path that so far has only led to economic hardship and inequity for many and yet great wealth for a few others.

It has also done so with the usual threats of a financial price to pay in the future to keep the household budget narratives of state spending alive and well. It would not do for the public to be disabused of the notion that taxes fund spending, that government has to borrow to cover its deficit and that public debt is real and will require difficult decisions at some unspecified time in the future. Such narratives are vital to government and will, without challenge, allow them to be able to finish off the job of destroying publicly paid for and managed public and social infrastructure and thus ensure the continuing dominance of global corporate power. We do indeed face a continuing hollowing out of democracy in favour of a growing alliance between the state and big business and the big political revolving door.

Whilst GIMMS and other educational organisations across the world have made huge strides in raising awareness of how money really works, the task ahead remains a daunting one. The weekly news is testament to the ongoing consequences of government policies and the spun narratives of how government spends but also encouragingly shows the power the public has to effect change, and not just through the ballot box. The on-going saga of free school meals continues to rumble on and elicit government U-turns. The latest, and most shameful, were the pictures on social media of the meagre ‘rations’ from a private company contracted and paid huge sums to provide substandard food packs which it turned out largely reflected government guidelines and did not meet the standards for the nutritious, balanced diet all children need to grow and thrive. It is to be regretted that the government, in the same week, went on to tell headteachers in England not to supply vouchers and food parcels to disadvantaged children during the February half-term, signalling it was already doing enough which is clearly not the case. There are no excuses for hungry children, or hungry adults for that matter.

The fiasco was yet another example of public money being poured into private profit and at the same time failing to address the reasons for children going hungry in the first place. Poverty and hunger are not new phenomena. Covid-19 has, without doubt, put a spotlight on the prevailing economic system and the economic decisions of successive governments which have not only been responsible for increasing poverty and inequality through employment, welfare and taxation policies but also shifted blame and created widening societal divisions which allow the real authors of economic distress to go scot-free.

It is therefore shameful that the Chancellor Rishi Sunak whilst facing opposition from campaigners is still considering cutting the meagre £20 per week universal credit uplift which has helped people struggling to get by during the pandemic. The consequences of the crisis will be with us for many months to come, possibly years, and therefore the government with its power of the public purse has no excuses when it comes to ensuring that its citizens can pay their bills and put food on the table while the disruption continues. Instead, its policy responses have proved not strategic but piecemeal and ill-thought-out with plenty of U-turns along the way.

Whilst we need the power of the public purse to mitigate the economic consequences of the current crisis, we also need a government with a long-term strategy for addressing the poverty and inequality that has arisen over decades and which has allowed top managers to reap excessive monetary rewards whilst depriving working people and their families, whose standards of living have declined substantially through low incomes and insecure employment.

Boris Johnson suggested earlier this week that he was still in favour of reducing Universal Credit saying:

‘what we want to see is jobs, we want people in employment, and we want to see the economy bouncing back. And I think most people in this country want to see a focus on jobs and growth in wages than on welfare’.

A change of heart? Given that the Tory government has presided over exactly the opposite over the last 10 years through austerity and economic policies which have increased economic instability whilst at the same time serving the corporate estate, instead, it is likely to be yet another in a long line of so far undelivered promises to level up. However, the sentiment is correct and is what should be driving government policy. We need a recognition of the power of the public purse to pursue full employment through a Job Guarantee and the vested power of government to legislate fair employment terms and conditions with the aim of shifting the balance of power back to working people instead of where it currently lies in corporate hands with government approval. We need a government prepared to address the key issues of our time using its currency-issuing powers, not just for the coming months but for always. Whilst Rishi Sunak calls upon the nation to spend the savings resulting from lockdown to get the economy going again (aside from the fact that he is turning a blind eye to the many millions of people as reported by the Resolution Think Thank this week who have lost out or got into further debt as a result of the pandemic adding to their already insecure lives) the looming crisis of climate change has been put on the back burner and time is running out. The god of growth must be worshipped anew to get the economy back into shape.

Aside from the fact that people are unlikely to spend their savings like drunken sailors in the near future, given the on-going uncertainty about the economy and jobs, exhorting the gods of growth and indiscriminate private consumption as a solution to economic slow-down would not only be folly but denies the clear power of government to spend to effect real and sustainable change.

We need a sea change in how we live our lives to address the already happening climate catastrophe and indeed, it will only be through large scale government action in spending policies and legislation that will enable this to happen. There is a pressing need for a national investment strategy that includes a massive and long-term investment in education and training in order to secure our future productive capacity. We much focus on high-skilled, low-carbon and well-paid jobs both for the private sector and in a much-expanded public sector to ensure high-quality basic services are provided to everyone, including our disabled and elderly citizens. Our nation must become more productive if we are to reduce our working week and support our retirees and support to those nations without the necessary real resources to support their communities.

The overarching need is to protect our environment for future generations which should also include acting to redress the vast wealth inequalities that exist. We need to restore our sense of the value of publicly paid for and provided public sector work to national well-being, implement a Job Guarantee to provide stability through an effective countercyclical response to the inevitable economic ups and downs all economies face, and a living income for anyone who is unable to work for health reasons or caring or other essential duties including higher education. Of course, these will not be magic bullets to bring about a perfect world, but provide a basis for a conversation that we need to have.

These are important decisions, not just concerning the big macroeconomic questions about creating an efficient functioning economy, but also relating to the sort of society we want to see. For left-wing progressives, this would suggest creating a fairer and more equitable society where people have sufficient wages to live comfortably with adequate nutrition and good living conditions as well as good public services such as health and education. Assuming that the future will bring forth a political party that has the express intention of addressing these issues, change is in our collective hands as an electorate and we should not forget the power we hold.

It is regrettable that currently there is no such party dedicated to the change we need and that all roads are still leading to an ever-distorted capitalism wherever you place the X on the ballot paper.

Whilst the very real human consequences of government decisions and its policies continue to play out in our communities and our families the government, opposition politicians, economists and journalists continue to pound out the messages of monetary scarcity; either talking about the need for ‘hard choices’ to deal with the deterioration of the public finances or delaying the ‘repayment pain’ until economic conditions will allow.

Whether it’s Rishi Sunak the Chancellor or his shadow opposition sidekick Labour’s Annaliese Dodds, they both adhere to a household budget narrative of the public accounts, in other words, the diktat of sound finance as if a government suffered from the same constraints as business. The operative question in either case being, at what point do you enact such fiscal tightening, not whether you actually need to. How the state really spends cannot have escaped their notice, and yet they stick to the orthodoxy like glue.

Whilst that is undeniably to be expected with the Conservatives, whose agenda is more about creating an alliance with big business under cover of stories about monetary scarcity and ‘hard choices’, Annaliese Dodds in this week’s Mais lecture indicated clearly her party’s on-going adherence to the false notion that government constraints are monetary. Whilst, to be fair, she gave a cutting analysis of the effects of government policies on people’s lives both before and after the arrival of Covid-19, she stuck to the orthodox economic mantras. Namely keeping the City sweet by maintaining the joke of supposed Central Bank independence and having a ‘responsible approach to government debt.

She summarised her approach to fiscal policy as requiring ‘a set of rules around both annual and the stock of debt, that simultaneously demonstrates a prudent approach to the public finances and leaves space for investment in the future and the ability to adapt to crises’. A sound approach to the public finances she said must ‘also include consideration of the quality and effectiveness of public spending.’ Whilst such evaluation should always be a part of government spending strategies (and clearly, we have seen in recent months and years the exact opposite) the concept of sound finance continues to be the guiding doctrine of politicians on both sides of the political spectrum. They might have different spending objectives, but both are couched within the clear limitations of household budget thinking.

