Sunak vs Truss: Debt, Inflation and Levelling Up

The Conservative leadership contenders ask:  When does the Covid-induced public debt start to get paid off? What about inflation if we reduce taxes to ease household finances? How do you achieve levelling up?

A FT letter writer Mark Hofman in August 2020  said that in the example of Japan which has had huge public debt levels for a long time:

     'government bonds held on the balance sheet of the Bank of Japan are effectively the Japanese government owing the bond debt to itself...so why not put a line through those entries on each side of the balance sheet? The level of debt would be reduced without the        taxpayer having to pay anybody anything, and with nobody being poorer.' 

If there is a possibility of inflation due to this he says it can be resolved by raising the reserve requirements of commercial banks at the central bank (in the UK's case - the Bank of England). He asks: Why consider the conventional way of paying off this debt with taxes for generations, when there is a better way?

Beware of suggestions that governments are like households and must not spend beyond their income.  Householders are not like that as they cannot create their own money whereas sovereign govenments, with careful monetary control can do so safely, as Hofman describes. 

On levelling up:  Change how tax is raised by levying a small annual charge on the value of all land, including the value of the land footprint of all homes. At the same time any tax raised in this way would be allowed against a personal income tax liability. For many homeowers the total charge would not change. 

Benefits would accrue:

• House price rises - now with a land value levy - would slow or fall and homes become gradually more affordable since speculation would be damped down and a steadier market would encourage first time buyers. 
• Homes would become less attractive for pure investment rather than for living in personally. Recent governments just subsidise new buyers which raises the price of homes and brings developers more profit. The crazy price boom continues.
  
• More homes would be built as development would be encouraged - for example a house with a large plot would be built on to share the land value levy over new, extra homes. Or an extension to create a separate rentable flat. New homes would be built to low carbon standards. Countryside would be preserved.
• Renters would be helped as the land charge would be on the landlord. Landlords would be anxious to have their property occupied at lower rents rather than keep homes empty waiting for increased rent.
  

Levelling up at a stroke, for many. Those who are land rich and income poor, thus short of cash, would be allowed to defer payment until they sell the home. 

The young would be able to consider buying and homeownership would increase. Older people in large homes would be nudged into downsizing. The increasing wealth divide between homeowners and renters would ease.

For the common good we need such monetary and taxation policies. Which candiate, or party, will grasp these choice fruits?  

Posted by THE FREE LUNCH - FAIRNESS WITH FREEDOM Charles Bazlinton

             

Hartlepool levelling up: Was that it?

What did 'levelling up' mean in the Hartlepool swing to the Tories?  The Hartlepool constituency, returned a Tory MP Jill Mortimer, 'farmer and business woman', after a 50 year run for Labour. That day was also the vote for the Tees Valley mayor and Ben Houchen won a resounding victory. Perhaps the Mayor Houchen factor was at work. Perhaps it was that in  Hartlepool with the Labour candidate still an EU fan who wants a second referendum, and with Hartlepool  very strongly Leave, maybe that prompted the strong rejection. Who allowed that to happen?

Ben Houchen, in winning his first Tees Valley contest in 2017 as a Tory promised to nationalise the local airport which he did and it created many new jobs.  Nationalisation is a policy borrowed from Labour.  Houchen has always said he is locality oriented and the use of socialist policies shows he is a non-ideolgical Tory.  The Boris-Rishi government has supported his Tees Valley projects - including environmental climate change schemes - by directing spending to the area. Also Treasury North, which is a partial government departmental move to Darlington, is a rather socialist, state planning idea. It probably helps in all these local changes that Chancellor of the Exchequer Rishi Sunak holds a nearby constituecy.  

Freemarket conservatives wanting small government (don't move but reduce the Treasury?), low borrowing and 'let the market rule'  are rare these days. Covid-19 financial support has meant Tory central government money is now always on tap for lots of schemes. The (allegedly) penny pinching austerity gloom of the Cameron-Osborne era is well gone, and now seen merely as anti-Labour sound bites, but which helped dampen expectations of government-directed productive investment which now the New Tories are unashamedly borrowing from Labour.  But remember: the high priestess of the free market, Margaret Thatcher secured a deal for Nissan in Sunderland in the 1980s with a  special central government money deal for Nissan.     

So the Conservatives are doing what is needed to remain in power whilst favouring neglected voters by boosting their local economy with cash handouts. Old fashioned pork barrel politics, as ever. The latest scheme is the Community Renewal Fund which will share £220m with 100 favoured places in a year and five of those are the five towns of the Tees Valley. Red Tories are in town.

The problem with such politics - sensible enough given the limited vision - is that only some groups of voters are favoured rather than producing a fairer outcome for all. Under Old Labour it might be such as union members,  managers of state institutions, and home renters; under Old Conservatives it might be shareholders, capitalists eager for state grants and home owners. 

When will overall fairness prevail? Instead of a hope that a trickle-down of government money may come my way via my Mayor, why not each citizen respected as contributer and beneficiary of a good recovering economy?   The previous blogpost on Universal Basic Income  illustrates how that idea of a payment to everyone unconditionally is well researched to be affordable - 'revenue neutral'. Even better an extra measure would be the funding of UBI to include land value tax charged on the land value underlying all homes, and allowable against income tax,  along with a reform of council tax. Renters would benefit as they would pay no charge, the landlord would. 

