The Tragic Triumph of the Econocracy

'The Bank', with a capital letter, means the Central Bank in any country or community: in our case, the Bank of England; and 'the banks', as a collective, means all the other firms and partnerships that the Bank recognises as legitimate banks and thus it is authorised to give them instructions and to trade with them. Specifically, it will sell them bonds and other debt certificates [from a list of approved categories] and lend them money at a publicly announced rate of interest called 'base rate'. A large proportion of the Econocracy [the prevailing rat-pack of professors of Economics] argue that if the management of the banks by the Bank is perfectly calibrated the economy can operate perfectly. If the money-managing institutions work perfectly, the whole economy can achieve 'equilibrium': a state where all the resources available to the human race are allocated to their optimum uses.

This is a model of perfection. The realities of human existence make it a total nonsense: but the Econocracy currently has control of the channels of advice to governments, and most of the economic commentators in the media, in banks and investing institutions are required to parrot the prevailing orthodoxy: though there have always been some brave spirits who have the wit and the integrity to deny the validity of the whole structure.

So-called Monetarism, a package of ideas formulated by Econocrats in terms that could be explained to politicians and to students, was introduced in the USA in the later nineteen sixties, when the flaws in the attempt at practical neo-Keynesianism had generated a disastrous wage-price spiral as trade unions demanded pay increases to match price increases [as reported on official indexes of 'inflation']. In the early nineteen seventies the major oil-exporting countries tripled the royalties that they charged for access to their oil and natural gas; and this sent up the prices of all goods and services because of the universal impact of the costs of fuel for vehicles to deliver goods and people to where they were wanted, and the price of fuel for the provision of energy to heat homes and schools and to power factories. Additionally, petroleum was a vital ingredient in many plastics and polymers. So all prices were rising, hence wage demands took on a new stridency: and governments tried to stop the 'spiral' going out of control.

The Monetarists argued that if real control was given to the Bank and the government backed up the Bank in issuing stringent instructions to banks as to when and on when terms they could lend money to whom, that would strangle the spiral of rising wages and prices. Employers would not be able to borrow from their banks on affordable terms: so instead of borrowing to pay workers inflated wages, they would have to tell them "take what is on offer, or we'll have to close down and sack you all". Similarly, consumers would be told that they could only stay in the homes on which they were servicing mortgages provided they paid penal interest rates which went as high as 15%: which left them with little to spend on other things. So if they kept the house and the car, paying high mortgage interest and high interest on their car loans and the loans against which they had bought their fridges and TV sets, they had to reduce consumption of everything else.

The Thatcher government adopted their own version of this policy straight after their election in 1979, and by 1992 they were well on the way to implementing it. Economic growth slowed dramatically; and wage growth slowed even more. Then the government itself stopped creating money with which to maintain activity in the coal mines and the shipyards. They compensated for the loss of income that they suffered as the real economy declined from the tax revenue that they received on North Sea oil and by the sale of the privatised industries. They cut back heavily on government spending on defence and in support of industries that had previously been considered essential for national survival: steel, shipbuilding, aerospace and coal. The economy was dramatically changed, as the 'real' material productive sectors were decimated and the financial services - notably 'investment banking' - began to predominate: and that sector of the economy was supposedly susceptible to refined control by the Bank.

Thus, by 2005 the 'real' - the material - economy on which human animals depend for their continued existence and comfort was utterly denigrated and largely despoiled; and the finance sector was put in a position to undermine the entire economy through its greedy overindulgence in speculative deals that the Bank did not even understand. This is the achievement of the Econocracy. The real incomes [money wages adjusted so that their current purchasing-power can be computed] of the mass of the British population have been static for a decade. Over those years, 2007-2017, plenty of jobs have been created; almost all of them in activities that do not result in any substantive increment to the real economy. There has been a spectacular degree of material stagnation which, set alongside the government's obsession with 'austerity' [in which they have been mentored by the same Econocrats] leaves almost everyone with an awareness that the economy is not "working for me". That is because the economy is being driven in obedience to an abstract model. The fundamental reality, that the economy should be the mechanism that serves material, living, aspirational individuals, has no place in contemporary Economics. That is why Economics must be brought down from its high place in academic temples, and opened up for radical restructuring.

What Comes Next, After North Sea Oil?

