Tag Archives: IMF

Is there a possibility that events such a Black Wednesday will occur more frequently in the future?

The short answer to my question is yes. There will always be that occasion when that combination of human folly and arrogance will lead to a repetition to the economic disasters of the past. As an economist I can reconcile myself with the knowledge that such crisis are but a once or twice life in a time occurrence. Unfortunately I believe that I will be unlucky enough to experience a third life time economic crisis, but one of such damaging dimensions that it has the potential to make the crisis of 1992 and 2008 seem relatively insignificant.

Recently I read an article in ‘The London Review of Books’ which expressed an opinion which I share and that is, that for the first time in recent history we have a group of leading politicians who want to do ill to a substantial number of their fellow citizens. These politicians are the ultras of the Conservative party. It is not just the turning back of the clock to disadvantage those groups that have profited from modernity, but desire to impoverish large numbers of their fellow citizens. Now some of them are beginning to openly admit that leaving the EU will not deliver any of the benefits they claimed in the referendum campaign. In fact they recognise that there will be a significant loss of national income as a result of Brexit.

There are those who believe that the economic downturn consequent on ending our free trade deal with the EU, will lead to a modest reduction in living standards.  They believe that the stoicism of the British will enable them to weather this temporary storm. Britons endured worse during the Blitz and so they believe they will the people demonstrate a similar stoicism in seeing out this downturn. Just as in 1940 they will see this deprivation as a price worth paying  to be free of this new tyrannical continental behemoth that is the European Union. They seem to want to replay the 1940s, but with a contemporary twist.

However what they do not seem to realise is that the various predictions of a 3% or 8% in future income growth are the cautious predictions made by economic statisticians. The  economy is not some mechanical creation such as a car that can be tinkered with to produce a slightly more modest performance, it’s a dynamic social organisation that is capable of volatile, unexpected and sudden changes in direction. An economic slowdown is quite capable of turning into something much worse.

The British economy as with many others includes within it many economic fault lines that if triggered would wreak tremendous damage to the economy. What these foolish politicians have forgotten is “Black Wednesday’ in 1992, a day in which speculators effectively bankrupted the country.  All the weakness in the economy that existed then, still remain today. One such is the massive private sector indebtedness, which includes that of the banks. Britain is one of the world’s bankers and as such it holds a large proportion of the world’s cash reserves. The banks assets are moving towards a position whereby they total nine times the county’s GDP, that is about £18 trillion. Just as in 1992 the British banks are borrowing short and lending long. In plain English customers deposit money on short term notice, money that they can withdraw on demand or with a few days notice. Banks lend this money long term, it is invested in property or some other asset, which either cannot be quickly changed back into cash if needed or if cashed in it will return a value much less than that for which it was purchased. British banks have reserves that they can use to fund cash withdrawals in normal circumstances, so this is never usually a problem. However it becomes a problem when the abnormal happens and investors lose faith in the banks and want their money back. The abnormal occurred in 1992 and 2008. On the first occasion the central Bank was almost bankrupted and in the second if was the entire banking system that suffered the same experience. Nobody that is not a fool or an arrogant politician with little understanding of economics would do anything to provoke a recurrence of these past crisis.

One of the triggers of a depression is falling business confidence, once that is lost the economy is in the doldrums. The maladroit government negotiations with Europe over Brexit is leading to a loss of business confidence, as businessmen are increasing uncertain of what the future holds for them.  Whenever politicians are informed on problems tor business that are developing because of Brexit, they are either ignored or dismissed. Such behaviour is further draining confidence out of the economy. In such febrile circumstances a run on the pound could easily be triggered. One such trigger point occur at the port of Dover. The government has made no preparations for the reintroduction of customs barriers at Dover, yet free trade with Europe will end in the near future forcing the government to reintroduce customs barriers. New staff are not being recruited and it no preparations have been made to introduce new  IT systems to processing the import and export trade tariffs, such checks are unnecessary while Britain remains in the single market. It seems to assume that they can introduce a seamless system of tariff collection, when they or nobody else in the world knows what such a system will look like or even if such a system is possible. After March 2019, when Britain leaves the EU and chaos prevails at Dover and other ports, it will be a demonstration of government incompetence. When the government is demonstrating such a degree of incompetence investors could take fright and take their money out of British banks. Our banks are quite incapable of funding such a large and sustained flight from sterling and the UK would have to turn to the IMF for help. The resultant crash would turn the British economy into an economic basket case resembling that which is contemporary Greece.