We need a re-set in our politics and economics in favour of fairnes for all, not just for instance the homeowners who are benefitting  from a housing boom. That would be better levelling up. Our society is becoming increasingly divided as defined by owning or renting a home. Renters are being sidelined as they have no unearned nest-egg accumulating on the value of the land with their house as homeowners do. We all contribute to our economy as we work and run things and a healthy economy raises house (actually land) prices, but that value is soley due to land ownership. Too bad if you rent your home, no level playing field for you from your contribution, it all gravitates down to the owner. What's fair in that?

Posted by Charles Bazlinton author The Free Lunch - Fairness with Freedom

 

Another Tory policy? Basic Income (without Government Debt)

Shock! Horror! The Tories have stolen Labour's public spending policies. Chancellor Rishi Sunak has started to undo the austerity that his own party imposed for a decade which, as Headley Stone  wrote (FT letter 15 Feb) 'has brought the UK's public services to its knees' . 

Commenting on the budget in the FT on 11 March,  Martin Wolf wrote: 'It makes sense for the government to borrow to spend, especially on investment. I have been arguing this for a decade. The decision to cut investment right after the financial crisis was a classic bit of Treasury idiocy. Now ...with employment high ...no longer the ideal time....But it is still a risk worth running provided the money is well spent which one has to doubt, given the hurry.' 

What is it about our party politics that had George Osborne, a Tory chancellor imposing harsh measures for a long time to the detriment of the common good and now has a successor from the very same party determined to undo it?  Left-leaning polices have now become the centre ground but have been cleverly captured by the politicians of the old right. At long last, new enabling fiscal policy that for so long has been proscribed, will be relaxed, but if Mr Wolf is right not with the best timing.  Incidentally the investment will benefit bankers and large funds as the money will be borrowed from them. It need not be that way, as sovereign governments can create money debt free.      

The huge impact of Covid-19 on the economy and on households will surely need 'helicopter money' for every citizen and the news is that President Trump is planning to 'send out cheques to every American within two weeks' to achieve a boost. There are people calling for such a measure in the UK. A UK petition is running with an ambitious plan to set a basic income at £1000 per month, sign here: Basic Income .   This: QE for the People  explains how it would work without raising new government debt.  

What may well be started as an emergency measure to plug depleting household budgets by a free handout, needs to become a standard fact of life for every citizen. Everyone needs sheltering from the whirlwind caused by Covid-19 and the usual rollercoaster of flip-flopping politicians who play with our livelihoods through shortsighted policies.     


Posted by Charles Bazlinton author The Free Lunch - Fairness with Freedom £3   

Election 2019. Debt-free public funding: broadband, water, energy. Public debt mountains not needed....

The Labour party has said it will bring utility companies into public ownership:
         We will bring rail, mail, water and energy into public ownership to end the great privatisation  rip-off and save you money on your fares and bills. We will deliver full-fibre broadband free to everybody in every home in our country...
See: Labour Manifesto p7 . Subsequent reported statements say that they will issue government bonds to do so - that is: borrow money and pay interest on the new debt.  

Lord Vallance of Tummel (ex-BT Chair) writes in The Times 19 Nov 2019 that the reason BT was privatised was to access sufficient capital for technological transition to digital. He states that telecoms ranked lower than the NHS, police, defence etc. in the annual  spending round and says there is no reason to believe that these priorities would change if BT came back to public ownership. He clearly does not realise what a government of a sovereign state with its own independent currency can do, to provide tax-free, debt-free funds.  Free money can be issued for non-inflationary productive investment such as developing broadband, railways, etc. No borrowing from banks is needed at all, Lord Vallance. No queues. No begging bowls. Just careful management of how the money is handled. 

As Prof Richard Werner wrote back in 2010, specifically on broadband investment:
Government Money
        One principle in monetary economics is that money creation used for productive purposes is not  inflationary. It is therefore possible to finance the Broadband Initiative with the creation of government money, without anyone incurring any costs or debts, and without any interest burden. From an economics perspective this is indeed the most efficient way to fund such productive government expenditure  

George Osborne, Chancellor of the Exchequer, concurred with that same view through a Treasury briefing document in 2013 (see para: 3.34), that money creation can be carried out to finance fiscal deficits, thus:

      ' It is theoretically possible for monetary authorities to finance fiscal deficits through the creation of money. This would allow governments to increase spending or reduce  taxation without raising corresponding finance from the private sector.'  

All the main parties are into spending much more government money than in the austerity days. But none of them mention money creation as a tool for financing public needs. Instead there are scare stories about public debt mountains and more tax. But if pension funds had their utility assets bought up through debt-free funding (no debt mountain-building) they could invest the cash in productive industry and commerce - Hey! there's a new capitalist idea for financial wizards to think on. A resurgence of new and newly capitalised businesses to fund our pensions? 

To prevent a property market boom through the cash released from re-nationalisations, the Labour idea of land value tax on commercial property would be a wise move. (Labour Manifesto p50).     

Posted by Charles Bazlinton. Author: The Free Lunch - Fairness with Freedom   

Plamen Ivanov reveals the strange origin of the Bank of England.