As society implodes as a result of rising poverty, inequality and ill health which has arisen as a result of government policies and placed increasing pressures on public services such as our NHS which this last year has bravely served the nation in a deliberately created environment of insufficient staff, facilities and other resources, there is only one direction in which we can place the blame. Governments whose decisions have favoured market solutions through privatisation and legislative policies which favour them – with shocking consequences.

In similarity to nature’s web of life, which is defined by its interdependence, our economy does not exist as disparate parts. The economy represents the lives of working people and the businesses that employ them, and its health is reliant on the public and social infrastructure provided by the government to support it. Remove one vital link and you risk that eventually the whole will collapse.

This is the frightening consequence we already face, not just in the real but finite resources upon which our societies are built and owe their existence, but also our dependency on the goodwill and care we express for others. As reliance on charitable institutions to feed hungry people or deal with rising homelessness increases, or rich philanthropists replace public institutions with the equivalent of poor law boards dictating the pace and deciding who will be a beneficiary, our society will continue to break down on the basis of a ‘convenient lie’ that the state has no money of its own and there is no alternative course of action.

Instead of examining the public accounts and deducting from the financial position the health of a country, a future government should be turning that idea on its head to see the reality of the challenges we face. The reality of the real constraints which are not money but real resources and how they can be managed fairly in the interests of all citizens. The fast-approaching reality of climate change and its consequences threaten to engulf us if world governments fail to work together to create better, fairer and more sustainable solutions.

We need a ‘Reset’. Not the ‘Great Reset’ being promoted by the World Economic Forum which, whilst sounding just the thing to address rising inequality and climate disaster, will maintain the same power structures with the same corporations dictating the rules in the interests of accumulating more profit and wealth whilst still clinging to the sham economic model which seeks to keep power in the hands of the few.

We need quite a different ‘Reset’ as suggested by Associate Professor Fadhel Kaboub in a GIMMS ‘in conversation’ event last week. One where public purpose, not profit or greed, directs government spending and legislative actions for a sustainable and fairer future and without which the light at the end of the tunnel will recede, not get closer.

There is an alternative and history is still to be written on the choices we make. We once believed that the Earth was flat, that it was at the centre of the universe and the sun and planets revolved around it. Those notions were disproved by the observations of scientists like Copernicus and Galileo. We need now to disprove the notions that money is scarce – not because knowing it makes a difference in itself, but because knowing it will enable us to decide what history will eventually record about the decisions that were taken as a result.

We can be on the right side of history if we choose to be.

 

Upcoming Event

Phil Armstrong in Conversation with Pavlina Tcherneva – Online

January 24th 2021 @ 4:00 pm – 5:30 pm GMT

GIMMS is delighted to present another in its series ‘In Conversation’.

Phil Armstrong, author of ‘Can Heterodox Economics Make a Difference’ published in November 2020, will be talking to Pavlina Tcherneva.

Pavlina is program director and associate professor of economics at Bard College and a research associate at the Levy Economics Institute. She conducts research in the fields of modern monetary theory and public policy and has collaborated with policymakers from around the world on developing and evaluating various job-creation programmes. Her work on the Job Guarantee spans over 20 years.

Author of the recently published book ‘The Case for a Job Guarantee’, she challenges us to imagine a world where the phantom of unemployment is banished and anyone who seeks decent living-wage work can find it – guaranteed. It will be of particular relevance as we begin to grapple with the economic fall-out of the Covid-19 pandemic but for anyone passionate about social justice and building a fairer economy it should be essential reading.

We invite you to join us for this informal event which we are sure will be both stimulating and insightful.

Tickets via Eventbrite

 

Past Event

Phil Armstrong in Conversation with Fadhel Kaboub – Online

Author and MMT Scholar Phil Armstrong talks to professor of economics and president of the Global Institute for Sustainable Prosperity Fadhel Kaboub about how MMT insights apply to the global south, colonial reparations, the MMT Job Guarantee contrasted with Universal Basic Income, and much more.

Audio via the MMT Podcast here

Video will be available soon.

 

Join our mailing list

If you would like GIMMS to let you know about news and events, please click to sign up here

Support us

The Gower Initiative for Money Studies is run by volunteers and relies on donations to continue its work. If you would like to donate, please see our donations page here

 

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The post The Covid-19 pandemic shows the need for change. For a real ‘Reset’. appeared first on The Gower Initiative for Modern Money Studies.

An Accounting Model of the UK Exchequer

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Published online 26th December 2020

 

In this timely study, the authors investigate the structure and function of the UK’s public financial institutions, in groundbreaking depth and scope.  Drawing on historical sources from the birth of the modern sterling economy, testimonies from government departments, official documentation, and parliamentary abstracts, the study forensically disassembles the components of the UK’s government finances, debunking ideology and half-truths along the way.

The authors expose the myth of Bank of England “independence”, and illustrate the central, driving role of HM Treasury in the UK financial system and the primacy of Parliament in determining spending and resourcing in the UK.

The study describes in detail how the financial operations of the UK Government work, and the accounts and structure of the UK Exchequer, including its relationship with the devolved UK administrations.

Supported with references from forgotten or little-known sources and extensive appendices detailing the history of the UK financial system, this important work destroys the myths and obfuscation of governments, economists and the financial services sector that has allowed decades of needless austerity to wreak social and political devastation in the UK and beyond.

As such, this is an overdue exposé that has implications beyond the field of economic literature and challenges the basis of UK economic policy since the 1980s.

For any queries or to provide comments, please contact the authors

 

An Accounting Model of the UK Exchequer

 

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The post An Accounting Model of the UK Exchequer appeared first on The Gower Initiative for Modern Money Studies.

Fiscal Dominance As Obfuscation

Published by Anonymous (not verified) on Mon, 21/12/2020 - 3:00am in

Tags 

MMT

One phrase that keeps being used by mainstream economists is "fiscal dominance." This is a fuzzy term that is being used to express disapproval but yet appearing to be a neutral technical term. However, the simplest way to view the discussion is that neoclassical economics was ambushed by reality, and that they are hiding behind jargon to distract from this.
What is Fiscal Dominance?Although there might exist a formal definition of fiscal dominance somewhere, in practice, usage in commentary is somewhat fuzzy. A recent example is in the speech "The shadow of fiscal dominance: Misconceptions, perceptions and perspectives", by Isabel Schnabel -- a member of the executive board of the ECB.

