We are The People

It was a pleasure to host Icelandic Democracy activist Hordur Torfason and his husband, architect Massimo Santanicchia, in Christchurch a few weeks ago, as part of their New Zealand tour. Hordur is a wonderful speaker and spoke at both Lincoln University and the Aurora Center in Christchurch. He also held a more intimate session with some Arts Scholars at Canterbury University, which allowed for some fruitful discussion. I was very impressed by his calm demeanor and his overall approach to activism. He is no firebrand, as he prefers to articulate a more engaging approach. He does this by questioning people and drawing them into the construction and creation of any particular response or action. As a good journalist might do, he asks “why”, “how”, “what”, “who”….he often provides the “when”. He switches the popular activist discourse of action to discussion; “Does anyone understand what has happened?”; “What can we do about this?”; “Does anyone want to meet the same time and place next week?” and so on.

This approach creates a more open and iterative process of dialogue, where some form of consensus or action points may appear. Multiple and varied demands may be distilled down to have a more refined focus. In the aftermath of the Icelandic banking collapse, Hordur inspired the Cutlery Revolution and a process of introspection, investigation and reformation. With a background as a singer, songwriter, actor, playwright, poet and artist, Hordur uses creative methods to engage with the issue at hand, enabling people to be involved and have some input. The influence of the creative artist is detailed in Louise Amoore’s “Global Resistance Reader“, specifically in Part 4, with contribution from De Goede and Bleiker. They show that by using music, poetry, dance, comedy and other artistic forms, the activist can reframe the traditional discourse offered by the embedded elites and, thus, undermine their implied seriousness and, ultimately, their legitimacy.

He offers some important lessons about the problem of corruption, even in supposedly highly transparent countries, political oversight, and problematic links between politics, money and media. This has deep resonance for New Zealand, which has suffered similar problems for many years, under both political hues. In the end, people do have power and, most importantly, if committed, organised and engaged, can exercise that power at any time. One point that struck me was that the larger the disconnect between citizen and government, the more opportunity there is for both loss of engagement and control. In large countries, this is a real problem. It need not be so in smaller states, where access to representatives is easier and there are smaller degrees of separation between people. Finally, Hordur exhorts us to all be vigilant, as we can have no complaints if we just sit back and allow stuff to happen to us. For me this calls into question an issue I have been thinking about for sometime, namely our transformation from citizens into consumers. This has been a core part of the neo-liberal experiment, which has seen people focused on their interaction with the market, leading to a subsequent loss of connection with the concept of citizenship and a one way relationship with the state. I believe this is where our ultimate problems lie and, for me personally, this is reinforced by the Icelandic experience. The slow collapse of the post-modern debt-based financial system is a symptom of this malaise. The bubbles of change have been fermenting in many countries over the last decade and point to a subtle shift in how people view their relationship to the market and the state. Hordur’s story about Iceland is part of that process and is worth listening to. I’ve selected a talk Hordur gave last year, as it is quite focused and succinct and just 30 minutes of your time. Enjoy.

The Great Transformation: Addendum

Karl Polanyi began his famous 1944 treatise, “The Great Transformation”, with the following words:

“Nineteenth-century civilization has collapsed. This book is concerned with the political and economic origins of this event, as well as with the great transformation which it ushered in”. His thesis was “the idea of a self-adjusting market implied a stark utopia. Such an institution could not exist for any length of time without annihilating the human and natural substance of society”. As we continue to make our way forward in the 21st Century, Polanyi’s words are worth reconsidering. He noted that the success of the Industrial Age was based on four key pillars: a balanced international system, a stable financial system, the self-regulating market and the liberal state. The end of the balanced power system towards the end of the 1800s was the signal that the almost 100 years of near peace, was coming to an end. When the gold standard failed, it was the end. Polanyi notes,

“The true nature of the international system under which we were living was not realized until it failed. Hardly anyone understood the political function of the international monetary system….to liberal economists the gold standard was purely an economic institution; they refused to consider it as part of the social mechanism.”

