The EMU reform ruse – Part 2

This blog continues the discussion from yesterday’s blog – The EMU reform ruse – Part 1 – where I consider the reform proposals put forward by German academic Fritz Sharpf, which have been held out by Europhile Leftists as the progressive way out of the disaster that the Eurozone has become. Yesterday, I considered his first proposal – to continue with the enforced structural convergence to the Northern model – the current orthodoxy in Brussels. Like Sharpf I agree that the agenda outlined in the 2015 The Five President’s Report: Completing Europe’s Economic and Monetary Union would just continue the disaster and would intensify the political and social instability that will eventually force a breakup of the monetary union. Sharpf’s second proposal is that the EMU dichotomise into a Northern hard currency bloc while the Southern states (and others less inclined to follow the German export-led, domestic-demand suppression growth model) reestablish their own currencies and peg them to the euro with ECB support. While it is an interesting proposal and certainly more adventurous than the plethora of proposals that just tinker at the edges (for example, European unemployment insurance schemes, Blue Bond proposals and the like), it remains deeply flawed. While it is assumed that the Northern bloc would comprise core European nations such as Germany and France, it is not clear that either would prosper under the new arrangement. France and Germany were never been able to maintain stable currencies prior to the EMU. Further, the ‘exit’ proposal ties the poorer nations into a vexed fixed exchange rate arrangement, which would always compromise their domestic policy freedom, just as it did under the earlier versions of the Snake or the European Exchange Rate Mechanism (ERM). Far better to just break the whole show up and let the nations go free with floating exchange rates.

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The EMU reform ruse – Part 1

On October 31, 2017, my blog – Europhile Left deluded if it thinks reform process will produce functional outcomes – countered some of the nonsense coming out of Europe (from the so-called progressive side) that the Eurozone hadn’t failed when judged by it bias towards mass unemployment and increasing precariousness of its citizens. I particularly noted the terrible record in terms of youth unemployment and NEETs. Yesterday’s blog – Massive Eurozone infrastructure deficit requires urgent redress – documented how much damage the austerity bias of the Eurozone has caused to essential productive infrastructure – human and physical and the ridiculous underinvestment by governments locked into mindless Stability and Growth Pact (and its recent derivatives) rules. Unphased, the Europhiles keep telling me that reform processes are underway and that we need to be patient. That the glorious vision outlined in the October 1990 European Commission Report – One Market, One Money Report, which, apparently outlined a vision of domestic-demand driven convergence bliss for the Economic and Monetary Union. I analysed that Report in detail in my 2015 book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale – and have to say that anyone who holds it out as a plan for the future must have been reading a different report or affected by heavy drugs. Today, I am considering recent reform proposals put forward by German academic Fritz Sharpf, who considers the neoliberal Eurozone experiment has failed but can be resurrected without abandoning the essential mechanics of the monetary union. Tomorrow, I will start to consider a so-called progressive proposal that breaks the EMU into two tiers – a Northern hard currency zone and a ‘Southern’ zone where nations reintroduce their own currencies, but peg them against the euro with ECB support. It will not surprise regular readers to know that I disagree with Sharpf’s reform agenda.

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Europhile Left deluded if it thinks reform process will produce functional outcomes

A recent twitter exchange with some Europhiles who believe that it is better to wait for some, as yet unspecified, incremental reform process for the Eurozone rather than precipitate exit and the restoration of currency sovereignty was summed up for me by one of the tweets from Andrew Watt. In trying to defend the abandonment of sovereignty and make a case for continuing with the so-called reform dialogue, he wrote (October 27, 2017): “Unemployment in “periphery” was v hi before €. Fell rapidly. Then rose sharply, has now fallen somewhat. So picture very mixed.” I found that a deeply offensive claim to make and responded: “It is not a mixed picture at all. Youth unemployment has never been as high. Greek unemployment was never > 12%. Now > 20% indefinitely.” I also attached a graph (see over). I think this little exchange captures the essence of the delusion among many in the Left that we document in our new book – Reclaiming the State: A Progressive Vision of Sovereignty for a Post-Neoliberal World (Pluto Books, 2017). The Europhiles maintain a blind faith in what they claim to be a reform process, which when carried through will reduce some of the acknowledged shortcomings (I would say disastrously terminal design flaws). They don’t put any time dimension on this ‘process’ but claim it is an on-going dialogue and we should sit tight and wait for it to deliver. Apparently waiting for ‘pigs to fly’ is a better strategy than dealing with the basic problems that this failed system has created. I think otherwise. The human disaster that the Eurozone has created impacts daily on peoples’ lives. It is entrenching long-term costs where a whole generation of Europeans has been denied the chance to work. That will reverberate for the rest of their lives and create dysfunctional outcomes no matter what ‘reforms’ are introduced. The damage is already done and remedies are desperately needed now. The so-called ‘reforms’ to date have been pathetic (think: banking union) and do not redress the flawed design. And to put a finer point on it: Germany will never allow sufficient changes to be made to render the EMU a functioning and effective federation. The Europhile Left is deluded if it thinks otherwise.

