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Rediscovering the Great British Republican Tradition



For a Civic and Constitutional Republic

                                                       Issue No 33 Friday 24 April 2009




This week


·         G20 Summit Backs Brown Policy Response To Economic Meltdown – Create Money To Produce Growth. So The Medicine For The Sickness Is The Same As The Cause Of The Sicknes




News Stories

Highlighting  news stories important to the Civic Republican view, particularly those that are overlooked or little covered in the main media.




·         G20 Summit Backs Brown Policy Response To Economic Meltdown – Create Money To Produce Growth. So The Medicine For The Sickness Is The Same As The Cause Of The Sickness



The G20 summit, held in London on 2nd April 2009, has been hailed as a success for Gordon Brown. And so it is. The policy, that he has adopted to get Britain out of the massive hole it is in by virtue of the credit boom policies that he (and others) pursued over the last decade, has now been transferred to the global stage. Borrow, spend, print money and chuck it all into the economy and hope for the best. The fact that all the borrowing will have to be paid back in the future, the fact that the currency will go down the pan – well, we will have to sort that out later.

Let’s be clear. We got into the current recession/depression because private banks were allowed under deregulation to create money like topsy. This money was used to blow up the price of assets, mainly property and shares, way beyond any true assessment of their worth and it was loaned to people whose income could not service it. Dodgy loans for dodgy assets. A magnificent Ponzi house of cards which New Labour trumpeted with the mantra of how they had “abolished boom and bust”. When the house of cards starting to crumble in 2007 we were assured that “the economic fundamentals were strong”. Now we are told we are in the worst economic depression since the 1930’s – or maybe the worst ever..

But, of course, global-trotting Brown knows how to fix things. The medicine for correcting the sickness is remarkably similar to thing that created it – boosting credit. Except this time it is governments, i.e. tax payers, that are going to do the job. And so Britain, along with America, have given the lead in ploughing billions into failed banks with the hope that this money will somehow find its way into the more lending. But, hey, this is the G20 summit. Having made our countries the biggest debtors in history, we can now go further. We can get the whole world into hock. With all the world leaders here, we can use the International Monetary Fund to create more money to throw at the problem.

Although a lot of commentators missed it the first time around, buried in the G20 communiqué was clause 19 which blandly stated: “We have agreed to support a general SDR allocation which will inject $250 billion into the world economy and increase global liquidity.” This refers to a facility created by the IMF in 1961 envisioned as being useful to tweak policy initiatives from time to time. It was never imagined that it would used to make radical moves to prop up a failing world economy. But the originators made their plans without knowledge of Gordon Brown – a man famous for his ability to sift through the small print to manipulate policy for his own ends.

That he persuaded all the other world leaders to accept the plan (in spite of the fact that many, notably the German chancellor had publicly criticised it) must be accepted as a remarkable achievement.

So what is wrong with all this? Desperate measures for desperate times, right? The problem is that the “solutions’, to the economic meltdown that we are in, are just more of the same policies that got us into the mess. There is absolutely no acknowledgement that the crisis has been provoked by a fundamental fact about the way we organise our economies. The G20 communiqué makes some right sounding noises about more bank regulation and we can all say “Aye” to that. But increasing regulation will do nothing to confront us with the fundamental flaw in our economic thinking.

The problem lies in the fact that we allow the private banks to create one of our most precious economic resources – money. It is common sense that enough money needs to be created to enable the economy to function and for wealth to be preserved and distributed. But private banks do not have the word “enough” built into their DNA. They have binged on the money creation function that governments have granted them. They have acted without any regard or scruple towards the people that granted them this privilege – that is, us, through our elected representatives. They will now be more regulated but there is no reason why they should have the right to create money in the first place.

Just take a long view. We all know about the Great Depression of the Thirties, but, of course, prior to that there were similar economic catastrophes plunging millions into poverty and destitution and laying waste our wealth. Since the thirties we have had economic crises of differing duration and effects in the seventies, the eighties, the nineties and now the noughties. But somehow despite such repeated and massive failures in our economic system we are still trying to find a fix for its problems as if somehow it like repairing a car that has a fault. It is as if the model is somehow still sound. It just needs to be refined a bit – until the next Armageddon.

The total blindness of the world leaders to the basic problem of the economic model we work under is revealed in the communiqué they issued. Repeatly they refer to the need to stimulate growth. They simply cannot envisage economic prosperity without growth. In the communiqué you can read:

·         Clause 4. We have today therefore pledged to do whatever is necessary to restore confidence, growth, and jobs;

Under the section entitled “Restoring growth and jobs” we read

·         8. Our actions to restore growth cannot be effective until we restore domestic lending and international capital flows

·         We are confident that the actions we have agreed today, and our unshakeable commitment to work together to restore growth and jobs, while preserving long-term fiscal sustainability, will accelerate the return to trend growth

·         22. World trade growth has underpinned rising prosperity for half a century

You can be in little doubt about the economic thinking that all the G20 countries embrace. Growth, growth and more growth. There are a few nods in the direction of greener policies but there is no real attempt to reconcile endless growth with preservation of the planet. Let’s face it. The two cannot be reconciled.

It is true that when looking at the past it is difficult to find periods when there was no growth and anything like reasonably general prosperity. But that is because we have always run modern economies according to the same flawed model.

But it is possible to have prosperity without growth. It is possible to have prosperity without continuous ravaging the planet for more resources to sustain growth.

The answer lies in changing the way money is supplied to the economy. Having the banks do the job has been tried on the laboratory of our lives and futures for over two half centuries. On paper, it was always crazy to give certain private companies who happened to be called “banks” the privilege of manufacturing money for the economy’s needs. In practice, the disaster has been as great has could be imagined if not greater. True, some advances in living standards have been made. In some ways we are now better off, but this is thanks to technology not economics.

When banks create money they attach debt to it. This debt creates a burden on the economy. To manage this debt more money has to be created and this in turn creates more debt. And so on. And so on. The pile of money builds up. The pile of debt builds up. But money cannot exist in a vacuum it has to be secured against something real. The result? Inflation of asset prices. Which brings us back to where we are now. Absurd asset prices backing debt that cannot be serviced. The government intervenes to enable the debts to be serviced, by taking over where the banks left off, creating yet more money.

But even in our topsy-turvy economic model you cannot just have money without it corresponding to economic activity. That is why the G20 communiqué talks about growth, growth, growth. But the strategy will fail because it is trying to defy the laws of gravity. What goes up must come down. Asset prices are still far to high. They were put there by Ponzi money. They will have to fall before we are out of this. That means a lot of pain for a lot of people but it will have to happen.

In the short term, instead of chucking more and more billions of our money into the black hole of banking balance sheets the government should be spending money on relieving that pain. As it is we are just prolonging the agony, pouring petrol on the fire.

Just a final word as evidence of all this. We already have a past model for the current economic problems of the world and that is in Japan. At the end of the eighties boom Japan had built up huge property prices based on irresponsible bank creation of money. So much so that Tokyo had the highest residential prices in the world – but how desirable is it to live in shoebox in Tokyo? The result was economic meltdown. The government’s response was pretty well exactly what Brown, Bush, Obama and now the G20, are now proposing. Slash interest rates to zero or thereabouts. Pour government money into the bankrupt banks to prop them up and engage in clever wheezes like “quantitative easing”. In other words, defy gravity. The result is that twenty years later Japan has never really recovered.

Will the rest of the world be as patient as the Japanese in waiting for a recovery that never comes?



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……. …….until next week