When we look at the implosion of the current debt based monetary system, it is worth pausing to re-consider Polanyi’s thesis. As Europe considers the all or nothing integration and the US climbs slowly off its knees, the social importance of a stable and high functioning monetary system is slowly being recognised. This has been seen in the amazing efforts of global policymakers to try and fix the banking system, mainly by flooding it with new liquidity. Whilst this policy shift has seen a stabilisation of the system, serious structural problems remain. Many of those problems have been noted but little, so far, has been done to deal with them. At the same time, austerity, the normal medicine, is no longer regarded as a economic panacea, with both the social and economic impacts hitting hard.

But out of the chaos has come a shift in focus. Initially the response to the GFC was to protect the banks, to bail them out and, in repairing their balance sheets, to use them as a conduit for recovery in the general economy. Unfortunately, that plan didn’t work, for the simple reason that trying to get people to borrow, when they are trying to pay down debt at the same time, is simply unworkable. Still, the money flowed in and continues to do so with QE2Infinity, and continues to boost equity markets as bonds start to lose their shine. However, in the last 12 months there has been a gentle stirring amongst policymakers and researchers and a new focus on the process of money creation and how banking works and impacts the real economy. If anything, the GFC can be seen as a crisis of finance itself and this has finally brought the spotlight and interest into a somewhat arcane area, normally populated by monetary reformers.

One paper to catch people’s attention is “The Chicago Plan Revisited”, an IMF working paper by Jaromir Benes and Michael Kumhof. Interestingly, Jaromir was at the RBNZ from 2006-2008 as a research advisor, so I presume they will have read it. It’s an excellent paper and explores themes familiar to anyone who has been reading this blog over the last 5 years. To those new to the subject, it’s a very useful read as to how the banking system is currently structured. Benes and Kumhof investigate the way in which banking works currently and the proposal of Irving Fisher’s 1936 Chicago Plan, which called for a separated monetary and credit function. Again, readers familiar with the research of my colleague, Lowell Manning, will know he has done extensive work on Fisher’s Equation of Exchange and so it’s heartening to see a new look at Irving’s work.

Their conclusions were fourfold and supported the claims made back in the original plan that separation money creation and credit provision would:

1) Lead to much better control of the business cycle by providing a more stable monetary platform.

2) Eliminate bank runs.

3) Dramatically reduce net public debt.

4) Dramatically reduce private debt, as money creation no longer requires simultaneous debt creation.

This is quite a major shift in thinking within the hallowed halls of the IMF (it should be noted that this is not official IMF policy) and signals a recognition that those of us who have been talking about this issue for many years have finally been heard. It has even made the mainstream media and has even provoked some interesting commentary on banking and financial modeling at the Economist. The most important realisation from this research is that the business cycle is completely in the hands of the banks. Put simply, the banks are in charge of the economy. This will surprise many people, including many bankers, but will now allow us to have a proper debate as to what constitute a stable, efficient and equitable monetary system. The understanding that finance has such an enormous social, as well as economic, impact (and of course environmental) will hopefully see this shift transform into major systemic change. It is a long way from where we are now to a full 100% reserve backed system but it is possible that we can take incremental steps along the road.

Here is a video with Michael Kumhof explaining the Chicago Plan Revisited

Steve Keen: Public Talk in Christchurch

Steve Keen is in New Zealand to present a range of seminars in Auckland and Wellington. He is also coming down to Christchurch to give a public talk. Details are below. It should be an interesting event.

Public Talk in Christchurch on September 8th at the University of Canterbury 

The Currency Conundrum

A story in this weekend’s NBR outlined how the exchange rate was still the major concern for NZ exporters. With the NZ$ at 52p and 0.65 Euros, it’s not hard to see why that is the case. On the other hand, strong commodity prices over the last few years have helped the trade balance into positive territory on occasions, negating the effects of the strong currency. So on balance, although the currency is clearly too high, it is not so out of whack that our trade balance is deeply negative.