Mrs Thatcher's government's economic and social policies were made viable only by the fact that her era coincided with the United Kingdom being able to exploit the oil and gas reserves that had been found under the North Sea over the previous couple of decades. The tax revenues derived from those resources largely funded the welfare state, enabled the government to give redundancy pay and early pensions to unwanted employees from the nationalised industries, and maintained the nation's defences. The material fact of having sufficient gas to meet the national need, and a significant oil supply that diminished the need for imports, enabled the country to shut down the coal industry almost completely. 

Those were the material conditions in which the financial revolution of 1986 was facilitated: and the financial services [with their related activities like the courts and arbitration services] were opened to the international community and became a significant earner of foreign exchange. The loss of the textile, crockery and steel industries was mitigated by the sale of financial and related service globally. In particular, Britain's membership of the European Economic Community as it went through the transition to the European Union enabled London to become the unchallenged financial hub of the Union. It will be interesting to see how far President Macron, as an ex-banker, is able to steal business for Paris in the coming years; but that will be a side-show compared to the issue that is being considered here.

The key fact is that material assets - oil and gas - enabled the immaterial activities of 'the City' to become established as major export markets. Simultaneously, the incomprehension of successive governments as to what was happening in the domestic financial services market was building up to the crash that almost brought down the entire economy in 2007-8. New forms of contract, most particularly securitisation, enabled the domestic financial sector to grow in an unprecedented ways to an extent that was way beyond the regulators' power to comprehend or to control it. Securitisation was developed simultaneously in the USA and the UK, as a means whereby borrowing by some firms and most individuals could be lifted off the books of the banks and building societies that made the original loans, and sold on as new forms of security to suddenly emerging 'wholesale' traders and investors. This meant that the retail banks reduced the amount of lending in their books, and could lend more again; which loans could then be securitised: and so on. The debts owed to their banks by small and medium-sized firms largely remained with the banks, because they were recognised to be too risky for securitisation. But the mortgages and credit card debts owed by millions of ordinary people were seen as safe debts to be securitised. Thus when the crash came, the banks faced the fact that they had many billions of pounds of debts from smaller companies on their balance sheets, most of which the companies could not settle in the depressed condition after the crash. So the debts were kept on the books, the Bank of England allowed the banks to cash in government bonds in sufficient volume and value to make those books look balanced, and a huge problem for the future in the form of 'zombie' companies was created [and it now seems almost permanent: impossible in the near term to resolve].

Meanwhile the financial institutions collectively have carried on lending pretty freely to house buyers with reliable incomes, fueling a boom in property prices for the sectors of society than can afford to maintain their repayments and causing a major social division between those who can 'buy' homes and those who can not. Juggling money to keep the mortgage market expanding, largely by expanding the money supply through the Bank of England's 'quantitative easing' trick, has maintained the illusion that 'owners' of property are asset-rich: and this has kept the economy buoyant with regularly reported 'growth' of the Gross Domestic Product of the economy. This is all based on a bubble of credit; about which the Bank of England is becoming increasingly concerned.

Meanwhile, the 'real economy' of goods made and imported and exported and consumed has shrunk to a minor proportion of the domestic economy. The country has become import dependent: to a degree that ongoing sales of financial and related services to the rest of the world will not enable he country to pay its way. Departure from the European Union, even if the UK is able to retain its status as the financial hub within the European Economic Area, will make this situation worse.

It is usually condemned as old-fashioned and uncomprehending to stress the overriding importance of the material economy. But the success of Germany as a material-exporting country [of high-value-added products] is the living demonstration of the point. The reckless use of North Sea assets to finance a material standard of living that the country can no longer afford, and to fund a finance sector that has exacerbated the nation's problems, is a horror story which will haunt economic reality for at least a generation to come: and no politicians are preparing to cope with it.

Greek Bondage, Eurobonds and Project Bonds

Greece is likely to leave the eurozone: I have said it ever since the bubble was exposed and it becomes more likely every week. More and more Greeks resent the restraints on public spending that have been imposed [not just by the EU, but more significantly by the IMF] to correct the inane profligacy that the eurorats studiously ignored for more than a decade. So intoxicated were the Brussels sprouts by their power to exploit the inertia and ignorance of the pseudo-statesmen who were notionally their political masters that they just pressed on with the delusory agenda  of full integration that assumed - contrary to available evidence - that all eurozone members were behaving 'responsibly' according to EU treaties and agreements. Ancient Greece was a slave-powered society: Greece today is bound by truly oppressive rules imposed by aliens. The Greek situation is so extreme that once it is tackled by measures that can be given a fair chance of bringing the economy into balance, the other enfeebled eurozone economies can be ring-fenced affordably to the rest of the European Union; possibly even including contributions from Sweden and other EU states that are outside the eurozone.