At the pinnacle of our capitalist system is perched the Bank of England which Dr Plamen Ivanov calls 'this key capitalist firm'. An apt phrase given that the Bank has seemed unquestionably authoritative and essential to the economic working of the UK for over 300 years. However, inequality under this system grows despite political efforts to the contrary, so given the premier role of the Bank can it be that it is a cause of the inequality? Or is it just a neutral, disinterested player in a democratic system run by others? Dr Ivanov reveals hidden and barely understood facts around the Bank's origins that befog the truth about the mechanism working our money system even today, and which he does blame for the disparities. He shows that what started in 1694 continues to this day, powerfully unabated through all banks which operate under what amounts to a marketing franchise which originated with the Bank and is regulated by it. The know-how and procedures of banks follow the model, with the result that the loans issued by them brings enrichment to their top managers and shareholders, even today, just as happened for the Bank itself after its formation in 1694 and for 250 years after. But Ivanov is hopeful that all is not lost for fairness, as there are benign banking ownership models for us to follow.   

Dr Ivanov's doctoral paper that explores these themes is The Bank of England: A Socio-Economic Inquiry into Private Money Creation, Public Debt Financing and the Long Run Implications for Inequality in Britain and beyond (Oct 2018) and he acknowledges the insights of Prof. Richard Werner's key credit creation work in the writing of it. It is about how the Bank made waging a long war more possible for the government of the day and facilitated that by taxing ordinary citizens to the huge financial benefit of a small group of Bank directors and shareholders. But he shows how national wealth creation might be made more sustainable and be better spread through logical and proven reforms. Whilst public (government) debt with its constant demand for interest payments is used to this day by politicians as a tactic to impose austerity for citizens, Ivanov questions the need for the national debt at all.

With the takeover of the throne of England by Prince William of Orange of The Netherlands in 1688 a new era of state finance began. For centuries the ancient 'dual policy purpose of a monetary and fiscal tool' - the tally stick system - was a: 'public credit system [which] allowed state bureaucrats to spend beyond the annual tax revenue by obtaining credit from the public via the issuance of receipts of future taxes paid' (p143). The earlier rulers had resorted, apart from this tally stick system, to funding by means including borrowing from goldsmiths, customs levies, other duties and land tax, all of which, contemporary sources acknowledged, had been sufficient to pay for wars. But the new Bank of England introduced a method for government funding through the new national debt specifically secured against new taxation. This relieved the king of money worries in a novel way, and bound the taxpaying people to the enrichment of the Bank's shareholders forever, especially if long wars ensued.

The pressing political scenario preceding Prince William and Mary's English adventure was that Louis XIV of France had been empire-building on the continent of Europe for over two decades. Due to murderous religious intolerance he had caused a mass exodus of Huguenot protestants in 1685 and many fled to The Netherlands and England. As Louis' campaigns grew, unfortunately the Dutch people themselves were losing the inclination to resist and might possibly withdraw from the conflict. William was in danger of becoming isolated from his people in this and engineered to unite his domain with the English so that opposition to Louis would be strengthened with the added clout of another nation in the fight. As it happened  the protestant English were becoming restive about King James II's catholic preferences. So William (conveniently married to his own cousin Mary who was also the current King James II's daughter) saw his chance and invaded Devon with a fleet four times larger than the Spanish Armada - this was to be a campaign for certain victory.  William was rapidly accepted and arrived in London within  a few weeks. James tried to retain his throne but gave up two years later after the Battle of the Boyne (1690). For William the regime change was now complete and within a few months of his arrival in November 1688 as King William had joined an anti-French Grand Alliance of nations on continental Europe that endured as the Nine Years War. England was now locked into the continental conflict.

Ivanov shows how the Bank of England was founded through the influence of the Huguenots behind a marketing frontman, William Paterson. The Houblon family were well established citizens and prime movers with other fellow church people who met in the French Church in Threadneedle Street (the same street as the existing B of E). Their anti-catholic feeling was such that radicals there had been calling for Charles I's head in a sermon in the church four years before the execution. They had been prominent in bringing William across as king, and now, using banking know-how from Amsterdam, they devised the new Bank for the purpose of creating a new national debt for the English to fight the war whilst also bringing benefit to themselves through their personal (merchant) interests: 
         'the state unilaterally appropriates part of the income and production of ordinary taxpaying citizens and reallocates such monetary gains to national debt creditors in order to satisfy interest payments on legal, contractually-binding debt contracts . More precisely, the religious cabal of the French Church at Threadneedle Street, led by the Houblon dynasty, managed to create suitable field characteristics for the erection of a privately-owned banking enterprise to underwrite national debt with the aim of self-enrichment.' p31   

So William secured his new throne, and within a few years, the funds to wage a long war with confidence; the populace were expected to support the idea that the war was a defence of their protestantism; taxpaying citizens paid the interest on the war debt through new taxes; and the Bank shareholders and associated city merchants grew exceedingly rich.  The national debt grew by the end of the Nine Years War to £17m, with taxation guaranteeing the Bank a very profitable future. In 1832 Sir Henry Parnell reported that the then £28m a year in dividends is: 'a transfer of so much money from the pockets of one part of the public into the pockets of another part of it' p107. At that time the interest on the national debt was above 50% of total government expenditure and had averaged nearly 40% since 1700.   Parnell observed the impoverishment of the populace through taxes coincident with the new debt (chart p116) just as Dr Ivanov is showing now. 

Another chart (p133) shows how 'infrequent wars' in centuries prior the late 17th century changed following the start of the Bank. King William's desire to tie England into his continental war adventures and the Bank as a means of funding it, faciliated an increasing numbers of wars since.   