At the time of the Maastricht Treaty, high government debt was seen as a major threat to central bank independence, and it was feared that fiscal dominance could induce a central bank to deviate from its monetary policy objectives, endangering price stability.
This was not just idle speculation. History is full of examples of high government debt eventually being resolved through higher inflation and financial repression.[1]

The examples of "high government debt eventually being resolved through higher inflation and financial repression" is based on an article by Carmen Reinhart and M. Sbrancia. I have not seen the article in question, but based on Carmen Reinhart's track record in the area of fiscal policy (routinely conflating currency sovereigns with ones within a pegged currency system), I think the fact that no examples are given is telling. If we confine ourselves to relevant examples for developed currency sovereigns, we are stuck with the relatively small sample of developed welfare state economies in the post-World War II era. Although "financial repression" existed, inflation was generally minor until the 1970s -- when debt levels had been reduced by growth.
However, the precise definition of fiscal dominance has been left aside. In practice, it appears to be as follows: central banks are forced -- for some unspecified reason -- to set aside their inflation mandates because of fiscal policy. However, there seems to be an even vaguer version: central banks have to take into account fiscal policy when determining monetary policy.
Since no developed country has faced high inflation in the past decade, one would need to be wildly revisionist to believe that central banks have set aside their inflation mandates because of fiscal policy. In fact, central bankers have failed in their promise that they could hit their inflation targets solely with monetary policy: they generally missed to the downside in the post-Financial Crisis period. They came up with an excuse -- it's all the Zero Lower Bound's fault -- something that they neglected to warn anyone about in the 1990s when inflation targeting was being pushed.
So we are stuck with the weaker version: they need to take into account fiscal policy when setting monetary policy.At the Operations Level, Monetary Policy and Fiscal Policy are Joined at the HipThe first thing to note is that it should surprise nobody that monetary policy and fiscal policy are linked. At the level of monetary operations, the central bank is the central government's banker, and operations need to be coordinated.
The pre-2020 Canadian framework is the simplest one to comprehend this issue. I described a simplified model that captures its working in my handbook, Understanding Government Finance. (In 2020, the Bank of Canada undertook Quantitative Easing operations, which changed things.)
In that system, private banks have an end-of-day target of a $0 balance in the payments system, which are normally described as settlement balances. In systems with reserve requirements (typical in Economics 101 textbooks), these balances are called reserves. Meanwhile. the fiscal arm of government banks at the central bank.
The net result is that the central bank needs to cancel out all the net transactions between the private sector and the central government every single business day. Some of these transactions would be the purchase/sale of banknotes as they are taken into/out of circulation, but the rest would be net monetary transfers of the central government.
This means that the central bank has no choice to accommodate every single fiscal operation of the government: sending out payments to the private sector, and taking tax payments, and bond issuance. If the central bank did not coordinate with the fiscal arm (e.g., Treasury), the banking system would either be short of required settlement balances, and/or the central government bond auctions would fail. Although some economists appear to believe that central bank independence allows central bankers to arbitrarily force the central government to default by disrupting the payments system, there is no evidence that there is legal support for that position in any country with a sane monetary system. (The Euro area provides the exception.)
The implication of this is that it makes no sense to pretend that monetary operations can be independent of fiscal policy. However, this tells us nothing about interest rate policy.Lender of Last ResortThe next area where central banks need to take into account "fiscal policy" is in credit policy (in a wide sense). Central banks are lenders of last resort, and one of their most basic tasks is to ensure the stability of the wholesale financial system. The central bank is a bank to other banks (hence the name), and it can only implement policy via a functioning banking system. 
Although many mainstream economists want to view monetary policy as twisting an interest dial to get optimal outcomes for society, monetary policy will have no effect on the economy if the intermediary banks are melting down and are unwilling or unable to borrow and lend. The paralysis of the financial system will immediately freeze the real economy, as 2008 demonstrated.
The most awkward problems come from sub-sovereign and private sector borrowers. Central banks can either liquidate the financial system, or engage in lender-of-last-resort operations. These were across the board in 2008, but in 2020 we saw policies such as the Bank of Canada launching extensive repo operations in provincial debt. The central government could have bailed out those borrowers with fiscal operations, but lender-of-last-resort operations make far more sense, since they can easily be wound down once the financial system regains its footing.
These operations can blur into operations with central governments. In the case of the ECB, there is no "central" government, and all of the "sovereigns" are in the same position as Canadian provinces. The ECB had no choice but to bail them out to keep the peg system from disintegrating. This reality is distressing for the neoliberal consensus, but is completely unsurprising for heterodox critics of the euro framework.
Even floating currency sovereigns see interventions in central government markets -- QE, the Great Treasury Repo Crisis of 2019. Although doom-mongers will claim that these interventions are needed to keep the central government from defaulting, the reality is that what was buckling was private sector government debt trading infrastructure. Even if neglected, the central government would get financed, but term premia might blow out in order to draw in risk allocations from end investors to reduce balance sheet stress of dealers. This would raise borrowing costs across the board, messing up the transmission of monetary policy to the real economy. The central bank has little choice but to stabilise the wholesale debt markets, or else its interest rate policy lever would end up compromised.Taking Debt into Account When Setting Interest RatesOnce we put aside operations needed to stabilise the wholesale debt markets, we are left with a very vague notion: the central bank needs to take into account central government debt levels and/or the deficit when setting interest rates. 
(The linkage from debt stocks to the flows in the real economy shows up as the result of interest income flows, which are the average interest cost times the stock of debt. Otherwise, there are no "magic levels" for the debt/GDP ratio.)
The question is: why should the central bank care?
This is where mainstream theoretical squishiness about government debt shows up. Do they believe that floating currency sovereigns like the United States, Canada, and Japan can be forced into involuntary default? At present, when MMT discussions come up, the usual story is that "we knew it all along that those governments cannot be forced to default by bond vigilantes." However, if we believe this, there is no reason for central banks to "bail out" such central governments. (Once again, the ECB is not in this boat.) The government will always get financed at the rates implied by the risk-free curve, and the front of that curve is under complete control of the central bank. (I put aside issues of term premia, but we need to keep in mind that the average duration of issued debt is fairly short, since the amount of long-term debt that needs to be rolled over every year follows an inverse relationship with its maturity.)
To repeat: there is absolutely no reason for the central bank to believe that interest rates need to be set any level to avoid default. Anyone who suggests otherwise has to provide the mechanism for bond vigilantes to force a default. There is a deafening silence of plausible scenarios in which that happens.
What does the central bank need to worry about? We need to circle back to Functional Finance 101: the constraint on a floating currency sovereign is inflation.
"Fiscal dominance" just means that the central bank needs to take into account fiscal policy when setting rates. In particular, it needs to take into account the interest income channel, which implies that raising rates raises interest expenditures by the central government, and may be inflationary.
This is literally what heterodox economists have been pointing out for decades. It is only a surprise to economists who have effectively ignored fiscal policy in their models. "The government needs to obey the inter-temporal governmental budget constraint, so fiscal policy has no effect on the economy!" That was a ridiculous analytical assumption, and so it needed to be abandoned.No Magic Wand to WaveThe whining about fiscal dominance is just a way of wishing that debt/GDP ratios reverted to relatively low levels, so that the interest income channel was negligible. However, there is no good way to get there from here.

  • The government could decide to default, creating the financial crisis conventional economists were worried about. This would be an insane overreaction to the analytical failures of mainstream models. Just get better models, and deal with it.
  • Rapid nominal GDP growth would shrink debt ratios, hence reduce the importance of the interest income channel. However, unless real GDP growth magically rises a lot, that means we need a good clip of inflation. In other words, we need to have high inflation so that central bankers can go back to pretending that they can control inflation solely by raising interest rates.
  • Austerity policies would take decades to reduce the ratios, as seen in the last cycle. Since this option conforms with the neoliberal ideology, it is a safe bet that this is what will be recommeded.