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World Bankspeak – how to hide the failure of a mission!

As the title of my 2015 book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale – indicates, I am interested in both economics and patterned behaviour within groups and the way groups erect edifices (such as, denial) to defend positions. I am also interested in the way groups use language. In an upcoming edition of the Journal of Post Keynesian Economics, I have an article written with Dr Louisa Connors entitled – Framing Modern Monetary Theory, which discusses this topic. Framing and language is a tool that reinforces Groupthink and allows group (organisations) to engage in denial even though the facts convey a different message. A 2015 analysis of World Bank Annual Reports from 1946 to 2012 is illustrative of the way in which framing, grammar and word usage can be used to clothe reality. The analysis published by the Stanford Literary Lab – Bankspeak: The Language of World Bank Reports, 1946-2012 – documents the shift in language by the World Bank between the first two decades of Annual Reports to the second two decades. They show how the Bank shifts from a language that is readily understood and considers a concrete world and offers very little prescriptive input to a narrative that becomes so opaque and filled with financial buzz words that comprehension is lost. They document the emergence of what they refer to as “Bankspeak”. Groupthink requires a certain language to reinforce the increasingly unsustainable reality that the group lives within. That is the role of the World Bankspeak! The Literary Lab analysis is worth reading because it provides a coherent analysis of the way words and sentence structures (grammar) are manipulated to shift focus, allay concern and basically, undermine accountability mechanisms that were established to ensure an institutional mission was being faithfully pursued.

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Why Britain should not worry about Brexit-motivated bank relocations

On April 26, 2017, some smarta*!se journalists wrote a Bloomberg piece – The Brexit Banker Exodus Gains Momentum – with some not-so fancy graphics purporting to show where the “U.K. banking jobs might be headed” allegedly because Britain is to leave the European Union. On May 9, 2017, the increasingly terrible UK Guardian bought in on the frenzy with its article – City banks could move at least 9,000 jobs from UK due to Brexit . And so it goes. Apparently, Deutsche Bank is “leading the threatened exodus”, followed by JP Morgan and Goldman Sachs. All exemplars of virtue, not! While the threat of the ‘City’ leaving London is now used to frighten British people about Brexit, the reality is, in my view, quite different. I would be celebrating the cleaning out this infestation of unproductive enterprises, which remain one of the destructive legacies of Margaret Thatcher and, later, New Labour and its so called ‘light touch regulation’.

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Deutsche Bundesbank exposes the lies of mainstream monetary theory

On one side of the Atlantic, it seems that central bankers understand the way the monetary system operates, while on the other side, central bankers are either not cognisant of how the system really works or choose to publish fake knowledge as a means to leverage political and/or ideological advantage. Yesterday, the Deutsche Bundesbank released their Monthly Report April 2017, which carried an article – Die Rolle von Banken, Nichtbanken und Zentralbank im Geldschöpfungsprozess (The Role of Banks, Non-banks and the central bank in the money-creation process). The article is only in German and provides an excellent overview of the way the system operates. We can compare that to coverage of the same topic by American central bankers, which choose to perpetuate the myths that students are taught in mainstream macroeconomic and monetary textbooks. Today’s blog will also help people who are struggling with the Modern Monetary Theory (MMT) claim that a sovereign government is never revenue constrained because it is the monopoly issuer of the currency and the fact that private bank’s create money through loans. There is no contradiction. Remember that MMT prefers to concentrate on net financial assets in the currency of issue rather than ‘money’ because that focus allows the intrinsic nature of the currency monopoly to be understood.

