Posts Tagged ‘money’

April 6th, 2013

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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.


February 2nd, 2013

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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


August 23rd, 2012


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 

Economist Steve Keen in New Zealand 6-10 Sept 2012
Author of best-selling book Debunking Economics, Steve Keen is Professor of Economics and Finance at the University of Western Sydney. He is a speaker of international renown and a voice of reason in confusing financial times. He was recently interviewed by Kim Hill on Radio NZ National and he’s crossing the ditch in September to talk to New Zealanders about the economy.
Professor Keen will present an evening public lecture in Christchurch:

Saturday 8th September at 5pm – C1 Lecture Theatre, University of Canterbury, Arts Rd, Ilam
Professor Keen will provide an overview of conventional economic theory, briefly cover its short-comings in dealing with the current financial situation, and outline his analysis as described in his book Debunking Economics. He will bring his discussion of the global economy right up to the present, and take a look at issues in New Zealand, including the housing market, debt levels and asset ownership, that affect our nation’s economic well-being.
Q: Who will benefit from attending the Steve Keen public talk? 
A: Everyone who wants to understand the economy.
(Economists, analysts, policy-makers, academics, politicians, public servants, teachers, students, investors, home-owners, renters, business owners, commentators, monetary reformers, financial advisers …)
See for further details on his Auckland and Wellington seminars.


August 8th, 2012

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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.





May 28th, 2012


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 22nd 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?


December 11th, 2011


To Print or Not to Print?


“To be, or not to be, that is the question,

Whether ’tis nobler in the mind to suffer

The slings and arrows of outrageous fortune,

Or to take arms against a sea of troubles,

And by opposing end them.”  Hamlet, Act III, Scene 1.

It seems, after nearly 30 years of deregulated markets, that we face a sea of troubles ourselves. An extreme global debt deleveraging is upon us, the numbers too outrageous to even consider. Not only have we consumed beyond our means, we have mortgaged our future. Whereas once credit was difficult to come by and banks conservative in their lending (can you pay this back?), the brave new world brought us access to unlimited treasures, all paid for on a credit system, which had limited restraint.

As financial models became more complex and debt could be packaged, securitised and sold off, all sense of restraint was lost. Who owed whom was lost in a parallel universe of metaphor: swap, hedge, collateral, obligation, repurchase. Repaying principal and interest, in the old fashioned sense was put to one side. Can you afford the interest? Don’t worry about the principal, that will pay itself off as the price rises! Can’t afford the interest? Don’t worry, we’ll lend that to you as well, or have a holiday (from interest that is….keeps charging but pay it some other time). Tick, tock, tick, tock.

Maybe Hamlet wasn’t as crazy as he sounded.

As I explained in a previous post on the Euro, deleveraging debt is a painful process. As debts are written off, the money supply contracts, causing a contraction in the general economy. This creates a spiral where demand for new credit drops and this causes further losses to business, resulting in more job losses and so on. Traditionally, this has been dealt with by the lowering of interest rates, which hopefully stimulate demand for credit and reduce interest burdens. Sadly, this doesn’t work until the overhanging debt has been cleared out, by which time unemployment has risen and economic output has contracted to severe levels.

The road to austerity is a self-fulfilling process. Clearing the debt mountain will take many years and, perhaps, like Japan, it could be a decade or more. During that time people will be unemployed, machines will sit idle and resources will be untouched. In the 1930s governments stood back, waiting for the miracle of the market. None came. That is not a road we want to travel down.

As the shadow banking system starts to fall apart, it is time to plan and look forward to building a stable and local supply of money to see us through the hard times. Continuing to rely on overseas capital and ever increasing borrowing is a road to ruin. Our gross debt will hit $90 billion  by 2016, according to Treasury forecasts. The government talks of returning to surplus by 2015 but that is very optimistic. Even then we will still carry this debt for many years to come.

So is printing new money and spending it directly into the economy a better idea? I talked about this in a recent interview with Kim Hill and Radio NZ National, which you can catch here.

RadioNZ National Kim Hill interview

I have had an incredible amount of positive feedback since the interview and, interestingly, from a very wide range of people. There were a few comments about “funny money”, including a little pop from Nevil Gibson at the NBR. My answer to that is if you think this is funny money, try explaining the nearly $4 trillion that’s been used to buy debt off US banks! The feedback has confirmed the following: that there needs to be a clearer explanation on how the money creation process actually works (even though the RB has published on this here), that inflation needs to be better understood and that people are extremely concerned about the way the financial system is structured. We will be working on producing a simpler explanation to those issues.

In the meantime, around the world, there is a lot of new work being undertaken around the quantitative easing process and how that is not really working. Sushil Wadhwani (Goldman Sachs and MPC member in the UK) and economist (and former colleague of mine) Michael Dicks have looked at more direct interventions into the economy, noting that QE is a very roundabout way of trying to stimulate an economy. They look at directing lending to companies from the central bank and, more interestingly, at simply giving households a voucher to spend. You can read the brief paper here. Their proposals are in the right direction but do not go far enough. Nouriel Roubini recently wrote that direct spending on new infrastructure in the US would be much more useful than simply buying toxic bonds off failing banks.

What’s clear is that more and more economists and policy analysts are realising that QE is a sop to the banks, boosting their balance sheets and stock prices, at the expense of the taxpayer. Clearly this is a misallocation (and perhaps misappropriation) of taxpayer funds. Furthermore, even with trillions of $ of QE, there has been no inflationary effects at all. This is important to note when considering the direct injection of new money, as we have proposed, for the Christchurch rebuild.

As I noted in this recent piece for ChangeNZ, as long as there is surplus labour and resources, there will be no inflationary effects from new money. This has been confirmed from business sources, who note the economy is limping along at between 33-50% of capacity. So there is little concern over the direct effects of the new money in raising prices. The indirect effects through the banking system are also likely to be minimal, given a very low demand for credit across the economy. Indeed, with debt deleveraging in full swing, we are likely to see further reductions in debt, offsetting any new potential demand for credit. Still, credit numbers will need to be watched carefully and, at the same time, it’s important to note that the amount we are suggesting is only $5 billion. Ultimately the goal is a strong and locally managed financial system with price stability. That is something we have not had, despite the continuing myth of a central bank induced low inflationary environment. The time is right to consider an alternative way forward.

Perhaps we should leave the final words to Hamlet, as we ponder the road ahead:

The undiscovered country, from whose bourn

No traveller returns, puzzles the will,

And makes us rather bear those ills we have,

Than fly to others that we know not of?

Thus conscience does make cowards of us all,

And thus the native hue of resolution

Is sicklied o’er, with the pale cast of thought,

And enterprises of great pitch and moment

With this regard their currents turn awry,

And lose the name of action..…”









"I’m a Londoner who moved to Christchurch, New Zealand in 2002. After studying economics and finance at Manchester University and a couple of years of backpacking, I ended up working in the financial markets in London. I traded the global financial markets on behalf of investment banks for 11 years. Since moving to NZ, I have been an angel investor, budget advisor, director, trustee, mentor and business consultant. I'm currently a Councillor at Christchurch City Council and a Trustee of the Volunteer Army Foundation and the Christchurch Arts Festival Trust. I write about the intersection of economic, social and environmental issues."

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