A practice discovered by Ivanov 'this surprising revelation' p72 concerns: a) the amount of the shareholder funds and b) the amount of the loan to the government. Did they match up? The shareholders were to raise £1,200,000 which was to be paid over as a loan of £1,200,000. What Ivanov has discovered is that only 60% of the shareholder's funds were actually subscribed but the full loan was paid over, with the bank issuing banknotes to represent  the entire loan (p31,p72). Ivanov points out this was an act of private creation of credit at will, and out of nothing, authorised by the Crown through Parliament, with the Bank having its monopolistic status made unassailable through a Royal Charter in return for the loan. This monopoly endured for the Bank itself until nationalisation in 1946 and endures to this day for the remainder of the banking industry which grew out of it into the UK and across the globe. 

So part of the loan to the government was 'invented'; there was insufficient gold or silver or whatever stood for acceptable value deposited by shareholders in the Bank to back it entirely; so it was a pretence to the government that it was there. The Bank issued banknotes and did whatever was needed for foreign transfers for the war payments abroad, and the paper money was spent among merchants - some being shareholders of the Bank. Money circulated into general circulation buying food and supplies, guns, gunpowder, horses, bridles, etc, to fight the French. 

Dr Ivanov champions two reforms to start to correct the imbalances of wealth and income that have grown up as the national debt pile has been renewed and grown over 300 years. Prof. Michael Hudson is the leading authority on ancient debt forgiveness in Babylonia which has been shown to have been practised when a new king came to the throne. This was to free indebted peasants from crop debts and maintain a free citizenry for public duties attached to their land holdings.  The rulers recognised that debts needed periodically to be cancelled or perpetual debt-slavery would ensue. Moses stipulated debt cancellation every 7 years and a return to ancestral land every 50 years - the Jubilee, Leviticus 25. 
Ivanov quotes Michael Hudson: 
              'Indeed, what turns out to be ironic in studying the history of Near Eastern legal practices is that precisely those parts of the Biblical narratives that hitherto have been most in doubt – the laws of cancelling debts, freeing debt servants and redistributing the land to its traditional users – turn out to be the most clearly documented Bronze Age legacy.' p156

Ivanov says we must somehow eliminate the debt.  As  'two thirds of the national debt is now owned by commercial banks and firms.' p136 to achieve the ancient feature of debt forgiveness, he advocates:   
             'governments may issue usury-free money to repay those layers of national debt owed to banking concerns without the need to resort to a great public sacrifice.' p157.  
   
The other proposal from his paper is the formation of many local community-owned banks as have been existing in Germany for more than 150 years. 
           'all of these cooperatives strictly followed three fundamental principles: they were self-help institutions, relied on solidarity, and were self-administering small financial intermediaries … These cooperatives, which adopted the common name Volksbanken (people’s banks), mainly operated in urban areas’. p160
         'Since ...the 1970, no savings bank has ever been liquidated and no creditor has ever suffered lossess. Rioural and Dawson-Kropf, 2012 p162

 

Dr Ivanov credits local banks with the success of the Industrial Revolution in the UK:
           'The increasing number of local banks in this Industrial Revolution period were drawing on their knowledge of local customers and their creditworthiness, financing the expansion of entrepreneurial activities and as a result national output (Cottrell 1980). This decentralised industrial planning through the lending policies of the growing number of countryside bank concerns was lost with the commenced centralisation of banking in London-based headquarters towards the latter end of the 19th century. This process gave rise to the domineering transactional lending approach which still troubles the British trade performance' p167
The community bank model does not involve the nationalisation of banks - which introduces the dead hand of central decision making - but moving ownership to new local, community-profiting banks which would manage themselves independently, and create money to finance local businesses and needs.     


This paper is key to the understanding and resolving of economic problems as the wealth and income gap widens. Dr Ivanov's narrative style and his detailed research, convinces. The fundamental rip-off through taxing the people to finance the national debt which was owned by wealthy people (who even invented the money lent out), is almost past belief. Even at the time alternative ownership was proposed by William Paterson who wanted the debt to benefit orphans. But Dr Ivanov gives reasons for hope for us in our day that the slate can be wiped clean and money creation transformed into benign ways. 

The Bank of England at its birth and for centuries was efficient at financing war, so surely its managers can now inspire us all and enlighten the government to direct finance to make a fairer society? They have immense power to create money for the common  good.  

Do not withhold good from those to whom it is due, when it is in your power to act. Proverbs 3.27   

Posted by Charles Bazlinton. Author, The Free Lunch - Fairness with Freedom.
Charles Bazlinton is a director of Local First CIC which promotes local banks 
 

Richard Werner is doing better than Benjamin Franklin

Do you like the idea of the prosperous life which the politicians promise? Last week in Leicester an economist showed an improved way of releasing prosperity. Point by point he showed that the 10 conditions generally deemed necessary for sustainable growth are misleading. He also showed that whilst  this conventional, western, economic set of rules has been  hopelessly unsuccessful, an alternative has been running for a long time and has proved a stunning success. 

Prof Dana Brown, Founding Principal and Dean of the Business School at De Montfort University Leicester introduced Richard Werner, Professor of Banking for his inaugural lecture. DMU supports the United Nations Sustainable  Development Goals, in particular  - G16 Justice and Strong Institutions. The economics and banking aspects of this is what Werner delivered as he took us comprehensively through basic economics and banking principles. 