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Reforming the international institutional framework – Part 4

This is the fourth and final part of the discussion relating to reforming the international institutional framework. In brief, the argument is that there are several essential functions that a multilateral institutional framework has to serve that need to be incorporated within any new structure. It is clear that an agency to channel development aid remains essential. Further, it is important to create an agency that will provide liquidity to nations who are unable to access essential imported resources (such as food) without invoking exchange rate crises. While these functions seem to align with the current World Bank and the IMF, a progressive approach to service delivery in these areas would not resemble the operational procedures currently in place.

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Reforming the international institutional framework – Part 3

As I noted in the first two parts of this little mini-series (can a mini-series be anything other than little), multilateral institutions such as the World Bank and the IMF have outlived their usefulness, given changes in economic conditions and a need to abandon the neo-liberal Groupthink that has infested both structures. In the final two parts (today and tomorrow) I will discuss the necessary issues that have to be addressed in reforming these institutions (or replacing them) and what a new international architecture that serves a truly progressive interest rather than the interests of financial capital in the US might look like.

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Reforming the international institutional framework – Part 2

This blog is the second part (now of three) where I discuss how the international institutional framework has to be reformed to serve a progressive agenda where rich countries (and the elites within them) do not plunder then pillory poor countries. In this blog I detail why we should dissolve the World Bank, the OECD, and the BIS, all of which have become so sullied by neo-liberal Groupthink that they are not only dysfunctional in terms of their original charter but downright dangerous to the prosperity and freedoms of people. The third part will consider what a new international institution might look like and the role it can play in aiding poor nations, particularly those who are reliant on imported food and energy. We will also discuss reforming the foreign aid system.

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Reforming the international institutional framework – Part 1

This blog continues the unedited excerpts that will appear in my new book (with Italian journalist Thomas Fazi) which is nearing completion. This material will be in Part 3 where we present what we are calling a ‘Progressive Manifesto’, which we hope to provide a coherent Left philosophy to guide policy design and policy choices for governments that are struggling to see a way beyond the neo-liberal macroeconomics. In this blog I examine how the international institutional framework has to be reformed to serve a progressive agenda where rich countries (and the elites within them) do not plunder then pillary poor countries. Central to this new framework is the abolition of the World Bank, the IMF and the OECD, all of which have become so sullied by neo-liberal Groupthink that they are not only dysfunctional in terms of their original charter but downright dangerous to the prosperity and freedoms of people. Former World Bank chief economist Joseph Stiglitz told journalist Greg Palast in an interview in 2001 that the IMF “has condemned people to death” (Source). I will propose a new international institution designed to protect vulnerable nations from damaging exchange rate fluctuations and to provide investment funds for education, health and public infrastructure. We will explore how new institutions protect themselves from developing the sort of dysfunctional Groupthink that has crippled the existing institutions. We will disabuse ourselves of notions that are popular among some progressive voices that a fixed exchange rate, international currency system is required. This will be a two part blog and will also have context for other blogs where I discuss reforms to the global financial system.

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The Bank of Japan needs to introduce Overt Monetary Financing next

The latest survey data from the Bank of Japan is interesting and supports a growing awareness among policy makers that monetary policy has run its course and will have to work more closely with active fiscal policy to stimulate economic growth. These insights have been a hallmark of ideas advanced for many years now by Modern Monetary Theory (MMT) proponents (including myself). The data shows that the negative interest rate and large-scale quantitative easing programs that the Bank of Japan has been pursuing have not had their desired effect. It was clear when they were announced that they would fail to achieve their goals. I wrote about that in 2009 and 2010. But it seems that the mainstream policy debate has to be dragged kicking and screaming through a series of policy failures before any progress is made towards actual solutions that will work. The Bank of Japan Board meets later this week and I am hoping they announce their intention to work closely with the Ministry of Finance (fiscal policy) to introduce Overt Monetary Financing (OMF) where the bank provides the monetary capacity to support much larger fiscal deficits with no further debt being issued to the non-government sector. That would finally put policy on track to do something effective and productive. It would also provide some policy leadership to guide other nations towards a more prosperous future (like Britain).