The sensible solution would be to accept that MMTers were correct, and that fiscal policy settings ultimately control inflation. This is unacceptable, since it means that technocratic central bankers can no longer pretend to be controlling the economy and handing out optimal outcomes.Concluding RemarksFiscal dominance is going to be an extremely common buzzword in the coming years, mainly because its use provides a mechanism from discussing the relationship between monetary and fiscal policy in plain English. It would be quite uncomfortable if the fad of using clear language caught on, since it would be clear that heterodox critics of the monetary policy dominance doctrine were correct all along.
(c) Brian Romanchuk 2020

Yes, MMT Is Not Monetarist

Published by Anonymous (not verified) on Tue, 15/12/2020 - 1:56am in

Tags 

MMT

Reader Jerry Brown sent me a link to yet another Scott Sumner article. In this article, he lists 6 points raised by MMT that he accepts as correct, yet he feels the interpretation is incorrect. I looked at the article quickly, and I would summarise the points as: MMT disagrees with the Monetarist interpretation, and he assumes that Monetarism is correct.
It is extremely obvious that post-Keynesians/MMTers disagree with Monetarism. (From a historical standpoint, these debates were essentially over by the time MMT formally split off as a new school of thought, this should be credited to post-Keynesians.) However, this is not really that big a deal, since very few economists now agree with Monetarists in these disputes, other than the people whose macro knowledge consists of Economics 101 textbook snippets. (The big mainstream macro textbooks were written when the mainstream was crypto-Monetarist, and they have not kept up with the times.)

I want to find interesting MMT critiques for my primer, but Sumner's complaints do not fit the bill. If someone clings to Monetarism in 2020, I doubt that anything I write will cause them to update their priors. (As for my primer, I found enough edits in my last pass that I decided to do one last pass over the coming weeks so that I can send my manuscript to an editor in the new year. This slippage is somewhat annoying in terms of the freshness of the text, but since I hope the book will have decent sales, it should be cleaned up. My book sales are not front-loaded like most books in bookstores, so most of my readers are reading the text years after publication anyway.)

Sumner And Endogenous Interest Rates

Published by Anonymous (not verified) on Mon, 14/12/2020 - 4:50am in

Tags 

MMT

Scott Sumner has continued his efforts to understand the MMT textbook by Mitchell, Wray, and Watts (which I will summarise as MWW), but he is running into problems. However, those problems just reflect Sumner's Monetarism, which is out of step with modern mainstream and post-Keynesian understanding of interest rates. 
He is concerned about the wording of the textbook, but that textbook has some of the same problems of any discussion of interest rates that takes place in introductory economics textbooks. If we want to discuss interest rates properly, we need to understand the concept of rate expectations and the risk-free yield curve, on top of understanding how private sector interest rates are related to that curve. The mathematics of that understanding is beyond the target audience of an Economics 101 textbook.
Sumner writes:

On page 464, you can see where MMTers’ confused ideas about endogeniety cause them to really go off the rails:
[Quote from MWW] "The fact that the money supply is endogenously determined means that the LM schedule will be horizontal at the policy interest rate. All shifts in the interest rates are thus set by the central bank and funds are supplied elastically at that rate in response to the demand. In this case, shifts in the IS curve would not impact on interest rates. From a policy perspective this means the simple notion that the central bank can solve unemployment by increasing the money supply is flawed." [END EQUOTE]
No, no, a thousand times no!!! The final two sentences absolutely do not follow from the first two sentences, which leads me to believe that MMTers misunderstand the concept of endogeniety.
It’s cheating to claim the money supply is “endogenous” and then completely ignore the fact that the interest rate is also endogenous. In the second sentence they mention that central banks “shift” the interest rate. Yes they do, and they do so to prevent shifts in the IS curve from destabilizing the economy. As a result, shifts in the IS curve absolutely do impact interest rates. A rightward shift in the IS curve right after Trump was elected caused interest rates to go up. I could cite 1000 similar examples. Central banks are like the child that runs out in front of a parade and then has the delusion that he is determining the route of the parade.

Once again, the quoted discussion from MWW is simplified, and Sumner just leaps off and discusses random advanced topics involving interest rates.
If we step back and look at this carefully, we just need to use the index of MWW. On page 363, they write:

MMT shares the view that the central bank cannot control either the money supply or the level of bank reserves. Thus, the supply of reserves is best described as horizontal, at the bank's target rate. That is the endogenous money, horizontal reserve approach, which was developed over the 1970s and 1980s by Moore and other post-Keynesians [references] Most economists regardless of their schools of thought, now accept this is a correct representation of the operating procedures of modern central banks.

That's largely all that should have been said on the topic. They are correct in that most economists accept this view; Sumner is one of the exceptions. However, this just means that Sumner's understanding of central banking is completely out of step with everyone, and so he should be just as confused by any modern treatment of the topic. (Note that Economics 101 textbooks have silly Monetarist models in them, but most neoclassicals will just huff and explain that critics are not supposed to look at Economics 101 textbooks (insert reason here), and look at more advanced texts.)
One may note that MWW does not say that "interest rates are endogenous," that is something that Sumner made up. The best way of understanding interest rates is that the reaction function of the central bank is exogenous, and thus the observed interest rate is thus determined by the conditions of the economy ("endogenous"). However, since the reaction function could be changed, this becomes extremely fuzzy, since the observed interest rate changes along with the reaction function. The endogenous/exogenous distinction that many economists love dropping into conversation is the wrong framing to use.
Note that the "reaction function" terminology is the preferred phrasing of neoclassicals, which might create some arcane objections from some post-Keynesians. However, this is the cleanest way of understanding the concept.
Meanwhile, Sumner jumped ahead to interest rates -- plural -- which is well out of scope for an Economics 101 model with one interest rate. Modern financial theory -- which is compatible with many neoclassical models -- tells us that the risk-free curve is mainly driven by rate expectations. In other words, a market-implied central bank reaction function. This means that the observed rates are in one sense endogenous, but at the same time, the central bank reaction function is exogenous.
Once again, some MMTers and most post-Keynesians will have terminology issues with that characterisation, but I see no major operational differences between what I wrote and advanced MMT discussions of interest rates. (Post-Keynesians are wedded to fairly ancient interest rate models -- e.g., liquidity preference -- and so they are less likely to be happy.) As such, the MMT view towards interest rates is not that different from consensus models within finance, and so should not confuse anyone who has read a text on interest rates written after 1990.
In summary, one needs to grasp the concept of a central bank reaction function to understand modern approaches to interest rates. One could try to replace them with something else, but the reality is that the resulting description will end up being textual hand-waving that is likely to be impossible to relate to observed interest rate behaviour. 
(c) Brian Romanchuk 2020

The UBI in Australia?

Published by Anonymous (not verified) on Sun, 13/12/2020 - 8:50am in

(source)

 

Before talking about something, it’s always a good idea to understand what is it one is talking about. That applies to everything, the much-talked about UBI included.

It’s not clear, however, that people talking about the UBI really understand what it is.

So, let’s try that.

UBI stands for Universal Basic Income. “Basic income” refers to “a periodic cash payment unconditionally delivered to all on an individual basis, without means-test or work requirement”.

“Universal” highlights something present in that definition: all members of a community are entitled to the UBI. In Australia that would mean that the Government regularly pays every citizen/resident an amount of money – presumably equal – no strings attached.

Last but not least, implicit is the idea that the UBI is permanent.

By itself this definition raises some evident questions (for example: How much money those individuals would be paid? Where is that money coming from?). They are important but the answers to them depend on many things, including what money is. So, we’ll bypass them.

----------

Let’s instead compare the UBI with JobKeeper.

Originally, when it started last March, JobKeeper recipients were to receive periodic (more precisely, fortnightly) cash payments of $1.5K. To get JobKeeper workers – part- or full-time – were nominated by their employer and weren’t required to do anything additional for those payments. As in the old song, it was “money for nothin’”.

It would seem, therefore, that JobKeeper was a close match to the UBI, right?

Well, no. Not really. JobKeeper is strictly temporary, notoriously so in fact, for it was predicated on being an emergency measure. However, shouldn’t the UBI be permanent?

