What You Need to Know - and What They Don’t Want You to Know

Notes from a speech to the Winning Labour Conference, 19th May:  

By Ann Pettifor 
(New Economics Foundation, Director of Advocacy International Ltd and Policy Research in Macroeconomics, co-author of 'The Green New Deal')

www.primeeconomics.org 
www.debtonation.org 
 Twitter: @AnnPettifor 



“Modern finance is generally incomprehensible to ordinary men and women.....   The level of comprehension of many bankers and regulators is not significantly higher. 

It was probably designed that way. Like the wolf in the fairy tale: 
	
“All the better to fleece you with.” 

Satyajit Das, a risk consultant and author of Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives – Revised Edition (2010, FT-Prentice Hall).


“Ignoring the role of private debt in an economy is like driving without accounting for your blind-spot…..The crisis we are in suddenly becomes entirely explicable—and predictable before the event—when the blind-spot on debt is removed.  ” 

By Steve Keen. LSE Blog, 14 March, 2012. 


Public debt crisis: the fake agenda

The Conservative/Lib Dem Coalition’s framing of the debate. 

•	The Coalition frame the current crisis as originating with the public sector: the rise in the deficit, the costs of welfare/the NHS/civil service/ are all framed as the effective cause of the current crisis. 

•	They imply (often not explicitly) that public sector debt and deficit are causal to the global financial crisis. “The Labour government allowed public spending to spin out control…We were left with this mess…etc.”

•	Coalition seldom reminds the public of the global financial crisis – in which Britain’s City of London played a major role in blowing up a massive private credit/debt bubble, which, when it burst, nearly brought down the banking system and required (in the UK) a £1 trillion taxpayer-funded bailout (equivalent to one whole year of UK income) when the bubble burst in 2008.

•	The collapse of economic activity in the UK as a result of the crisis, and the very slow recovery from the shock of 2007-9 is both deeper and slower than in the Great Depression of 1929. See the chart below from Jonathan Portes, to be found at his website: www.notthetreasuryview.org 


Blame for the crisis and slow recovery – levelled at innocents. 

•	The framing and the narrative of the Coalition government goes further: it blames individuals/households and even the poor for the crisis. 

•	Philip Hammond, the Defence Secretary, recently effectively blamed ordinary British borrowers. He said that banks were not solely responsible for the financial crisis as “they had to lend to someone”.

•	The minister, who played a key role in drawing up David Cameron’s economic strategy in opposition, also claimed that people who took out loans were “consenting adults” who, in some cases, were now seeking to blame others for their actions. Daily Telegraph, 3 May, 2012 

•	Even worse there are many who far from blaming the speculating bankers that inhabit the global financial sphere, instead blame the poor. A recent report from the Resolution Foundation suggested that: 

o	“ evidence does suggest that it is possible that the increasing demand and supply of credit to low income households may have... increased both the risks and the consequences of crisis.” 

•	It is true that, thanks to ‘light touch regulation’ of bank lending; falling real incomes, rising housing costs, and a shrinking housing stock, the consumer-led economic miracle of the Labour years was underpinned by borrowing, with all households increasing spending faster than wage rises in the decade from 1997.

•	It is also true that the poorest 10pc of society, outspent their income by 40pc in 2007. 

•	Between 1997 and 2007 – i.e. under a Labour government - the incomes of the poorest 10th of society grew by 17pc while their spending grew by 43pc.

•	Similarly, middle-income households’ incomes fell behind their spending, with wages rising by 33pc and spending growing by 46pc.

•	Hence the Daily Telegraph headline: “Britain's pre-crisis boom was fuelled by an unsustainable debt binge among lower and middle- income households, new research shows”. 15 May, 2012
 
•	Note that the bankers do not get a look in in this debate. 

•	The debate reminds ones of the crack cocaine pusher blaming the drug addict. 

•	For more from the Resolution Foundation report, follow this link: http://www.resolutionfoundation.org/media/media/downloads/Final_-_Inequality_debt_and_growth.pdf

How does Labour frame the narrative around the ongoing financial crisis?