However there are a minority of Tory Ultras who would welcome such a collapse. The consequence shortfall in government finances would mean that many of the institutions of modernity, such as the welfare state and the NHS could cease to exist through lack of funding. They like the medieval doctors who let blood to purge the body of noxious vapours, believe that an economic crash which destroyed the welfare state would lead to a similar purging of the British character.  Such a purging would be the purging of the welfare dependency virus, no longer would the British people be able to look to the same for welfare or health care. This purging of the British character would lead to a rejuvenation of the British, they would become like their independent 18th and 19th century forebears who created the largest empire the world has seen. Some ultras are even speaking of the Empire 2.0.

However they show little awareness of history, the Greek political parties that dominated the Greek political scene prior to the crash of 2008 that is New Democracy and Pasok have disappeared from the political scene, as the people blamed them for the decimation of their incomes and economy. Although these Tory ultras are careful to remain in the background pulling the strings to ensure that the government commits to their desired hard Brexit, they would not be unable to avoid ‘ownership’ of the post Brexit economic crisis. They were members of the party of government that caused the economic crash and in any election many would be voted out by an angry electorate.

Greek tragedy provides a metaphor which can demonstrate the reality of the crisis facing Britain. In Greek tragedy the God’s raise the hero up, only to later destroy him. It is as if the God’s of the economy have raised the Brexiteers and Conservative Party Ultras to power only to destroy them. The Gods seem to have chosen the least capable and those least fitted for the role to lead the Brexit negotiation, knowing that their incompetence will be the cause of their downfall. It is tempting to refer to Winston Churchill wartime speeches in this context, because they see themselves in the Churchillian role of standing up to the continental tyrant. He said the Nazi’s would reap what they had sown, the same applies to the Brexiteers who will reap the consequences on what they have sown. Not the whirlwind of mass destruction but the whirlwind of economic destruction. Quite possibly the Conservative party, as with the conservative Greek New Democracy party will disappear from history.

Any prediction made by an economist is never more than a probability or a possibility. When the Bank of England predicted economic meltdown if Brexit occurred, it was widely assumed that they had made a terrible mistake, when this never happened. However this scenario was avoided through the prompt action of the governor of the Bank of England, who fearing a downturn in the economy, pumped billions of pounds of extra money into the economy to prevent that downturn happening. Similarly it is possible that the realists in the Conservative party regain control and instead of going for a decisive break from the EU with all it’s damaging consequences, they will negotiate a ‘soft Brexit’ which will minimise the damage to the British economy which will result from leaving the EU.

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Swamp creatures, entrerpreneurial economics and Donald Trump

When Donald Trump spoke of draining the Washington swamp, he conjured a very different image up in my mind to the one he intended. I immediately thought of an old film that I had watched entitled ‘The Creature from the Swamp’. In this film the inhabitants of a small American town are terrorised by a creature from the swamp. This creature has been created from the interaction of the chemical discharges from the town’s factories with one of the embryonic reptilian creatures developing in the swamp. Needless to say after a number of deaths the creature is killed by the ‘all American Hero’ a man who was a feature of so many films of the fifties. I should have added that this film included the fainting helpless blonde who attracted the desire of the swamp creature and who had to be saved from the creature by the all American hero. If Donald Trump has seen this film he would have identified with the all American hero, instead of seeing the swamp creature as an all too realistic portrayal of himself.

The swamp creature I believe provides a very useful analogy for the understanding the politics of our time (and the misguided economic policies of those politicians). There are I believe many cultural swamps within our culture that damage and distort the personalities of the people within them. Although it may appear an unfair  comparison, I think there are two similar swamp cultures within our society that are particularly damaging. One is the criminal sub culture that produces the bosses of organised crime and the other that entrepreneurial subculture, usually focused around property development, that produces the new class of sociopath entrepreneurs.What both cultures produce is a people who lack empathy, who lack an understanding or appreciation of others. These creatures rise to the top through a career that involves the destruction of others. The sociopath crime boss or entrepreneur sees others either as an obstacle to their advancement which has to be overcome or as tools that can be used to advance their interests. What both swamp creatures lack is empathy as they cannot see others except as either having or not having a ‘use value’. They are incapable of recognising the humanity of the other, people for them as people don’t exist. Only by denying the humanity of the other can practise the cruelties and deceits which are the prerequisites  of their success.

In a radio programme I heard how the Tony Schwartz the author of ‘Trump: the art of the Deal’ describe how he first came into contact with Donald Trump. He was a journalist working in New York and he was sent to investigate a redevelopment project for which Donald Trump was responsible. He discovered that Donald Trump had hired a firm who specialised in getting those with a legal right to remain in their home to move. (He could only redevelop an empty apartment block so he needed these people out.) They could make it undesirable for these tenants to remain by removing the lights from corridors or putting lifts out of action. What is significant about this story is how Donald Trump turns what could be a human obstacle into a tool for their own use? The journalist Tony Schwartz was so captivated by Donald Trump the man, that he agreed to write a book on Trump the deal maker. The book was a tremendous success and it made Donald Trump into a national and international celebrity. Such a favourable public image is essential for the sociopath hungry for power. The mythic status of being a deal maker turns the uglier aspects of the personality, the ruthless and abusive personal manner into something more positive. Donald Trump became the man who could get things done, which became the essence of his successful Presidency campaign.