Conceivably one could support an initially generous but temporary JobKeeper during emergencies but not an equally generous but permanent UBI during normal times. Makes sense?

----------

There’s more. JobKeeper was not universal. It was subject to income thresholds and meant only for permanent staff currently engaged by an employer. That legitimately excluded age pensioners and the unemployed.

Casuals and visa workers and tertiary education workers were also excluded – arbitrarily – from JobKeeper. No amount of pleading sufficed to change Scott Morrison’s mind about that.

But the UBI is supposed to be universal.

----------

Tim Hollo, from the Green Institute, and the ABC’s Gareth Hutchens believe public perception of JobKeeper (and JobSeeker) reinforces the idea that there’s public acceptance of the UBI.

I doubt it. They ignore crucial differences, as explained above. But the real problem is the many, many disturbing similarities.

For starters, JobKeeper is notoriously vulnerable to political whim. The exclusions to the list of beneficiaries is just one example. Here goes another: with Labor’s complicity, Morrison introduced different amounts for part- and full-timers; the payments themselves were reduced. Why wouldn’t UBI recipients face the same problem?

Beyond telling sad personal stories to ABC reporters, there is nothing JobKeeper (and JobSeeker!) recipients affected can do about those arbitrary cuts. They can’t collectively bargain, for they can’t strike (nor even take “protected industrial action”!). They have nothing with which to bargain: they can’t deny employers their labour, for they don’t labour for any employer. Wouldn’t the same apply to UBI recipients?

Let me put this in words Marxists still remember but that are apparently distasteful to the modern liberal/Left for they must make a deliberate effort to keep out of mind: the UBI exists in a world with no class struggle. Ironically, that comes after even Jim Stanford – of all people! – seemed to understand that Morrison’s Kumbaya moment was short-lived.

----------

JobKeeper was as much a transfer to workers as it was a wage subsidy to their employers. In other words, the Government paid employers to keep those workers in their payrolls. That’s why employers were eager to accept it, in the first place. And they made big bucks from it.

But I am under the impression that the UBI is not a wage subsidy. If I'm right, what’s in it for employers? If I'm wrong, why wouldn’t they make big bucks from it?

----------

It’s unclear that one can extend public perception of JobKeeper to the UBI, for both things are different enough to make that a comparison of apples and oranges. Survey respondents may know it, even if UBI fans prefer to ignore it.

But that’s not the point I need to highlight here. It’s the similarities that I find disturbing.

Compare the UBI with MMTers’ Job Guarantee. To some the JG may sound underwhelming; the problem is that the UBI is just too good to be true.

My point is that the UBI is an inherently bad idea made to look good through sheer wishful thinking. Even if voters could be persuaded to support it, it doesn’t change that fact.

Sorry, fellas, too much wishful thinking, too much of “money for nothin’ (and chicks for free)”. Don’t get me wrong, I’d like that as much as the next bloke, but it just ain’t gonna happen, or at least I hope so. :-)

Will rising interest rates in the future bankrupt the UK government?

Published by Anonymous (not verified) on Sun, 13/12/2020 - 8:10am in

Pound coinsImage by Michael Brasuela from Pixabay

For this week’s MMT Lens, GIMMS is pleased to publish a guest article by Berlin-based economist Dirk Ehnts, author of “Modern Monetary Theory and European Macroeconomics

 

The Office for Budget Responsibility (OBR) issued stern warnings at the end of November stating that fiscal adjustment would very likely be required to arrest the continued rise in public debt. This led British finance minister Rishi Sunak to make the claim that public finances are on “unsustainable” path. According to the BBC reports, Sunak stated that “there are record peacetime highs in borrowing and debt, and the forecasts that were set out yesterday show us on a path where that continues to be at a very elevated level, so that’s not a sustainable position”. The elephant in the room is this: How is a sustainable position in public debt defined?

Some, like the OBR, apparently seem to think that the public debt needs to be “stabilised’. What that exactly means is not made explicit. The OBR warned:

The increase in borrowing does, however, render the public finances more vulnerable to changes in financing conditions and other future shocks. This heightened vulnerability is compounded by the shortening of the effective maturity of that debt as a result of both a greater focus on short-term debt issuance by the Treasury and further Bank of England purchases of longer-dated gilts financed through the creation of floating rate reserves. Taken together, these leave debt interest spending twice as sensitive to changes in short-term interest rates than prior to the pandemic. Arresting the continued rise in public debt is likely to require some fiscal adjustment once the virus has run its course. Only in our upside scenario, in which the pandemic is swiftly ended and there is little lasting damage to activity, does borrowing fall below the level required to stabilise the debt-to-GDP ratio by the forecast horizon. In our central forecast and downside scenario, tax rises or spending cuts of between £21 billion and £46 billion (between 0.8 and 1.8 per cent of GDP) would be required merely to stop debt rising relative to GDP.

 

Monopoly Money

Dr Phil Armstrong has written an article on fiscal policy for The Gower Initiative for Modern Money Studies that is worth reading in relation to this. In it, he mentions the “government budget constraint” which conceptualises government as a currency user – that is that the government would have to have income before spending. This is upside down because the government is the monopoly issuer of the currency, not a user. The Bank of England is today wholly-owned by the UK government, and no other body is allowed to create UK pounds. It can create digital pounds in the payments system that it runs, thus marking up and down the accounts of banks, the government and other public institutions. It also acts as the bank of the government, facilitating its payments. The Bank of England also determines the bank rate, which is the interest rate it pays to commercial banks that hold money (reserves) at the Bank of England.

The interest rate that the government pays on its government bonds (gilts) follows that bank rate closely. Looking at the figure below, it is clear that the interest rate on gilts with a 10-year maturity is mostly determined by the bank rate. The reason is that there is an arbitrage relationship. Banks can choose to hold their money in the form of reserves (deposits at the Bank of England) or they can purchase gilts with these reserves. When reserves pay a lower rate of interest than gilts, banks have an incentive to adjust their asset portfolio. Swapping reserves for gilts delivers more profit for commercial banks.

Line graph showing long term government bond yields in the UK against the Bank of England policy rateGraph via https://fred.stlouisfed.org/

 

Gilts and bonds

The interest rate that the UK government pays is a policy variable determined by the Bank of England. Furthermore, it is not the Bank of England’s remit to bankrupt the government that owns it. The institutional setup ensures that the Bank of England supports the liquidity and solvency of the government to the extent that it becomes an issuer of currency itself. Selling government bonds, it can create whatever amount of pounds it deems necessary to fulfil its functions. Given that the Bank of England stands ready to purchase huge amounts of gilts on the secondary market (for “used” gilts), it is clear to investors that gilts are just as good as reserves. There is no risk of default.

Moreover, consider that the Bank of England can always allow the government to spend using overdrafts of its ways and means facility. This prompted the Financial Times to publish this article: “Bank of England to directly finance UK government’s extra spending“. The Bank of England can, in effect, just execute all the payments that the Treasury sends its way. Issuance of gilts is optional. While this might seem strange at first sight, it is only a logical consequence of the fact that the Bank of England is the issuer of currency. Before gilts can be purchased, the government first has to spend some money into the economy. Alternatively, banks can borrow from the Bank of England before they purchase gilts. Issuing gilts provides a risk-free asset with some interest, but it is not needed to “finance” the government.