•	Labour spokespeople seem to fight shy of shining a light on the role played by the City of London, ‘light touch regulation’ and the global finance sector in creating monumental mountains of unpayable private debt, precipitating the crisis, and then demanding that their liabilities be nationalised/socialised. The bursting of the global credit/debt bubble (the ‘credit crunch’) led to: economic failure, rising unemployment, and bankruptcies. 

•	Instead, by keeping the focus on public sector debt, Labour appears to embrace the Coalition framing of the argument: “We agree that public debt is a problem. We too would cut the deficit, but not so fast.” 

•	So Ed Balls as reported in the Guardian 26 September, 2011: 

“Shadow chancellor Ed Balls will attempt to begin restoring Labour's credibility on the economy by promising that before the next election he will set out demanding and independently scrutinised fiscal rules for cutting the deficit.

He will also tell his party conference in Liverpool that if there is any windfall from the sale of state-owned bank shares such as RBS, the cash will be used exclusively to pay down the deficit and not boost state spending.

Adopting a more hawkish stance on the economy, Balls will say: "We will never have credibility unless we have the discipline and the strength to take tough decisions."

•	The contrast with Old Labour could not be greater. 

•	Back in 1944 Labour published a policy document ‘Full Employment and Financial Policy’ (FEFP) from which the following extract is taken:
 
“The central problem of our age is not growth or inflation, it is unemployment; the condition of the public finances is only a symptom of the failure of private finance to provide that employment, both in the special context of the present crisis, but also over the whole world for at least 30 years. The means to restore the public finances to health is to restore employment, and the means to do that is to reposition finance as servant to production and to labour” (my italics). (For more on this see “Labour, Finance and Keynes” at Policy Research in Macroeconomics (PRIME) 

•	Finance under the Blair and Brown governments was far from acting as servant to production and labour. On the contrary, Labour’s links with the City of London and Wall St. were – and remain strong. 

•	While many think that the media acted as master to both Labour and Tory governments – in fact Finance – in the form of the City of London -  acted as master – and still seems to intimidate Labour’s elected politicians. 


Private debt crisis

Public debt was not, and is not as serious a problem for the British and global economy as the collapse of the banking system and the vast PRIVATE debts created by the banks. 

•	These debts are unlikely to be paid in full, and are the real cause of global financial instability. 



Manipulating the crisis narrative. 

UK Treasury’s Budget Report 2011: Rebalancing the UK economy

“1.1 Over the pre-crisis decade, developments in the UK economy were driven by unsustainable levels of private sector debt and rising public sector debt. Indeed, it has been estimated that the UK became the most indebted country in the world.

1.2 Chart 1.1 highlights the rise in private sector debt in the UK. Households took on rising levels of mortgage debt to buy increasingly expensive housing, while by 2008 the debt of nonfinancial companies reached 110 per cent of GDP.

Within the financial sector, the accumulation of debt was even greater. By 2007, the UK financial system had become the most highly leveraged of any major economy. The level of public sector net debt as a share of GDP steadily rose from 2001-02, as the government ran a persistent structural deficit, despite continued economic growth.”  

Budget Report 2012: A Stable Economy. 

“1.1 The financial crisis of 2008 and 2009 exposed an unstable and unbalanced model of economic growth in the UK based on ever-increasing levels of public and private sector debt. As a result of that crisis, and unsustainable levels of public spending, the Government inherited the largest deficit since the Second World War and the UK economy experienced the biggest recession of any major economy apart from Japan.”

•	The UK’s private debt now amounts to about 500% of GDP (See chart below from McKinsey Global Institute, January, 2012). 
•	Financial institutions – i.e. banks, insurance companies, hedge funds etc – have debts amounting to 219% of UK GDP

•	Non-financial corporations have debts of about 109% of GDP 

•	Private households have debts of about 98% of GDP

•	These debts are a severe burden – and the burden becomes more severe as incomes and profits fall. 