His argument firstly demolished the assumption that in order to develop sound, sustainable economies governments must follow the 10 policies of the Washington Consensus. These include: austerity, fiscal deficit reduction, privatisation, the opening up of currency flows, free markets (deregulation, e.g. sell your assets to foreign buyers at knock-down prices) and several other items of accepted 'wisdom'. These ideas for promoting structural changes within developing countries in particular are repeated like religious mantras by chancellors of the exchequer, secretaries of the treasury, the IMF, the World Bank and the like. The terms were conditional to IMF 'help' to developing countries in 159 cases from 1973-1994. Werner exposed these conditions as unhelpful to good economic outcomes, and showing that the actual outcomes can include the transfer of power, advantage and control to external entities. His purpose was to show how the most spectacularly successful economy on the planet for the last 30 years tried quite different methods. The title of his lecture was:

Paradigm Shift. How to get sustainable, stable, equitable and high growth. Is everything wrong they ever told us about how economics works and did Deng Xiaoping get it right?  

The bedrock of his talk was how banking works by creating credit (money) out of nothing i.e. how they make the loans.  They don't wait for depositors to bring their money in and then lend it out, they just create the money themselves when asked for a loan and then lend it. As Werner has discovered in studies of Japan and now China, as long as general central direction is given that the loans should go into the productive economy (making things, invention, product improvement, et al) this is not inflationary, and the economy then runs sustainably for as long as the overall policy is followed. 

On the contrary what typically happens in western countries is that banks prefer to lend for speculative investment such as for land and built property (real estate), shares and other financial assets, all of which are outside the Gross Domestic Product (GDP) part of the economy. As he explained the power in such non-GDP lending lies with those who hold assets where there is a shortage; thus with more borrowed money funnelled into a market, prices rise, governed by the fundamental  principle: higher demand & short supply brings price rises. Thus for deals involving land assets (e.g.  existing houses) the land value component rises raising overall house prices; assets such as shares are in limited supply and again, prices rise.  This brings the familiar price boom and bust cycle of western economies - caused by unregulated credit creation for assets in short supply. Eventually the speculative side of the boom gets out of hand and then early speculators sell up and banks find they have too many non-performing loans as the asset prices ease and a crash develops, which brings recession and job losses.

However if investment into the productive side of the economy were encouraged GDP would grow, bringing jobs. Careful management of the financial side of the economy is needed or  inflation can occur as consumers raise easy credit. The sudden demand for limited goods and an inadequate supply can bring price rises. The typical western unrestricted, free-for-all method of the Washington Consensus does not bring sustainable economies, as we all know.       

Werner spoke of his findings on interest-rate-setting by central banks. With a colleague Kang-Soek Lee, he has proved that the western central bank assumption: that  interest rates cause growth is wrong. What happens is that growth drives interest rates, thus high growth brings high interest rates and low growth the reverse.  Thus whilst central bank committees  deliberate for hours over interest rate setting, thinking they will coax the economy into life or damp it down, what they should seek out is what really drives the economy - the  causes and not the effects. Will they heed what Deng Ziaoping  set in train in 1978 when he said China would 'seek truth from facts'. Deng was a pragmatist and gave a new direction to his  country and was prepared to try whatever worked. Werner said what is called in the west 'the Chinese Miracle' is a misnomer, it is nothing of the sort. What China has achieved is sustained growth through clear repeatable policies and actions. A miracle has no naturally observable cause.

Recessions can be ended quickly by central banks. Ben Bernanke actually did this correctly after the credit crisis of 2007/8 as the US FED bought up US banks' non-performing loans at face value (not written down value)  and cleaned up their balance sheets, enabling them to lend.  This happened very rapidly as seen from a chart of the US Federal Reserve's balance sheet , with GDP growing within a year.
   
He examined the idea of equilibrium in markets. Assumptions are made: that markets being perfect, prices adjust instantly, and that markets clear automatically; that there is perfect competition; that all players are rational; that perfect information is available. These are all impossible and it is quite wrong to base policies on them. The Chinese way has been to accept the truth that markets never clear, rationing always taking place, so their government intervention is not a 'distortion', as believed in the west, but an essentially good thing to do, so that bad market outcomes are addressed. Markets are in pervasive disequilibrium Werner stated. He said that believers in equilibrium in markets (he listed 8 'features') were outdoing the Red Queen in the Alice in Wonderland fantasy novel, who sometimes believed '6 impossible things before breakfast'.

He challenged Washington Consensus believers to examine the outcomes of their conditions for sustainable growth. There is not a good track record compared with the Chinese case. One fundamental failing of western economics is the absence of textbook studies on money and clear statements that the creation of virtually a country's entire money supply, is through private banks, out-of-nothing. Until he carried out an empirical study no one had ever checked this money creation out-of-nothing theory. The result can be read here and became a most downloaded paper from Elsevier.    

A hopeful thing is that bank credit creation is a game changer for any country. With their own currency and banking system they have no need to borrow foreign currency. Their own local banks can create the credit needed in their own currency and lend it locally. Indeed, Werner demonstrated that even incoming 'foreign loans' remain in the jurisdiction of the issuing bank's country, and are merely matched by an accounting procedure in a local bank. When gold was shipped around the world in earlier times there were capital flows, but not now. All that flows is the control of the borrower's assets to the lender.  