 

Deficit versus surplus

 

Line graph showing public sector debt outstanding in the UK against the Bank of Englan policy rateGraph via https://fred.stlouisfed.org/

 

The figure above shows the UK public debt to GDP ratio and the Bank of England’s policy rate through the centuries. Note that UK public debt peaked in 1945 at above 250 per cent of GDP. Unsustainable? Obviously not. In 1951, the interest rate started to increase from 2 per cent to 16 per cent in the mid-1970s. Unsustainable? Obviously not. What the figure shows is that the government of the UK cannot “run out of money”. When it spends more into the economy than it collects through taxes, a “public deficit” is produced. This means that the private sector saves a part of its monetary income which it has not spent on paying taxes (yet). When the government spends less than it collects in taxes, a “public surplus” results. This reduces public debt. That public debt to GDP ratio can be heavily influenced by GDP growth, which explains the fall in the public debt to GDP ratio in the second half of the 20th century.

I would like to raise one last issue, even though it should be clear by now that as a currency issuer the government will not run out of money. Lately, the Bank of England has purchased quite a lot of gilts through its Asset Purchase Facility. On September 30, 2020, it held 674.9 billion pounds worth of gilts. At the end of October 2020, the public debt to GDP ratio hit 100%. This was £2,076.8 billion in currency. Roughly one-third of outstanding gilts are held by the Asset Purchase Facility. Where does the interest go that the Treasury pays on these gilts and accumulates at the Asset Purchase Facility? The answer is this: “As a result of the Indemnity Agreement, all profits and losses are passed onto HM Treasury.” So, HM Treasury pays interest, then gets one-third of it back immediately. There is no technical reason why the Asset Purchase Facility couldn’t buy up all of the outstanding gilts. Then, all interest payments made by HM Treasury would come back immediately. The banks would have reserves at the Bank of England worth the public debt. These earn interest equal to the bank rate. Since this interest rate is set by the Bank of England, it can be set at zero if the Bank believes this makes sense. At positive interest rates, the Bank of England will pay the banks holding reserves by marking up their accounts. They do this with the computer and as the monopoly supplier of currency, there is no limit.

So, do rising interest rates in the future create a problem for the UK government? No. The Bank of England is the currency issuer. There is nothing that stops it from paying what HM Treasury instructs it to pay. Gilts can be issued in this process as an option. The government’s ability to pay is not put into doubt since the Bank of England acts as a lender of last resort, offering to buy up gilts on the market so that the price of gilts can never crash. Higher interest rates cannot bankrupt the UK government.

 

Upcoming Event

Phil Armstrong in Conversation with Fadhel Kaboub – Online

January 9th 2021 @ 13:00 pm – 14:30 pm

GIMMS is delighted to present another in its series ‘In Conversation’.

Phil Armstrong author of ‘Can Heterodox Economics Make a Difference’ published in November 2020 will be talking to Fadhel Kaboub.

Fadhel Kaboub is an Associate Professor of Economics at Denison University, and the president of the Global Institute for Sustainable Prosperity. He has held research affiliations with the Levy Economics Institute, and the John F. Kennedy School of Government at Harvard University. He is an expert on Modern Monetary Theory, the Green New Deal, and the Job Guarantee. His work focuses on public policies to enhance monetary and economic sovereignty in the Global South, build resilience, and promote equitable and sustainable prosperity. You can follow him on Twitter @FadhelKaboub and @GISP_Tweets

We invite you to join us for this informal event which we are sure will be both stimulating and insightful.

Register via Eventbrite

 

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Comments On Recent Fiscal Policy Articles: What Are The Limits?

Published by Anonymous (not verified) on Thu, 10/12/2020 - 1:00am in

Tags 

fiscal, MMT

As would be somewhat expected, with the vaccine roll-out starting, people are turning back to discussing fiscal policy. There has been some signs of shifting in "mainstream" views, but it is unclear how much the free market wing will change their views. Pointing to the amount of debt outstanding and intoning "it is a really big number!" has been the go-to tactic for fiscal conservatives for a long time.
Andolfatto ArticleDavid Andolfatto wrote "Does the National Debt Matter?" recently. It runs through the background on government debt, and includes comments on its relationship to government money from a variety of perspectives.
It is a primer, and the subject matter overlaps many other primers on the subject. Since many of my readers will have already read other primers on the subject, I will only highlight a few points that caught my eye. For readers with less of a background in the area, the article is definitely worth reading.
The first thing to note are his comments relating debt to government money.

Together, these considerations suggest that we might want to look at the national debt from a different perspective. In particular, it seems more accurate to view the national debt less as form of debt and more as a form of money in circulation.

This is in line with how modern finance treats default-risk debt. We can decompose government bonds into the constituent payments, and view them as a sequence of zero-coupon bonds. These bonds have a discount price and an associated discount rate. We can use these discount factors to relate future cash flows to the present. The only thing different about "money" is that the discount factor is fixed to be 1.
The next thing to note is that the first reference is to the Scott Fullwiler article on fiscal sustainability. Since one of the usual complaints by MMT proponents is that their work is not being cited in the appropriate context, this citation is highly welcome. 
One of the most important points of debate is related to the question of limits. Andalfatto addresses the topic in a few directions, but the following might be viewed as a partial summary.

There is presumably a limit to how much the market is willing or able to absorb in the way of Treasury securities, for a given price level (or inflation rate) and a given structure of interest rates. However, no one really knows how high the debt-to-GDP ratio can get. We can only know once we get there.

This topic segues into the next articles that I wish to discuss, so I will move my discussion towards those papers. My argument is that the "only know once we get there" is an extremely long timeline.Debt-to-GDP Losing Respectability?

 My feeling is that we are seeing a split in fiscal analytical tendencies within what I term conventional analysis. (The "conventional wisdom" which includes both mainstream academics, as well as the more eclectic views of financial market participants.)

  • Those with strong free market views will probably stick with conventional debt-to-GDP ratios, since they are so easy to scare people with. This has been the go-to tactic for decades, and I see no reason to for them to change at this point.
  • Otherwise, there are obvious issues with the debt-to-GDP ratio as a metric, and so there needs to be a new focus of discussion. Since embracing Functional Finance is apparently a step too far, the path of least resistance is discussing interest service metrics.