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The Italian bank crisis – another Eurozone mess

So several investment funds based on real estate in the UK have suspended trading to stop people withdrawing their funds. Who would have thought that in a vastly overvalued UK property market that people would start to reassess the value of these investments, especially after working out (gosh!) that the mismatch in maturities in these type of funds was more or less extreme? And so the Leave vote is now being blamed on crashing a market when all that is happening is that the real estate market is starting to correct back to something less ridiculous. And talking about ridiculous. The Italian government is now coming headlong into conflict with the, now ridiculous, European Commission on the impending crash of its zombie banking sector. You might have thought we were still back in 2008 or something. No folks, this is 2016 and the Eurozone problems just keep on going. The Italian banking crisis was always going to happen – it was just a matter of when. Why? Simply because the single currency experiment has failed and the policy making process and the institutional machinery is so detached from reality – as in all cases of Groupthink – that it can no longer respond in an effective way to changing circumstances. The Eurozone is still crippled by its flawed monetary design and in more recent years the migrant issue has come over the top to reinforce this malaise. The Brexit vote outcome reflects the consequences of this dysfunction and demonstrates that a world contrived by the elites to benefit themselves is not the world of reality where things have a habit of turning sour if the rest of us are suppressed.

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Greek bailout money goes to banks and corporations – who would have thought?

Earlier this week (May 23, 2016), the Greek public opinion polling agency – Public Issue – published its latest Political Barometer (No. 156) which reported on – Attitudes towards the European Union and the Euro. As at May 2015, the majority of Greeks polled did not believe that the EU has a future and a rising proportion now believe things would be better off in 1-2 years if Greece exited the euro and introduced its own currency (32 per cent as opposed to 18 per cent 6 months ago). Things are shifting. I also wonder what the next polls will say when the Greek people learn of the latest research that shows where all the Greek bailout money has gone? It is an appalling story really.

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Friday Lay Day – Canadian central bank governor bucks the mainstream Groupthink

It’s Friday again, my blog Lay Day, which means I fast track the blog entry in favour of other writing tasks. But one thing that is worth noting today (and I’m sort of catching up on recent events in my reading of them), is a speech that the Governor of the bank of Canada (its central bank) gave to the Empire Club of Canada in Toronto on December 8, 2015. The speech – Prudent Preparation: The Evolution of Unconventional Monetary Policies – was somewhat of a revelation given that it was coming from a central banker. Essentially, he admitted that monetary policy in the current situation was relatively ineffective and that expanding fiscal policy was the appropriate government strategy to address the cyclical downturn in non-government spending. He also disabused his audience of the notion that the current low growth environment was of a ‘structural’ nature. He said that the slow non-government spending growth was cyclical and reflected the reality of precarious private balance sheets and low confidence in the future. He channelled the writing of John Maynard Keynes, explicitly, which in itself, was a significant public recognition, especially by a central bank governor. So Canada has now elected a new government that is promised to increase the fiscal deficit to stimulate job creation and economic growth. It also has a central bank governor that implicitly is urging the government to use its fiscal policy capacities in that way. What a refreshing change!

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Friday – when banks were banks

It is my Friday lay day and I am quite distracted with other commitments. But at the London presentation a few weeks ago, I mentioned that I would scrap central banks and consolidate their functions within a division of what we now think of as Treasury departments (or Finance Ministries). Whenever you say that there is a ridiculous response from those who claim to know something about banking along the lines of either, it would cause hyperinflation or that the politicians cannot be trusted. Both arguments are as I say – ridiculous. There are some things that central banks do that are necessary, for example, maintain financial stability through the integrity of the payments system. They also, depending on the nation, manage foreign reserves although that function is unnecessary if exchange rates float. Yes (flame suit on) I know less developed countries face exchange rate volatility and have to import food to survive. Which brings me to the point. The first part of scrapping central banks is to eliminate their ideological/political function. They are bastions of conservative mythology – pick whichever one you like – expanding the money supply is inflationary, ‘printing money’ is inflationary, politician meddling in monetary policy is inflationary, financial markets will desert a country that does not have an independent central bank, etc ad nausea. Politicians also use the so-called independence of the central banks as a way of deflecting policy responsibility for mass unemployment. Modern Monetary Theory (MMT) does not advocated doing away with the functions that are legitimately performed within the current central banks. It would stream-line some and make other functions redundant, but what it would do away with is this incessant cycle of ideology that emanates from these institutions.