China has thousand of local small banks so that credit is made available where the new jobs are going to arise, as the central policy of productive investment is encouraged. By contrast the UK has only 4 or 5 huge centralised banks which leaves a hopeless mismatch of the credit supply needed for the thousands of small businesses scattered over the country that will produce the new jobs needed for a sustainable economy. Werner said big banks naturally want big deals, small business need small loans which are proportionately too much trouble for big banks to bother with.   

Japan in 1945 followed the above methods and, hoping for a doubling in national income within 10 years after war, achieved that in 4 years and enjoyed  15% year-on-year growth for decades following. China adopted principles from Japan, of investment directed towards production in the late 1970s and had over 7% growth in GDP in most years for decades. By contrast Soviet Russia tried centralised direction of the economy but having only one main bank it failed to achieve a thriving economy at all.

Werner ended his lecture with a Q & A session and appealing for a local community bank in Leicester patterned on Hampshire Community Bank which is near to achieving its license.  No staff bonuses - just reasonable salaries, a charity is the ultimate owner giving towards local good causes. Such banks should follow the German local bank models which for more than 100 years: 

• have never needed public money to bail them out
• have never failed paying out customer deposits 
• have under 3% non-performing-loans 
• and provide 90% of SME loans in Germany.  

Local community-type banks have a great public appeal as they are based on relationships and trust - as was experienced in earlier times in UK banks. Werner showed that the prospect for new style local high street banks for the UK is good.

So, how do we consider startlingly different ideas that come from another culture such as  the economic success story of China? We are not fussed about buying their  goods, so why would a different way of doing economics from China be any different? UK politics is drifting to the left as Labour advocates more state intervention and as their poll ratings gain, perhaps the time is coming when economic lessons from Japan and China are becoming acceptable. Richard Werner wrote Princes of The Yen which details his findings as to how Japan ran its economy.      

A somewhat parallel story to this from 250 years ago is in The Times on 2nd May Paul Simons: 'Weather Eye.  American sailors discovered the powerful North Atlantic Gulf Stream flowing from America to England. British mail ships faced this as a counter-current on the journey to the America which slowed them. American ships found their voyages to Europe were up to two weeks shorter as they took advantage of the current. Benjamin Franklin, co-founder of the later American Constitution tried to publicise this navigation scenario.  Despite plotting the current on charts and delivering them to the Admiralty in London he was ignored. Franklin's cousin, a whaler who used the current, told him that the captains of the mail ships ''were too wise to be counselled by simple American fishermen''. It is thought that this blindspot disadvantaged the Brits in the following American War of Independence through delays to supplies and communications. The Brits lost that war. 

Werner's audience listened spellbound as his iconoclastic intellectual tornado swept through. Dean Dana Brown seemed impressed. But will there be a Bank of England governor and a Chancellor of the Exchequer who will grasp this economics nettle to reshape the economy with its banking system for the general good? Deng Xiaoping got something right about economics and decentralised banking.  With one community local bank nearly ready for the UK the hope of a more stable and sustainable prosperity might be coming, especially if the wider message from China is heeded. 
  
Posted by Charles Bazlinton. Author The Free Lunch - Fairness with Freedom. 
Director of Local First CIC - Promoting Local Banks.       

8 June 2017 Election Surprises?

Party manifestos, according to Free Lunch principles, should tackle the monopolistic tendencies arising in society.  The moral basis for this is from common threads found in biblical, enlightenment and liberal values and concern human rights, equality and freedom. As the political parties ply for our votes in June how do they measure up to the implied 'fairness with freedom' ? 

The core aim of The Free Lunch - Fairness with Freedom is the common good. The book suggests ways to move towards a society where each citizen is a beneficiary of the resources of nature and those arising from community-inspired schemes. The book is anti-monopoly and what is termed rent-seeking: meaning the hunt for gain sought by monopolists. Extreme disparities of wealth and poverty are the outcome in a society where control of monopolies is lax. Enlightened politics will reduce rent-seeking outcomes. 

• How are the current political parties matching up with the aims of reformers who desire the sharing of monopoly resources via a universal income for all?  
• What do they prescribe to redress the unfairness of the land monopoly: For example what about the land value gains of home owners compared with none for renters?
• What about the resource of further education now being charged for through student fees when it used to be provided free as a common provision from the public purse?
• What about the huge credit-creating monopoly of banking which neglects small business loans as too small and unprofitable to bother with? 
• What about the ability of government to create its own money to fund public expenses for public services, safely and without inflation?
• What about extending the voting franchise to younger people?

It is natural to want monopoly rights. It makes for an easy life. Owners of homes share in the land monopoly through the valuable nest-egg that builds up over the decades associated with the underlying land value of their home.  Fred Harrison points out that:

'... owners of high-value homes are able to recoup what they pay in taxes through rising property prices. ...enjoy tax-free use of schools and hospitals... Low income earners and families that rent their homes...carry the cost of the infrastructure investments and public services that enhance the value of the homes of the rich.' 

How fair is that? What do our political gurus recommend about this particular inequality which creates a constant welfare burden?  

Universal Basic Income (Citizen's Income / Citizen's Royalty)

• The only party wanting to introduce this is the Green Party.  They would create a pilot to test the idea. 