What about formal definitions of sustainability? The problem is that the standard metric -- the transversality part of the governmental budget condition -- is entirely useless in practice. It is assumed to hold, and there is no good answer as to what happens if it does not.
The problems with the raw debt-to-GDP ratio relate to the fact that it is a ratio between a stock (debt) and a flow (GDP). Although this is not entirely an error (which some people claim), the problem is that there are only weak behavioural relations between stocks and flows -- stock/flow norms. As people shorting the JGB market -- or trading European debt based on debt/GDP ratios -- the stock/flow norm is weak.
Replacing debt/GDP with an interest expenditure/GDP (or interest expenditures/tax revenue) moves us to a more sensible flow/flow comparison. The issue is that the interest cost is almost entirely dependent upon interest rates.Furman/Summers and Galbraith Articles The next articles of interest is one by Jason Furman and Lawrence Summers, which generated a response by James K. Galbraith. I am not hugely impressed with the Furman/Summers piece, but I leave the reader to read the comments by Galbraith.
For me, the interesting part is how Furman and Summers argued that the focus on the debt-to-GDP ratio is misguided, but replaces it with a 2% interest expense-to-GDP ratio. (I would note that Canadian establishment figures have seized upon a similar metric earlier, but expressed as a percentage of Federal revenue.)
The problem is straightforward: why 2%? Why not 3%? What happens if that limit is exceeded? This is a purely arbitrary "limit," and it is completely detached from any theoretical justification. 
The only sensible way to justify looking at debt service is that it is a form of expenditure, and presumably has a multiplier greater than zero. As such, as debt service gets larger, it will have a greater stimulative effect. However, this raises ugly theoretical problems for the mainstream: aren't rate hikes supposed to slow the economy? We need good models that can offer reliable estimates of these effects -- which are notable for their absence.
(The post-Keynesian/MMT story is that the effects of interest rates on the economy are mixed -- partly because of the interest income channel -- so all they can say is "I told you so.")Real-World Debt Dynamics More Stable than Models SuggestOver-simplified models exaggerate the risks posed by government debt. Variables are extrapolated to infinity without any analysis whether the results are internally consistent. The forecasts by the CBO are typical -- they assume that interest rates rise and deficits are large, yet nominal GDP growth remains depressed.
The first important thing to note is that the duration of government debt is not zero. If growth increases, this will cause interest rate costs to collapse relative to growth. This blows up discussions about "r and g."
The next thing to note is that the higher the debt-to-GDP ratio, the more of an effect there is on growth on the ratio. If growth is 2% greater than interest costs, the debt-to-GDP ratio drops by 1% if the debt-to-GDP ratio is 50%, while it drops by 2% if the debt-to-GDP ratio is 100%. This is basic mathematics, but fiscal conservatives to prefer to play with hopeless fantasy models.
The only way to get a high debt-to-GDP ratio and keep it there is with sluggish nominal GDP growth. As can be seen in Japan and the euro area, sluggish nominal GDP growth is not a great environment for bond bears.Concluding RemarksIn order for fiscal policy to get interesting, we need to see some actual inflation in the developed countries. The question is: why will there be wage inflation? Although I can imagine stories that lead to that outcome, none of them seem to be highly likely.
(c) Brian Romanchuk 2020

The Paradox of the Two Knights

Published by Anonymous (not verified) on Mon, 07/12/2020 - 12:01am in

By Carlos García Hernández

Article originally published in Spanish by RedMMT here

Two knights chess pieces on a chess boardPhoto by Hassan Pasha on Unsplash

Marx argues that any economic system based on private ownership of the means of production is doomed to disappear, in order to give rise to a superior system without private ownership of the means of production. The reason for this collapse of capitalist society and the subsequent emergence of socialism is to be found in the Law of the Tendency of the Rate of Profit to Fall. According to this law, the contradictions among social classes within the capitalist system can only tend to increase, because in order to be able to compete against each other, the capitalists have to increase their rate of profit permanently. This is only possible through increased exploitation of the workers, which results in ever lower wages and ever longer working hours. However, this impoverishment of wage-earning labour comes up against a limit, “capital itself”. Below this limit, a crisis of demand occurs after which workers cannot subsist, as they cannot buy enough of the goods they produce. Moreover, the few capitalists who exist at this stage go out of business. This is how the edifice of capitalism collapses and a better, sustainable system without private ownership of the means of production, called socialism, emerges, whose higher phase is called communism. “Development of the productive forces of social labour is the historical task and justification of capital. This is just the way in which it unconsciously creates the material requirements of a higher mode of production”.

No one took Marx’s work more seriously than John Maynard Keynes. That is why he realised that history was faced with a fundamental question: Is what Marx says true? In order to answer this question, we have to pay attention to the logical form of the Law of the Tendency of the Rate of Profit to Fall. The logical form that this law takes is the modus tollens ((P→Q) ʌ ¬Q) → ¬P, if private property exists (P) then the system collapses (Q); if the system does not collapse (¬Q) then private property does not imply the collapse of the system (¬P).

Certainly, during the decades between the publication of Marx’s Capital and the time of Keynes, there had been dramatic developments. While capitalism did not seem to be on the verge of collapse in many places on the planet, the communist revolution had triumphed in the Soviet Union, in 1929 the US economy had entered a major recession following the analyses of the demand crises set out by Marx and Germany was being torn between Nazism and communism. In the eyes of an anti-socialist like Keynes, the situation was highly worrying. However, to prove the falsity of the premise P→Q it is enough that this premise is false in one single case. This led Keynes to study what, in his eyes, was Marx’s main contribution, his analysis of the monetary circuit. If there was any contradiction in Marx’s approaches, it had to be there.

To get to the monetary circuit, Keynes had to go first through Marx’s theory of labour. In fact, he accepted it as true and wrote: “It is my belief that much unnecessary perplexity can be avoided if we limit ourselves strictly to the two units, money and labour, when we are dealing with the behaviour of the economic system as a whole”. From an anthropological point of view, Keynes has no problem accepting that human labour is the only source of value and that commodities receive the value from human labour, just as cold water receives the heat from a hot object when the object is immersed in it. The contradiction is found in the next step, when Marx analyses the monetary circuit in a monetary economy of production in which there is a shift from having producers who exchange their commodities for money in order to buy other commodities (c – m – c) to having capitalists who accumulate money in order to buy commodities which they then sell for a larger amount of money thanks to the surplus value extracted from the workers (m – c – M). This step is explained by Marx as an extension of barter, he mentions Robinson Crusoe and takes a metallist stance with regard to money, this is where Keynes finds the contradiction he was looking for, in the exogenous commodity money presented by Marx, and it is from here that he builds his work.

First, he denies exogenous money and defends the endogenous character of fiat money. Thus, in his “Treatise on Money,” he presents the creation of money as an endogenous part of the economic cycle and denies the loanable funds theory. The money is mostly created by banks lending to their customers regardless of their money reserves, as they can always turn to the Central Bank as a lender of last resort. The rest of the money is created directly by the states through the coordination of the Central Bank and the Treasury to carry out public spending. In both cases, the money is denominated in national currency and comes from the Central Bank, which does not depend on its gold or silver reserves, tax collection or debt issuance to issue national currency.

This raises a political question, again not analysed by Marx. If in the “Treatise on Money” the creation of money is presented as a decision made by banks when they are faced with an opportunity to make profits, in the “General Theory”, the creation of money is also presented as a political decision by governments to create aggregate demand through public spending via deficits. Without this ability of governments to create aggregate demand through public deficits, not only would Marx’s prophecy about the collapse of capitalism be fulfilled, but it would also be impossible to explain the very birth of the monetary economies of production. The monetary circuit is not born of barter, neither of gold nor of silver, but of credit granted by governments as sovereign issuers of national currency, which in today’s societies passes through the existence of central banks.

Keynes’ recipe is simple: to avoid the demand crises described by Marx, states must create aggregate demand through public expenditure in order to maintain levels of full employment and levels of welfare that do not lead to the collapse of capitalism. This is the recipe that Franklin Delano Roosevelt applied, in contact with Keynes himself, to set in motion the New Deal that brought the US out of the Great Recession of 1929, and it is also the recipe that was applied in the West after the Second World War to build up welfare and social protection systems. Here are two cases in which P→Q is not fulfilled and therefore the premise enunciated by Marx is refuted.