Currencies are primarily a method for exchanging goods and services between different nations and, therefore, an important component of international trade. When countries have a surplus or deficit in their trade accounts, they need to deal with the foreign currency surplus or deficit. Theoretically, the exchange rate should adjust to rebalance any surplus/deficit and so restore an overall balance. That’s the general idea behind floating exchange rates. It was certainly the crux of the plan that Keynes proposed at Bretton Woods back in 1944, as he knew that trade imbalances had contributed to general global political instability in the previous world wars. However, the US, with its tail up, insisted on the US$ as the centre of global trade, and thus we have seen the global imbalances continue for the last 70 years.

Prior to the 1980s deregulation bonanza, a serious balance of payments deficit could see a country on its knees, going cap in hand to the IMF to borrow the deficit, as was the case with the UK in the 1970s. There was some form of censure and limit to imbalances, with draconian lending measures, added to a sharp devaluation in the currency, bringing about the appropriate rebalancing. Fast forward to 2012 and we see many countries running persistent current account deficits (ultimately accumulated balance of payments deficits plus borrowings to fund them) without a care in the world. New Zealand is a prime example of this. So why is NZ not being called in to see the IMF to explain its large overseas debts and why is the NZ$ not 15-25% lower?

Therein lies the modern conundrum. As the financial system has been flooded with surplus currency, the demand for safe ports has increased. This has seen deficits overlooked as surplus countries have sought to keep funds out of their domestic systems, this keeping their currencies weaker than they should be and actually reinforcing the imbalance in trade. In effect, they have lent back the surplus to the deficit countries, in return for a nice yield. The obvious problem is that surplus countries have amassed too great a surplus and so created instability in what is, at best, a volatile international system. At some point, one would reason, there must be some major adjustment as we saw in the late 1980s with the Plaza and Louvre Accords, but instead, a dependency is created, where deficit countries become addicted to debt…debt they have been fed by surplus countries. This metaphor of addiction is all too real. In the end, when repayment in demanded, what can deficit countries offer? They cannot sell their goods, as the currency is too high. All they can offer is their assets….land, companies and other resources. That’s generally not too popular, as we have seen here with the Crafar Farm sales debacle but in the end the piper must be paid.

Added to this is the new headache of currency reserve diversification. The Euro and the $, not to mention the Pound, are not in favour at the moment. The SFr has a line underneath it as well, and this leaves few options for liquid currency investments for major holders of cash, namely sovereign countries and major corporates. An example of this is the A$, another major deficit country, which has seen major inflows in recent times from all manner of investors, including Apple and Google. This really is madness: Major US corporates having to store cash outside the US because of a loss in faith in their domestic currency. This is set to continue and cause serious problems for Australia, a country where growth is slowing and commodity prices, which normally support the currency, falling. Thus, the capital account has overwhelmed the trading account, with investment flows having more impact on currencies than the simple price of goods and services. Foreign direct investment is lauded as both necessary and positive for an economy to prosper, yet it indicates that countries are not in a position to finance their own activities. The irony of this contradiction seems to be lost on policymakers, who have clearly drunk too much of the global capital kool-aid.

At some point, and when is anyone’s guess, these flows will reverse. Recent and past history tells us that this is not likely to be an orderly event. For the foreseeable future, the real economy will continue to struggle as currencies are priced on a non-production related basis. More and more,  we will see jobs being exported from deficit countries, rather than goods and services. Some central bankers, the RBA and RBNZ in particular, seem to believe they can do nothing about this problem. This is primarily due to the over earnest and somewhat naive adherence to strict inflation targeting and singular focus on monetary policy to the detriment of the real economy. The world of global finance has shifted considerably in the last 20 years and a fresh look at the problem of a persistent current account deficit is warranted. To simply ignore this is a recipe for further financial disaster, as Keynes clearly predicted back in 1944, and with every possibility that the wheels of the global financial system will completely fall off.