The land monopoly: home owning or renting

• Labour and the Liberal Democrats both mention land value tax as a tax reform measure. This would retrieve the gains accruing to the land values in property prices for the public purse and allow lower taxes on income and goods or as a substitute for council tax.  
• The Greens and Labour would introduce rent controls. This would be a protection for renters as a useful half-way measure until a full land value taxation scheme was implemented payable by landlords.
• The Tory manifesto policy for care in later life was to be paid from a home sale without limit above a £100k house value. The enforced U-turn, in days, shows the political danger of taking land value gains. Whilst not having the universality of land value tax for all land, the idea that property gains should fund the care is a reasonable quid pro quo, but to have to individually account for each care package and each property is probably a bureaucratic path best not travelled, besides introducing a variable charge/cost (aka 'taxation') for every case.      
• Bedroom tax aboliton (now a liablity of council house renters)  is proposed by the Greens, Labour, the Lib-Dems and UKIP.

Student tuition fees  

• The Greens, Labour and UKIP plan to abolish student tuition fees and would introduce maintenance grants (UKIP for poor students). 
• The Lib-Dems, the original champions of the abolition of tuition fees who reneged to their great downfall after being in coalition, propose bursaries for nurses and grants for poor students.
• The Tory proposal is: forgive loan repayments for teachers; provide access to grants for technology students & 'financial support that offers value for money'. This one looks 'interesting' with the news that student debt interest rates will rise from 4.6% to 6.1% this year. Andrew Greenwood (FT letter 19 April) wonders why the Swedish model is not followed with the cost of student loans as per the cost of government borrowing at 0.34%?     

Voting age to 16 

• The Green Party, Labour, the Lib-Dems and UKIP all want this. 

Local Banks 

• Labour will get the Post Office to establish a Post Bank with full banking services in every community. They also propose regional development banks. 
• The Lib-Dems will 'Require the major banks to fund the creation of a local banking sector dedicated to meeting the needs of local SMEs'. 
• The Tories propose British Business Bank branches in several major cities for SME lending needs.

Monetary reform  No parties make any suggestion about using government money creation powers to fund some public expenses. Instead the arguments are about balancing the books for borrowing, taxing and spending. Labour suggests borrowing for extra infrastructure investment because interest rates are so low - it is bound to pay off. But no one makes the case for creating the money as an extension of the QE creation process to pay for such expense without debt or interest to repay to banks. 

Lord Turner is an exponent of this e.g. deficit financing (Book: Between Debt and The Devil) as is Prof Richard Werner e.g. broadband investment.  There is no reason why just as quantitative easing is used to create money to buy back government debt or to buy commercial bonds, that it could not be used to nationalise the water companies (a Labour Party idea but bought through bonds) or to fund general government spending. The Monetary Policy Committee of the Bank of England would need to take note of any money supply implications and outcomes and act as necessary to prevent adverse economic effects - as they do now with QE. Student education could be a modern case for debt free, interest free government money creation. No more student tuition fees.  This would be a monetary reform which only hurt the big banks.  Where are the far sighted politicians to start controlling this monopoly power? 

With the early solid Tory lead appearing to slip the contest may be more open than we ever thought. World wide electors surprise us. Will June 2017 UK be yet another one? 

Posted by Charles Bazlinton author The Free Lunch - Fairness with Freedom. Director of Local First CIC 'Promoting Local Banks' 

ECOBATE 2016 Plamen Ivanov & David Ricardo's banking wisdom for the 21st century

Plamen Ivanov's Ecobate 2016 paper (University of Southampton) David Ricardo and Modern Monetary Reform Propositions: A critical Analysis reveals what one of the founders of modern economics thought about banking and banking sytems. Ricardo writing in 1824 understood that banks create the money supply, but until very recently this has not been at all widely acknowledged in academia. Imagine that such a fact, fundamental to all things economic has been hidden in plain sight for nearly 200 years! In the UK it was only in 2015 that the Bank of England acknowledged this openly in its May 2015 Working Paper No. 529: Banks are not intermediaries of loanablefunds — and why this matters  Authors:  Zoltan Jakab and Michael Kumhof .

Up to that point the function of banks has been overwhelming assumed by the ordinary person (and by many who should have been financially more knowledgeable?) that bank lending was merely the passing on of previously deposited money. The function of the creation of money by ordinary banks has not been given its due recognition in economics textbooks. Ivanov cited Werner (Dec 2014): Can banks individually create money out of nothing? - The theories and the empirical evidence, who set out to show in real time how a bank branch created a loan of  €200,000 for him in 2013 which, to prove it was real money, he deposited in another bank  He also proved that a fractional reserve amount representing  his loan at the central bank, was not involved (thus showing fractional reserve banking is obsolete, or at least only a half-truth) and that no already existing money at the bank was involved in making up the loan amount.  

Ricardo wanted a National Bank to be set up by the government to be run by 5 salaried Commissioners. The then existing Bank of England charter would expire and its premises might be purchased and staff transferred to the Commissioners. The Commissioners were to be independent of the government; they should create the money needed to redeem government debt to the Bank of England; they would create the money needed by the national financial system but should not create it for the government to borrow. Government needs were to be met by taxation or borrowing from privately owned banks. Ricardo wanted a full reserve system of banking, as championed by Positive Money . See also Martin Wolf.  