 

Chess board showing the two knights endgame

 

In my opinion, it is essential for the left to draw lessons from all this accumulated experience. I like to pose the question as the end of a chess game in which only the two kings and two knights of the same colour are on the board. In these cases, the game is considered a draw. However, a paradox occurs. Theoretically, it is still possible to reach a checkmate position as the one shown in the diagram. However, the game is considered a draw because a checkmate position like the one shown in the diagram is only obtained if the player who only has his king collaborates with the player who has both knights. If the player with only the king on the board does not cooperate, checkmate is impossible. The same applies to the question at hand. The states that allow the existence of private ownership of the means of production collapse if they are incompetently governed. States with private ownership of the means of production do not collapse if they create sufficient aggregate demand through their spending policies via public deficits and if they intervene in the economy through a strong public sector presence that guarantees high levels of welfare for their citizens. The collapse of capitalism in Russia and the rise of National Socialism in Germany were only possible because of the manifest incompetence of Tsar Nicholas II and Kaiser Wilhelm II respectively; likewise, the collapse of capitalism in the USA due to the Great Recession of 1929 was only prevented by public intervention through the New Deal. We are currently witnessing a similar event in the European Union. To combat the COVID pandemic, the EU has decided to suspend its absurd and reactionary deficit limits. It has done so because the pandemic threatened the existence of capitalism itself in the EU. As soon as the pandemic passes, the EU will re-impose its deficit limits so that its model of mercantilist capitalism continues to guarantee the privileges of the export elites and continues to condemn the working majority to suboptimal living standards.

Does this mean that we should renounce socialism, that the attempt at a socialist transformation of the economy and society as a whole is a waste of time? Not at all. To renounce socialism is to renounce a better life. Keynes himself writes: “it is an outstanding characteristic of the economic system in which we live that, whilst it is subject to severe fluctuations in respect of output and employment, it is not violently unstable. Indeed, it seems capable of remaining in a chronic condition of subnormal activity for a considerable period without any marked tendency either towards recovery or towards complete collapse. Moreover, the evidence indicates that full, or even approximately full, employment is of rare and short-lived occurrence. Fluctuations may start briskly but seem to wear themselves out before they have proceeded to great extremes, and an intermediate situation which is neither desperate nor satisfactory is our normal lot”. We socialists cannot resign ourselves to living under this order of things. To conclude this article I would like to present very succinctly a proposal, which I have elsewhere called fiat socialism, as an alternative path towards the socialist transformation of society and which I hope will soon take the form of a book so that it can be presented more widely.

To begin with, the two opponents must shake hands and accept that the game is a draw. Socialists have to accept that there are no historical laws and capitalists have to accept that the most they can offer are unsatisfactory solutions to major social problems. Then the pieces have to be put in place to start a new game.

We have to start asking ourselves, what does it mean that there are no historical laws? Historical laws like the one expounded by Marx conceive history as the development of a law towards whose essence (idea) humanity flows over time. Therefore, the essence (the idea) is placed at the end of a process towards which humanity tends inexorably. This scheme followed by Marx was adopted first by Aristotle and then by Hegel as opposed to Plato and Kant respectively and must be abandoned by the left. This means that we must return to Kant and abandon Hegel. There are no inexorable historical laws governing the destiny of humanity; the human being is not an actor whose mission is to hasten the birth pangs of a new society predetermined from the beginning of history. On the contrary, we must start from a primaeval idea from which our political activity is derived. This entails establishing our goals as the premises of our politics. We believe that these premises are correct, but we cannot be sure of this and we do not even know if they will become a reality. The truth or falsity of our premises will have to be corroborated by free and democratic elections. In the specific case of socialism, we have to start from a definition that does not reflect any inexorable historical law but the ends we defend. I propose that those ends should be those set out by the American economist Stuart Chase, who in his 1942 book “The Road We Are Traveling” says that all economic policy must meet five fundamental objectives:

  • guaranteed and permanent full employment
  • full and prudent use of natural resources
  • a guarantee of food, shelter, clothing, health services and education to every citizen
  • social security in the form of pensions and subsidies
  • a guarantee of decent labour standards.

If we look at all but the second point, which has to do with the preservation of nature, these have been fundamental axes of socialism in all its forms, from the socialism of the Soviet Constitution as the first binding legal document that included guaranteed work, to the socialism of the welfare systems, which both in the former socialist bloc and in the advanced societies of the West guaranteed access to the services set out by Chase. In fact, it was the defence of these five points that enabled the left to survive the demise of the Soviet Union, and in terms of environmental protection, the left has already incorporated the Green New Deal to its ideas. Furthermore, these five points were fundamental in non-Soviet socialist experiences of great importance that we cannot forget, such as that of Mohammad Mosaddeq in Iran, the Arab socialism of Gamal Abdel Nasser and the Ba’ath Party, the experience of Olof Palme in Sweden, of Thomas Sankara in Burkina Faso, of Patrice Lumumba in Congo, of Salvador Allende in Chile, of Evo Morales in Bolivia, of Jaime Roldós Aguilera in Ecuador, of Maurice Bishop in Grenada or of Hugo Chávez in Venezuela, among others. It is, therefore, these five points and their achievement that we must call socialism, not a system in which, regardless of the achievement of these five points, but in accordance with a historical law, there is no private ownership of the means of production or in which the surplus value is equal to zero. Both the size of the private sector and the levels of surplus value must be decided by the citizenry democratically. There will be places where, in accordance with the different cultural traditions of their constituents, socialist organizations will advocate the achievement of these five points through greater or lesser involvement of the private sector. Likewise, workers, in return for guaranteed work, good wages, adequate social benefits and not having to take the risks involved in private entrepreneurship, will tolerate a greater or lesser degree of surplus value. What is important is that they have in their hands the democratic mechanisms necessary to control these levels. In my view, the best mechanism for this are the job guarantees based on employment buffer stocks advocated by modern monetary theory.

This leads us to the last section of this article, the one devoted to the method. In my view, the best method to achieve the five goals of socialism outlined above without creating runaway inflation is modern monetary theory. As its founder, the Australian economist Bill Mitchell, says, this economic school is not a political regime, but a lens through which economic science can be focused in the right way. Modern monetary theory tells us the method for employing all the real resources of the economy while maintaining price stability. The full employment of these resources can be directed towards the objectives that are decided politically. My proposal is to direct the full employment of real resources to the five objectives set out above and to give this employment the name of socialism.

I am therefore of the opinion that a new definition of socialism should be put forward. Currently, the Spanish Royal Academy of Language defines socialism as: “Social and economic system based on collective or state ownership and administration of the means of production and of distribution of goods”. This definition is filled with notions from historical laws, whose existence we have previously denied. I, therefore, propose that a new definition of socialism be: Social and economic system which, through modern monetary theory, provides guaranteed and permanent full employment, full and prudent use of natural resources, a guarantee of food, shelter, clothing, health services and education to every citizen, social security in the form of pensions and subsidies, and a guarantee of decent labour standards.

As I have said, I have called this in the past fiat socialism, but it could also be called flexible socialism, as it frees socialism from the rigidities imposed by historical law. This socialism will take different forms in different places, it accepts that socialist organizations are not exempt from making mistakes, it will involve different levels of participation by the private sector, as well as different levels in the gross operating surpluses, and it is open to processes of improvement in order to mobilize real resources in the best possible way to achieve the five ends of socialism. Only one rigidity is established: monetary sovereignty. Modern monetary theory is only valid in monetary systems where the state is the sovereign issuer of its currency and where there is an appropriate coordination between the Central Bank and the Treasury. If Archimedes in ancient Greece said give me a point of support and I will move the world, a socialist Archimedes would say give me monetary sovereignty and I will build you socialism. Without the point of support of monetary sovereignty, the proposal of socialism as explained above is not possible. In most parts of the world, this is not a problem because monetary sovereignty is already in place, but in the European Union this is the main stumbling block to any socialist transformation of the economy. Therefore, in Spain, the first step towards socialism would be to abandon the European Union and the euro.

Euro delendus est.

Carlos García Hernández – editor of Lola Books publishing house.

 

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