•	On the one side people and firms have assets – e.g. property – that are falling in value; their incomes and profits too may be declining.  But on the other hand they have debts which are fixed. 

•	This means the private individual/household and corporate debt burden is becoming more burdensome every day relative to income.

•	The private sector is therefore ‘de-leveraging’ – paying down, writing off – its debts. 

•	For this reason, the corporate sector, for example, prefers to use surplus cash for the paying down of debt, than for investment 

•	Individuals and households are saving, not spending, because of high levels of debt.

•	As a consequence of this private debt de-leveraging, the economy is weakening, and public debt rising. 

•	The UK’s public sector debt has risen from about 50% of GDP before 2008 to 81% since the collapse of Lehman’s in 2008.  


The cure -  designed to kill the wrong patient 

•	As the Irish economist, David McWilliams wrote in the Financial Times (29/05/2012) 

o	“ Prescribing government deficit reductions to fix these private capital imbalances is like prescribing chemotherapy for heart disease.” 

•	Governments worldwide had (practically overnight) to mobilise $16 trillion euros to bail out private banks. (See the audit of the US’s Federal Reserve in this report from the US’s Government Accountability Office.) 

•	 The UK had to find £1 trillion – a whole year of of the nation’s income – to bail out Britain’s private bankers – and that was just the start of the massive subsidy that taxpayers have since provided to private bankers (through government guarantees and QE issued by the nationalised Bank of England) since 2008. The ongoing subsidy takes the form of low-cost lending by the Bank of England and other central banks; actions to keep interest rates at historically unprecedented low levels; government guarantees against losses and the threat of failure. 

•	As Mervyn King said in a speech on 21 October, 2009: 

“To paraphrase a great wartime leader, never in the field of financial endeavour has so much money been owed by so few to so many. And, one might add, so far with little real reform. " 

•	Public debt only started to rise significantly when a) government was forced to bail out private bankers and b) when the financial crisis hollowed approximately £250bn of income from economic activity out of the economy. (Govt budget had to finance the bail-out/nationalisation of banks, pay out rising unemployment benefits, while tax revenues slumped.) 

•	Labour, anxious to defend the public sector plays along with the Tory narrative – by keeping the searchlight/focus on public services – and becoming - wait for it -  defensive!

•	The solution to the global financial crisis, argue the Tories, is to hand over the assets of the public sector to the (still insolvent) banks and private corporate sector. 

•	NO, NO, NO say Labour – defensively and helpfully keeping the spotlight firmly on defence of the public sector.  

•	BUT: the cause of the ongoing global financial crisis is the vast inflation of credit/debt by the ‘lightly regulated’ private sector, credit used mostly for speculation; and the subsequent bursting, or deflation of that debt. 

•	To quote David McWilliams again, in reference to Ireland, but with application to the UK: 

o	The …..crises stem from too much cross-border private sector borrowing and lending. Ireland’s financial crisis didn’t destroy our nation’s wealth; it just revealed how much wealth had already been destroyed by reckless lending, borrowing and speculation. (Financial Times, 29 May, 2012) 

A brief review of the history 

•	There were no financial crises of any consequence between 1945 and 1971 – the “Golden Age of economics” (according to most economists) when under the Bretton Woods system (largely, but not wholly designed by JM Keynes) the finance sector was managed and regulated by central banks and the state; capital mobility was controlled, the creation of credit, and the rate of interest on a spectrum of loans (short, long, safe, risky) were regulated. 

•	A famous economic historian, Barry Eichengreen has described that period in these terms: 

“In retrospect, the three decades following World War ll seem to have been a golden era of tranquillity in international capital markets, a fulfilment of the benediction “May you live in dull times”. Eichengreen & Lindert The international debt crisis in historical perspective. The MIT Press, 1991. 

•	Levels of private and public debt were also low during the regulated Bretton Woods period, when cross-border capital mobility was constrained. Individuals and governments ‘lived within their means’. 

•	Bankers successfully lobbied for these regulations to be lifted - in the UK first under Anthony Barber’s 1971 “Competition and Credit Control” system (dubbed ‘all competition and no control’ by economists.) 