Ivanov thinks we have moved beyond the safeguards which Ricardo expected of full reserve banking. People would find ways to game the system and perform money creation outside the official constraints, and how do you handle new phenomenon such as digital currency e.g. bitcoins? Full reserve banking is likely to be costly and impractical, and it might cause the economy to contract. But we do need a safeguard to keep the economic system safe and Ivanov adopts Ricardo's idea of a nation's banking system divided into districts, where stability arises from many small independent parts rather than a few large players.  With many small banks the failure of one or two, through unwise money creation for their lending, will not wreck the whole system as was the danger in the 2007/8 crisis in the UK, when a very few large banks dominated. But our economic system is still in thrall to its top-heavy banks. However local independent banks of the German Sparkassen type with distinct areas of operation are a practical and realistic safeguard. Plamen Ivanov is involved in the establishment of a local community bank of that type. His paper was a ready made answer to Prof David Llewellyn's Ecobate keynote speech 'Are banks over-regulated today?' with its theme that more types of banking model are needed for safety. 

From the Ecobate 2016 Conference and with additional information.  Posted by Charles Bazlinton Director of Local First CIC which is promoting local banks.    

Michael Hudson reviews James Galbraith's: 'Welcome to the Poisoned Chalice'

Michael Hudson in a review of James Galbraith’s new book: 'Welcome to the Poisoned Chalice’ says of current solutions to the post-financial crisis world that: 

‘financial interests override sovereign  self-determination  and national referendums on economic and social policy…[and] impose austerity and force privatisation selloffs that are basically foreclosures on indebted economies. Galbraith rightly calls this financial colonialism.’

Real-world economics review issue 76 carries the review.

It points out that resolutions to the current situation have been available since the 1920s. The book covers the economic traumas that the Greek nation is going through.  The prospect is that similar measures across the Eurozone will turn it into a dead zone along the lines of Latvia’s... 

‘disastrous ‘’success’’ story involving drastic emigration and declining after-tax wages’.

The solutions imposed through bond holders involve widening fiscal deficits, with countries being forced to sell off their land and mineral rights, public buildings, electric utilities, phone and communications systems, et al, at distress prices.

The problem is that the EU’S central bank (ECB) does not finance deficit spending to revive employment and economic growth. Additionally the German constitution imposes austerity by blocking funding of other countries budget deficits (except for quantitative easing to save bankers).  The 2010 bailout by banks is likened to the unpayably high German reparations imposed in the 1920s. The hope of the lenders is that deep austerity and privatisation will enable the repayments, when what is really needed is bad debt writeoffs and an expansionary fiscal policy.  

Lord Turner back at ECOBATE 2011 spoke on 'managing credit creation to deliver social optimality' See this Blog link.  

And (same blog) Chris Giles of the FT in 2013 has: 'Turner defends permanent printing of money'.

In the You-Tube film 'Debt-Free and Interest-Free money' Richard Werner exposes the false notion that debt alone is the only solution for government expenditure:  'The government can spend money into circulation, money it has issued'.

Galbraith's book highlights the rule in Europe by the dictats of finance and banking favouring right wing governments, along with opposition to any left wing alternatives to austerity. They won in Greece.

The UK has a different Conservative government from 3 months ago that looks to be setting policy ideals derived from left, right and centre. How radical will its economic changes prove to be? Chancellor Philip Hammond is soon to make an Autumn Statement on the economy. Does he realise the powers he has to invest for the common good without increasing debt? 

Fiscal Charter: Wisdom, Irrelevant Nonsense or a Cunning Plan?

John McDonnell gets a blasting from the FT ('Labour left floundering over economic policy') for Labour's chaotic policy turnabout but gives helpful hints of what might have been if  JM had been better informed.

George Osborne made an attempt this week to bind every future government to its Fiscal Charter (balanced budgets).  As the FT points out the Brits do not do such things.  'Declaratory laws' have no place and besides Mr Osborne himself rubbished a Labour attempt at the very same thing in Labour's 2010 Fiscal Responsibility Bill: 'vacuous and irrelevant' he said then. What's different with yours now, George?  The FT says that John McDonnell's description of the Fiscal Charter as a 'stunt' is accurate, being just another trap for Labour to encounter. All this works for the Osborne austerity view whilst the public are generally oblivious to the truth that the government's accounts are not the same as household's accounts as Lord Turner said recently :
'...the very essence of the insight of macroeconomics is that governments and states are not the sum of households. In the personal household economy, books have to be balanced, but the state economy is different.'

It is not that George Osborne himself does not understand an alternative to austerity such as the Quantatitive Easing for the People that Jeremy Corbyn now wants. Back is 2013 he quite understood that austerity is not the only way:
 ' It is theoretically possible for monetary authorities to finance fiscal deficits through the creation of money. This would allow governments to increase spending or reduce taxation without raising corresponding finance from the private sector.'  
So we have a party following a Chancellor with an 'austerity' policy that seem merely set up to wrong-foot the opposition regardless of the damage it might cause to our economy or the possibilities it might exclude.

Mr Osborne is probably knowingly stretching his apparent belief in the austerity imperative as long as it discomforts Labour. Sooner or later he will decide, as the FT suggests, that a political judgement must be made rather than an economic necessity followed and his outlook will change - even with a cunning plan? Perhaps he will then begin to monetise the deficit as Lord Turner suggested in 2013. This might then 'achieve' his Fiscal Charter rules because creating government money that does not need to be paid back would be excluded from the deficit calculations!

Meanwhile we are being led on a false trail of needless hardship where the benefits of deficit financing are being ignored. Perhaps some Tories will be bold enough to develop insight? Or will Labour actually get their act together? The debate must be opened out and not delayed just for the benefit of the Conservative political purpose of annihilating Labour.