Drowning in Debt? QE making you Queasy? Try Monetary Dialysis

As Spain heads to debtors prison, questions are being asked about the viability of the whole Euro project. It’s become clear that a large scale monetary union without fiscal integration, is not a viable long-term structure. Distortions in interest rates and currency levels are good for some but not for others. Add in the corruption of the entire financial system and you have a recipe for disaster that impacts everyone.

Quantitative easing is also not working. Why not?

Quantitative Easing first entered popular language during the 2008 Global Financial Crisis. Central banks, specifically the US Federal Reserve (FED) and the Bank of England (BoE), tried to provide stimulus to their economies by buying securities from banks, with a goal to reduce monetary conditions and, thereby, hoping to induce an increase in lending and hopefully, as a result, new economic activity.

As interest rates fell to zero, the Fed began QE1 in November 2008 with a $600 billion purchase of Mortgage-backed securities (MBS). It did this by creating new credit in its own account and then exchanging this for the MBS held by the banks. The purpose of this was threefold: to improve bank balance sheets, raise the price of securities (and therefore reduce interest rates along the yield curve) and stimulate new borrowing. This was not an entirely new policy, as Japan had been engaged in the same process for over 10 years, though with limited success. The Bank of England followed suit in March 2009 and started buying UK Government bonds and a limited amount of other high-grade assets.

The initial impact was felt in the asset markets with the price of stocks, bonds and commodities all rising. In fact, rising commodity prices were seen as an unwelcome side effect of QE, given that QE was supposed to boost lending and, therefore, economic activity, specifically new jobs. Banks were supposed to be lending these excess reserves, not speculating in financial markets. The reality was that banks had no interest in lending and businesses and consumers had little interest in borrowing. The central bankers had failed to note that they were in the middle of a huge debt bubble and that `trying to offer new debt into a market saturated with the stuff was hardly going to be a winner.

There is no doubt QE helped restore confidence to the financial markets and, as a side effect, helped steady the general economy. Whether it actually worked in the manner it was supposed to, is highly debatable. As Bank of England governor, Mervyn King, stated when giving evidence to the UK Treasury Committee on QE,

“I can’t guarantee that it (QE) means that bank lending will rise, but what I do believe is that it won’t fall as far as it might otherwise have done”.

In terms of impact, the US bailout of the auto industry had more success with over 1m jobs saved. Whilst the financing aspects were contentious, the outcome has been positive. As Obama aides noted, direct government funding enabled the auto industry to survive and this would not have happened if it had been left to the market. Setting aside the merits of saving the US auto industry, what was crucial and different about this policy was that it involved direct stimulus into the real economy, where people are employed to make products.

As Nouriel Roubini noted, the US Government would have been better off just spending the new credit used for QE directly into the economy. He suggested, in a co-authored 2011 paper, that there should be a massive infrastructure rebuild ($1.2 trillion) in the US, which would create jobs and lay the foundation for “a more efficient and cost-effective economy”. He further noted that the crisis had been exacerbated by “inadequate action” by policymakers who had an “inadequate understanding of what ails us”.

It’s clear that policymakers have not stepped back and tried to understand both the causes and outcomes of the crisis. In a debt deflating environment, no amount of new debt is going to help the problem. Until the bad debt has been cleared, new investment is unlikely to happen and the economy dies a slow death. One option that hasn’t been considered, as Roubini alludes to, is to actually stimulate the real economy directly i.e. the economy that produces real goods and services. Governments can actually print new money and spend it directly into the economy through infrastructure projects. That way the money directly enters the economy and supports real economic activity, in a way that QE was supposed to do but never did.

We actually proposed this type of policy in 2011, immediately after the devastating February 22^nd Christchurch Earthquake. A direct injection of $5 billion of new money was suggested, as a way of financing new and necessary infrastructure for the rebuild of the city. At that time, this was calculated to save around $200 million a year in financing costs and avoid further increases in government debt.