Investments that might be made in Greece after exit from the euro, by public sector and private investors from Europe and beyond, could support substantial growth of the 'real economy': but only if the investors are sure of the security of the investments. Foreigners will not invest if their assets could be written off by hyperinflation, or if they faced a high probability of being nationalised, or be immobilised by strikes that freeze the stream of revenue. Similar strictures would apply in any eurozone country where investment was sought for projects devised to strengthen productive resources or improve the infrastructure: Italy, Spain, Ireland, Portugal and - potentially - France.

The experience of several countries that have tried quantitative easing [usually explained as 'printing money'] is that the 'new money' is not used to buy industrial assets or  stock in material trade, but to enable the central bank to buy bonds that might otherwise plummet in price if there were no buyers. The propaganda machine says that the intention is to sustain real economic growth: in reality quantitative easing is an additional way of shoring-up 'banks' that brings a huge threat of future inflation of costs and prices [and an additional erosion of personal wealth]. The players in financial markets are very clear of the real nature of this charade and they will not support any such policy by buying bonds issued by a government that is not pursuing serious economic discipline. Thus in Europe there is a strong lobby - led by the less-responsible governments - for the creation of 'eurobonds' that would be guaranteed by all eurozone governments. The funds thus accumulated would be lent to countries and to banks that found it difficult to raise funds in other ways. In effect it would be slightly covert way of getting Germany to shore up financial institutions in Spain, Italy, Ireland, France [and possibly even Greece]. It is absolutely unsurprising that Germany is resisting this.

But now the evidence is unequivocal that the eurozone is in danger of collapsing, with or without Greece, so the Germans have indicated a willingness to consider issuing 'project bonds' with some sort of eurozone backing [perhaps through the European Central Bank]. This would stimulate employment and spending in member countries by building roads, airports, housing estates and other infrastructure that would have demonstrable material existence. The buyers of the bonds would become the indirect owners of the assets, and could be recipients of interest payments directly raised from the assets: this would give a limited guarantee that the money would be properly used according to the intention of the investors. That guarantee would only be as good as the legal system and the economic order within which the investment would take place. Politicians are fantasisers, liars and cheats: the investments would have to be ring-fenced from political  chicanery; then the idea may begin to take up some serious attention.

Quantitative Easing into Credit Easing

The Governor of the Bank of England was yesterday apocalyptic in his description of the present risk of a massive world financial crisis, when he announced another wave of money-creation that is euphemistically called Quantitative Easing
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If this money simply goes to bolster wholesale banks' balance sheets - as the previous tranches did - this will do nothing for the 'real economy'. Only if the money is handed out as extended and increased funding of 'real' businesses can it help to stimulate demand and supply in the economic system that living people inhabit.

But there is a real problem here. Even if the Bank and the Treasury demand that some of the money is made available to businesses, they will hand it for allocation to the old lags in the retail banks who have been so cautious and cynical in lending to businesses in recent years. It is commonplace to hear from businesspeople that the only firms that can get money are those who don't need it. Business owners who want funding for small, often start-up businesses, have to offer their own homes as security, making the funding effectively a personal loan. In really hard times [such as the Governor expects to get worse] the risk for an entrepreneur of placing their house as well as their income into dependency on their business seems too great for many people to take. It is precisely these people and their ideas that should be funded: they are a large portion of the potential that exists as latent force in the economy that needs to be exploited.

Whoever hands out new money to businesses should be prepared to risk funding failures to an extent that bankers cannot comprehend. The greatest need is for an increase in activity and spending - and of productive potential - as soon as possible. Most businesses grow slowly; but they can be empowered to start spending quickly. There is no sure way of picking medium-term winners. The Bank and the government must accept that a significant proportion of properly-allocated easier credit will never be repaid. New methods are needed for getting it into the right hands. The Open Risk Exchange is one such concept: there should be many others: so where are they?

While I wrote this I paused to listen to an interview on the TODAY programme of the Chancellor. He spoke in obvious oblivion to the real current situation. He still argues that the multiply failed banks are the only agencies that could extend additional credit: oh dear!