•	The lifting of controls over the creation of credit, coupled with the lifting of control over the rate of interest for short and long-term loans, safe and risky loans – led to an explosion in credit creation – and to rising borrowing costs. 

•	In the same year, 1971, President Nixon unilaterally dismantled the Bretton Woods system – based on fixing currencies to set amounts of gold. The purpose of the Bretton Woods framework was to prevent the build-up of ‘imbalances’ – large surpluses and deficits between nations. Countries were obliged to restrain both capital flows, but also flows of goods and services, to maintain balance in both their current and capital accounts. 

•	Because the US, by fighting wars abroad, had built up massive foreign debts, and did not want to correct this financial imbalance by “structurally adjusting” the US economy, in line with the requirements of the Bretton Woods framework, Nixon unilaterally defaulted on the US obligation to repay debts in gold.  

•	Because gold, up till then a form of ‘reserve currency’ -  had been unilaterally abandoned, there was a reserve currency vacuum. 

•	Instead the US offered the world ‘greenbacks’ as payment for debts - thus establishing a “promise to pay” – the US Treasury Bill – as the world’s reserve currency. Thus the dollar enabled the US to become ‘the banker’ to the rest of the world -  a system of global financial ‘Monopoly’.

•	Holding the world’s reserve currency means that the US can issue its debts in its own currency, and repay those debts in its own currency. As central banks have ways of manipulating the currency’s value up or down – that means the US can effectively manipulate how much of her foreign obligations will be repaid at their true value. 

•	Poor countries like Tanzania cannot do the same. Instead they have to borrow in a foreign currency – the dollar – and earn  dollars for foreign debt repayments. 

•	In the Eurozone area, countries like Greece do not have the power the US has over their own currency, and like Tanzania, Greece effectively borrows and repays in a ‘foreign’ currency. 

•	 (For more on this, see my book: “The coming First World Debt Crisis’ published by Palgrave Macmillan in 2006.) 

Blowing up a massive credit and asset price bubble 1971 – 2007-9  - and, then as now, blaming the victims 

•	As a result of the de-regulation of credit in 1971 – bankers began creating credit and pumping ‘easy money’ into the economy. 

•	Unfortunately, because the regulation of the rate of interest had ceased, the ‘easy money’ was also ‘dear’ – much dearer on average than during the period 1945- 71. 

•	The outcome of too much credit/money chasing too few goods and services was predictable – inflation. 

•	But, in just the kind of ideological manipulation that we witness today – instead of blaming bankers and ‘easy money’ for inflation, the Tory government – and then a Labour government – turned on the unions, and blamed workers for inflation. 

•	While it was true that unions responded to rising prices by defending their interests and demanding higher wages – they were not causal to inflation. 

•	Higher wages and prices were the result of the inflation of de-regulated credit. 

•	However, both the Labour movement and right-wing governments, and of course the City of London – blamed ordinary workers – the victims of inflation. 

•	The post 1970s private banking sector was freed up to create and then dump trillions of dollars/pounds/euros of debt on a) individuals and households b) firms and governments- because of ‘light touch regulation’ – and because Labour and other Social Democratic parties effectively colluded in freeing up the banks to lend at prices determined by bankers themselves (see LIBOR – the rate of interest set by the British Bankers Association and the basis of tens of trillions of dollars of debt worldwide); and speculate on global financial markets -recklessly . 

How the rich got richer – and the poor, poorer

•	The vast inflation of credit/debt in turn inflated the value of assets: property, stocks and shares, works of art, race horses, brands – in short all those things the rich (rentiers) own, and which effortlessly earn rent for wealthy elites. 

•	By contrast, central bankers, finance ministers and Finance Ministries (i.e. the Treasury) declared (wage and price) inflation to be the greatest evil in the land – and clamped down ferociously.  

•	So policies were implemented (globalisation/’flexible labour forces’/attacks on collective bargaining/prices and incomes policy) – to “tackle inflation” and keep wages/salaries down. Also prices – which hurt farmers/small businessmen/entrepreneurs etc. 