Ironically, the Minister of Finance rejected this, on the grounds that it may cause “an adverse combination of high inflation, arbitrary wealth transfers and a loss of confidence in the creditworthiness of New Zealand”. This response supports Roubini’s position that policymakers simply do not understand the problem. In the case of New Zealand, the Minister of Finance seems to be quite happy to keep borrowing money and worsening the financial position of the country.

As has been seen, inflation is non-existent in a debt deflating economy. Of course, any new injections of new money must be carefully monitored and be at a level which is not likely to cause over stimulation of the economy. As Willem Buiter, a former external member of the Bank of England’s Monetary Policy Committee notes, an injection of base money “even in huge amounts, need not become inflationary ever”. Buiter goes on to state that “any inflationary increase impact of the enlarged stock of base money on the stock of bank credit or broad money can be neutralized by either raising bank reserve requirements, or by raising the remuneration rate on excess reserves held by banks”.

Thus, inflationary concerns can be set aside when this double-sided process is undertaken. This type of intervention has been called “Monetary Dialysis”, where clean money comes into the system (newly minted e-notes) and replaces or causes a reduction in debt money (bank credit) in order to keep the money supply at a prescribed level. The key is that the process is managed within the same framework that current monetary conditions are dealt with. No new legislation is required and the process can begin immediately. The RBNZ is already developing a new suite of macro-prudential tools and will be well placed to manage this policy shift.

In this process, all the objections raised by the Minister of Finance are dealt with. Infrastructure is rebuilt, people are employed, goods and services are provided, inflation is stable and money is saved, as there are no financing costs incurred. This really is the ultimate point: its is not about not having enough money, it is whether you have surplus labour (unemployment) and resources (capacity in the economy). This was the stark lesson of the Great Depression and it’s incredible that it still hasn’t been properly understood.

As to the creditworthiness of New Zealand, it is more likely that this will improve, as the overall level of debt falls and the productive economy recovers. What’s not to like about that?

Selling your Soul: The Unintended Consequences of Asset Sales

Submissions on the new Mixed Ownership Model Bill (who dreamt that nonsense up?) closed last Friday. Although I was away on holiday, I did get mine in, though it wasn’t quite as detailed as planned. I have posted the full submission below but, in light of news out overnight, I wanted to add a few points.

My opposition to the proposal to partially sell 4 of our energy companies (and who knows what else down the line) is based not on an ideological opposition to privatisation (government should only own assets that have a public good purpose or have key national strategic value) but on the issues of finance, risk and law.

The finance argument is simple. There really is no case for selling these assets based on their poor performance, funding costs or return. Government debt may be high and set to rise but flogging the family silver provides short term gain with long term pain. The debt position in NZ (both public and private) is a structural problems and will not be solved by a $5-7b sell down of core assets.

The question of the risk of these proposed sales is perhaps more subtle. It simply comes down to how one views the provision of energy on a national scale. It is a clear public good, even if it can be provided privately (e.g solar or micro-wind) and therefore should be provided at least cost (taking into account externalities) to the public. Floating energy providers onto the stock market changes the goal of the company. It is now a profit maximizer with long term shareholder value as its primary concern. Some might argue that SOEs are already operating in that model but that’s not relevant to this argument. The key is that in order to provide a public good, ownership must be in public hands. Added to that, the changes in technology and energy availability will require national level changes, planning and investment. Diluting ownership will make this problematic. At some point, the national interest may come back into focus and then what? What of the shareholders? They may not be interested in the national interest, especially if it impacts on the share price or their dividends.

This leads nicely into last night’s news. Argentina has sensationally nationalised YPF, a unit of the Spanish energy giant, Repsol, quoting “Hydrocarbon Sovereignty” (in Spanish) and basically arguing a lack of investment by YPF in Argentina. This is out and out expropriation and Repsol has hit back with a claim for $10.5b as compensation. This has been completely rejected by Argentina, as expected. This is likely to play out very badly in the international trade and investment arena and will probably end up in the international courts, if it is not resolved diplomatically.