Despite my reservations the sociopath can fulfil a useful function in society. It was Robert Merton who said that crime and organised crime fulfilled an invaluable role  in society. They made available to people products or services that they otherwise could not get. Without organised crime the low income addict could not get their drugs and the city financial dealer their cocaine. Some accounts suggest that cocaine is the essential tool for maintaining that high level of frenzied intellectual activity which makes a successful trader. Similarly many of the great entrepreneurs of the past such as Andrew Carnegie America demonstrated the ruthless behaviours characteristic of a sociopath. He believed that steel worker union was hampering him in his efforts to trade union prevent him from make Carnegie steel into the largest and most efficient maker of steel in the USA.  He decided that he would remove this obstacle which resulted in the notorious Homestead Strike of 1892. He employed the Pinkerton Detective Agency to break up the steel workers strike. Extreme acts of violence were committed against the trade unionists and by the trade unionists in their defence. Ultimately the ruthless boss triumphed.  Other businessmen were not above using organised crime to deny the worker their rights in their endeavours to make their businesses more profitable. Jimmy Hoffa the boss of the Teamster’s Union decided to fight fire with fire and he allied himself with organised crime to use the employers weapons against them. He was so successful that many of the dockyards in the 20th century USA were in effect controlled by the Teamsters Union and their allies in the American mafia. Although I can condemn these men as monsters, they performed an essential role in driving the American economy forward.

While Donald Trump is but a pale imitation of the great entrepreneurs such as Andrew Carnegie. This particular monster is far more damaging to American society, as the damage he has done to the social fabric is not matched by any benefits accrued to the wider society. A steel mill is far more beneficial than a casino, for example the former requires skilled highly paid workers, the latter the reverse. The one single factor that makes the difference is that in 1890 although Andrew Carnegie was able to subvert the local legal system and manipulate it to his advantage, the larger national legal system remained largely uncorrupted. Andrew Carnegie was a monster but his monstrous activities were largely constrained within a manner that benefitted society.  In contemporary America there are no longer the legal constraints limiting the damage that these people can inflict on society. Wolfgang Streeck describes American variously as a kleptocracy or oligarchy. It is a state in which the rich oligarchs can use their money to bend and twist the law to suit their purposes. Just recently the US senate passed a law guaranteeing the US banks unlimited and ‘no questions asked bailouts’ in the event of another financial crisis. The monsters are no longer constrained in their behaviours in a manner that ensure that there activities work largely to benefit to the wider American society.

In a successful and viable social system monsters such as Donald Trump would be constrained. He would have been the owner of a small chain of casinos and leisure centres, the legal system would have prevented his ‘walking away’ from his serial failures. Unfortunately in the current US the legal system has been rendered ineffective in regulating the bad behaviour of rich oligarchs, so there is now no limit on what these monsters can achieve. There is a similar change taking place in the UK. There is on disturbing example that proves this, when the EU was proposing to introduce legislation to make money laundering more  difficult, the British government successfully lobbied against it. The City of London had argued that if the legislation was passed British banks would be at a disadvantage, as other countries would not observe the law, while the British government would operate it to their competitive disadvantage.This spurious argument worked and the UK is now called the world’s largest tax haven by the IMF.

Unfortunately for us all the creatures from the swamp are allowed to roam freely within our societies and wrecking damage to the host society to further their own self interests.

Machiavelli and the Madness of Politicians

What puzzles me is why when we have the best educated politicians in history, the governments that they lead are so abysmal. At least one European leader has a doctorate and most were educated at the elite universities in their own countries. Why are these so well educated leaders so awful at the business of government? The only plausible answer that I can find plausible is that they are affected with a degree of madness in that they consistently mistake the world of their fanciful imaginings for reality.

Perhaps this is best demonstrated with the current crisis in Greece. The  leaders of Europe insist on repeating the  changes they have forced on the Greek economy which rather than solve Greece’s debt crisis has worsened it. The programme of imposed austerity and so called structural reforms pushed Greece into a situation which resembles the Great Depression of 1929 to 1939. Obviously a country in suffering an economic recession is less able to pay its debts than one that is booming. Yet the so called Troika (the European Commission, the International Monetary Fund [IMF]) and the European Central Bank) insist that the Greeks must accept even greater levels of austerity if they are to receive the bailout funds necessary to keep their banks open. It is obvious to all that this a policy that won’t work, yet our European rulers insist that it must continue.