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Structural reform – code for smash the worker resistance

The ECB had another lavish annual talkfest in Portugal over the weekend just gone in the guise of their – Forum on Central Banking. Like all these EU-type gatherings there was plenty of fine food and wines. They even provided footage along those lines. The President of the ECB Mario Draghi gave the opening speech – href=”http://www.ecb.europa.eu/press/key/date/2015/html/sp150522.en.html”>Structural reforms, inflation and monetary policy – on May 22, 2015. There was also talk about how “structural and cyclical policies … are heavily interdependent” but then a denial of the same. The message from the President was like a record stuck on the turntable – “to accelerate structural reforms in Europe … even in a weak demand environment”. Well here is my message – similarly like a stuck record – structural imbalances occur because of weak demand and the best time to assess structural policy is when you have first attained full employment by appropriate setting of fiscal deficits, not before. It is madness to deliberately constrain fiscal balances to levels that ensure high and entrenched unemployment and rising underemployment and then expect citizens to support microeconomic policies that further undermine their welfare and damage what job security they have. But that is the EU way and that is why the Eurozone is a massive basket-case failure.

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Greek bank deposit migration – another neo-liberal smokescreen

There was a news report on Al Jazeera on Friday (January 5, 2015) – Greece’s left-wing government meets eurozone reality – which contained a classic quote about the supposed incompetence of the new Greek Finance Minister. A UK commentator, one Graham Bishop was quoted as saying “If you’re a professor of macroeconomics and a renowned blogger, you probably don’t understand precisely how the banking systems works”. Take a few minutes out to recover from the laughing fit you might have immediately succumbed to on reading that assessment. As if Bishop knows ‘precisely’ how the system works! The context is the current news frenzy about the deposit migration out of Greek banks as a supposed vote of no confidence in the anti-austerity stand taken by Syriza. Having voted overwhelmingly for Syriza, Greeks are now allegedly voting against the platform by shifting their deposits out of the Greek banking system. A close look at things suggests that is not going on and it wouldn’t matter much if it was.

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The sham of central bank independence

Let it be noted that the Japanese government 10-year bond yield hit 0.33 per cent overnight. That tells you that all the scaremongering that has been going on over the last twenty years about hyperinflation, the Japanese government running out of money, the bond markets dumping the yen, and the rest of it were self-serving lies designed to advance a particular ideological position at the expense of the broader social well-being. A year ago, the yields were 0.88 per cent – so they are going in the opposite direction to that predicted by many mainstream economists, blinded by their irrelevant textbook theories about how markets work. In that neo-liberal textbook fairyland, the yields should be sky high now, inflation accelerating out of control and the government forced to admit it had run out of money. Get over it, it won’t happen because the real world doesn’t operate like that. Students of macroeconomics are continually being taught a myth, which is detrimental to their education and life experiences. Many turn into the future doomsayers and sociopaths in organisations such as the IMF, the European Commission and other like policy making institutions. They always rave on about the need for more central bank independence to insulate monetary policy from political decision-making as if that will foster the well-being of the population. The idea of central bank independence is a sham and in the last week there has been stark evidence to support that view.

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The Cyprus confiscation becomes the model for bank insolvency

I am still sifting through the documents from the recent G20 Summit in Brisbane to see what our esteemed leaders (not!) have planned as their next brilliant move to reinforce neo-liberal principles. One of the least talked about outcomes from the recently concluded G20 Summit in Brisbane were the agreed changes to the banking systems operating in the G20 nations. The dialogue started in the G20 Finance Ministers’ and Central Bank Governors’ Meeting in Washington in April 2014. Clause 8 in the official Communiqué covered the aim of the G20 “to end the problem of too-big-to-fail” and signalled the “development of proposals by the Brisbane Summit on the adequacy of gone-concern loss absorbing capacity of global systemically important banks (G-SIBs) if they fail.” The Brisbane Summit would consider these proposals. The aim was to “give homeand host authorities and markets confidence that an orderly resolution of a G-SIB without exposing taxpayers to loss can be implemented”. You won’t believe what they came up with.

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Direct central bank purchases of government debt

There was a recently published Federal Reserve Bank of New York Staff Report – Direct Purchases of U.S. Treasury Securities by Federal Reserve Banks – by Kenneth D. Garbade, which recounts the way the central bank in the US could purchase unlimited amounts of treasury debt by creating funds out of thin air and how that capacity was eventually constrained. The Report is an understated account of the way in which the conservative ideological forces eventually prohibited this capacity and forced the US government to only issue debt to the private sector. He shows that between 1917 and 1935, this capacity was used often “without incident” but as the conservative antagonism grew it was limited (in 1935) and then abandoned altogether in the early 1980s. The Report demonstrates there were no intrinsic financial reasons for abandoning this capacity.

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