Now this is exactly what I alluded to in my submission around the issue of international law and any future re-nationalisation or expropriation of assets, no matter what the situation is locally. Added to that we have the TPPA lurking in the background, which may further complicate matters, especially for a National government desperate to turn everything in NZ into an investment. One may argue that there is absolutely nothing to worry about in terms of possible future legal claims or problems but history shows us that this is a serious and unconsidered risk. Certainly I have not seen it in mentioned in any commentary. The government tries to duck and weave around the wording and structure of the sales model but it really needs to rethink the whole process from start to finish.

Submission on the Mixed Ownership Model Bill

The main purpose of the bill is to raise funds to reduce government debt and provide funds for new spending on public services. Reducing government debt is a laudable proposition and one can do that by increasing taxes, cutting expenditure or selling assets.

The government has chosen to sell publicly owned assets, specifically energy companies, in order to raise somewhere between $5 and $7b. These numbers are purely guesswork and will depend on a number of factors, including current market conditions, offering price and the structure of the companies post-sale.

This proposed bill is of concern for a number of reasons, which are listed below. I have categorized them into three areas: finance, risk and legal.

1)   Finance: The prime reason given for selling energy companies is that they provide a poor return to the government and that private owners may extract more “efficiencies” from the businesses. There has been no clear-cut evidence provided to support the former assertion, namely that the return from the energy companies is lower than the cost of government debt. Furthermore, there is scant evidence to support the proposition that privately run energy companies are any more efficient than publicly run ones. As we have seen from the Pike River disaster, private companies tend to be poor managers of risk and cut costs wherever possible, in order to increase profits. As many costs are externalized as possible to achieve this goal. In the energy business, this is a very dangerous approach. It seems that the financial argument is weak at best.

2)   Risk: As alluded to above, risk management is of serious concern when privatizing companies in the energy space. Energy provision is a prime public good and should therefore be provided by the public. Like water, energy is a pre-requisite for basic survival and should, therefore, not be seen as a profit maximizing good. By giving up pubic ownership of these basic assets, we open ourselves up to a poorer service, which may be based on ability to pay rather than a right to have the basic provision of energy. We may also lose the ability to make changes to and investment in the development of new energy production and networks. Investors, even with a 10% cap and other restrictions, will still have rights and views (see legal for further argument on this point), which may not be aligned with the public good. As well as safety and control risks, there is the risk of prices being raised over and above what might be appropriate. The example of the Bolivian water privatization and the Bechtel corporation (see Cochabamba riots of 2000) is a good example of what can go wrong when private interests are allowed to control basic pubic goods. Theses risks should not be taken lightly.

3)   Legal: Global investment rules have been expanded significantly over the last 20 years. NAFTA, the WTO and numerous bilateral trade agreements, have made the investment law field extremely complicated. What is clear, though, is that foreign investors have clear rights and these rights may, in some cases, trump domestic law and the expectations of the domestic citizenry. Examples of this are the Santa Elena case in Costa Rica, the Metalclad Corporation vs. The United Mexican States and the Ethyl Corporation vs. Canada. These are a small example of cases taken by foreign investors against states, where they feel their rights have been infringed. This could be for a number of reasons: environmental laws, human rights laws or expropriation (e.g. arising from renationalization or similar action).  We have transnational agreements being negotiated in secrecy (the Trans Pacific Partnership Agreement (TPPA)), which may contain further restrictions on the ability to make decisions based on domestic considerations but perceived as harmful to foreign investors. The making of new international investment rules has seen many unintended consequences. The same outcomes may apply to this bill.

In summary, it is clear that the proposed bill has some serious problems. There are many consequences, known and unknown, which give cause for deep reflection and concern. The financial argument is weak and there are other ways to raise funds for public expenditure. Of more concern is the risk and legal framework that may end up being applied. The examples are too numerous to fully list but they are clear and unambiguous as to the impact on the local population and its finances.

This bill seems predicated on an ideological desire to privatize state assets and not on any serious and well thought out argument for doing so. I would therefore argue strongly against its implementation.

Raf Manji,

Director,

Sustento Institute,

Christchurch.