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Reading this it seems that there is a hint of madness in the decisions of the European policy makers. They were all the time confusing the world of their imaginings with the Europe of today. Anybody can misunderstand the reality they face yet to consistently do so suggests madness. The IMF has twice produced reports saying that Greece is incapable of repaying its debts, the latest report suggests that Greece should be granted a moratorium of 30 years before it has to repay any of it debts. Yet despite the evidence from the Greek economy demonstrating that the policy forced on it by the Troika has put it into long term decline making it less likely to the economy will ever achieve a level of growth that will enable it to repay its debts, they continue to insist that the policy must not change. While it is possible that the European leaders directing the policy of the European Commission can be deluded as to the effectiveness of their policy, what is most surprising is that Christine Lagarde as managing director of the IMF is supportive of this failed policy when her own organisation is writing the reports stating that the policy is wrong headed. Why this level of delusion, why do these politicians fail to see what is in front of their eyes? Why are so self evidently mad?

The best explanation for the behaviour of our contemporary leaders comes from the writings of Machiavelli. In ‘The Prince” there is a chapter in which the following scene is described. The son of one of the Greek tyrants is accompanying his father on a walk. Then as they are walking past a field of wheat, and the son he asks how is it possible to remain in power when their are so many potential enemies in society. Rather than answering his son directly this man picks up a stick and knocks of the heads of the tallest stalks of wheat. European leaders in their dealings with Greece have adopted a similar policy. Whenever a Greek leader appears who might threaten their policy of austerity, they destroy them. The greatest threat the European leaders have faced is Tsiparas  so they had set about undermining him and destroying his power base. In denying the Greek banks access to much needed Euros they have reminded him that they possess the power to close the banks and with that wreak havoc on the Greek economy and society. Rather than risk chaos, Tsiparas has capitulated. The leaders have calculated that the terms that they have forced him to accept will force his eventual resignation and destruction of his radical Syriza party. Not only these politicians cut down the tallest wheat stalk in Greek society, they have made it clear that they will do the same to any other wheat stalks in any other European country that might threaten their authority.

This leadership style that Machiavelli demonstrated is not a style of leadership appropriate for a democratic society, which depends on political dialogue and consensus to function effectively. If the opposition is destroyed or emasculated the political dialogue becomes extremely limited, as all the potential leaders realise that only by following the accepted script can their careers advance. Consequently there is a political echo as what leaders hear from the political dialogue is but an echo of their own views. ‘Yes’ men and women become the vogue in politics, individual thinkers self exclude, as they must pursue careers outside politics as the system penalises individual thinkers.  They  realise if they entered  politics would be marginalised in the political set up or more likely as in the Greek example have their political reputation and  career destroyed by a hostile elite of non thinking conformists, who hate any threat to their authority. This gives leaders a sense of omnipotence as all they ever hear is their words repeated back to them. Political difference is viewed in the words of Christine Lagarde, as not being ‘adult’ and not worth consideration. The views of Tsiparas and the Greek leaders were not worth considering as they were not spoken in the language of the elite. They were children who failed to understand the grown up world of the political elite.

Never having to engage in serious dialogue with your rivals and their alternative views, leads to an arrogance of power. By never facing contradiction these leaders cannot but believe in the rightness of their views. These leaders have been driven mad by power, they believe the acquisition of power sanctities the rightness of their views. What they say is true, anything else is heresy. They are like so many  Kim Jong-uns who don’t have to pay regard to any view but their own. Kim Jong-uns that will resort to any tactic to destroy the reputation and career of rivals.

There is one great failing in Machiavelli’s book ‘The Prince’ he failed  warned leaders that acquisition of power does not equate with greatness of mind. What we have in the West is a series of mediocre leaders who have attained power by Machiavellian means, but who lack the greatness of mind to govern effectively. In Britain and Europe the means to power is also the means by which great individuals are excluded from power.  Mediocre thinkers who have attained power by manipulating the political system overestimate the significance of their success, playing the system well does not equate with greatness. The technocrat governments appointed in many southern European countries are not experts in economic management but timeservers willing to do the bidding of their political masters. The technocrats that Europe will put in charge of the running of the Greek economy, will be no more successful than their predecessors. The misery and damage they inflict on Greek society will be hidden behind a serious of dubious statistics that appear to shw success. Britain and Europe are ruled by a number of petty Napoleons who are blinded by power and in the madness, they believe that their insane visions represent what is best vision for humanity. We are ruled by the self deluding inhabitants of a political madhouse.