•	But political and financial elites turned a blind eye to the massive inflation of the value of assets. 

•	On the whole it is the rich and the better-off that own assets: property, stocks and shares, works of art, brands, racehorses – any asset that earns rent (almost) effortlessly. 

•	The rest of us live on our wages and salaries, or else from the profits of our small businesses. 

•	This explains why during the 30 years of financial de-regulation – the rich got steadily richer, and the rest of us (including the sqeezed middle professional classes) got poorer. 

•	At the same time de-regulated private banks borrowed crazy amounts of money for the purpose of speculation. (The gains from speculation (think of winning the lottery) are much higher (before a crash) than those from sound, risk-assessed lending, investment in the productive economy – and hard graft.) 

Why did the bubble burst? 

•	The simple answer is that private debt became unrepayable. 

•	This was because while the real cost of debt was rising (as e.g. interest added) real incomes were falling. 

•	Second, the rate of interest on most private debts was high in real terms. Individuals, households and firms had to increase their incomes/profits by more than the rate of interest on their loans each year, to stay afloat. 

•	Unlike the post-war ‘golden age’, when both credit creation, and interest rates were regulated, during the age of liberalisation (unsurprisingly with bankers in control of the ‘price’ of loans) – interest rates rose. 

•	The chart below shows how base rates rose from 2003 onwards. Think of these rises as the sharp points of a dagger – pointed at a massive bubble of debt. Eventually the high rates of interest punctured the vast bubble of debt. 
The broken, dysfunctional banking sector; 

•	Loans/debts are now proving unrepayable. Most of the private banking sector is insolvent. (Note that only a year ago, the EU declared that most banks had passed ‘stress tests’. But only this week 16 Spanish banks were downgraded by Moody’s – because they are effectively bust.  

•	We established banking systems for a purpose: to ensure that the private (and public) sectors could have their activities financed – through lending. 

•	Banks are, essentially, lending machines. 

•	But the banking system is now broken. Instead of lending into the real economy – as they are designed to do, banks are borrowing from the real economy. Lending has turned negative.  (See the chart below from the OECD). 
•	In other words, banks have become borrowing machines. 

•	This is a bizarre and unprecedented development. 

•	The fact is that, on any fair basis of assessment, most of the world’s global banks are, if not insolvent, at least at risk of insolvency. (For more on this see Golem X1V here.) 

•	Barclays Bank boasts of having survived the crisis, but like Lloyds and other banks, Barclays had to draw on the ECB’s LTRO facility in December, 2011. A healthy bank would not have needed that taxpayer-backed (backed by Greeks as well as Germans and British taxpayers) subsidy. 

•	Hence the huge dependence of private bankers on taxpayer subsidies – via central banks (QE) and on the very low interest rates engineered by our nationalised central banks (e.g. the Bank of England). 

•	These private bankers simultaneously swear by ‘the invisible hand’ and discipline of the market. Except that is, when the discipline applies to them…..

•	So while banks have socialised their losses, and only continue to function because of the massive explicit and implicit subsidies provided by the UK’s & Fed’s QE; the ECB’s LTRO – and by the deliberate manipulation of interest rates by central bank Committees – to keep them excessively low -

•	Their political friends, continue to demand that public services be privatised. 

The unwinding of the crisis 

•	The Coalition continues to turn a blind eye to Britain’s heavily indebted private sector (“the most indebted nation in the world” according to the 2011 Budget Report.) 

•	Nothing is being done to ensure the orderly downpayment or write-off of these debts. 

•	There is now a real threat that ‘de-leveraging of the debt’ – will become disorderly. That is bankruptcies will escalate, households will be ‘foreclosed upon’ by bankers – house prices will fall precipitously (as has happened in the US) unemployment will rise – and bankers will be further bankrupted, because unemployment and falling house prices will trigger further defaults (‘negative equity’) on mortgages. Bankrupted SMEs will not be able to repay debts. 

•	As long as Britain is burdened by this huge and unmanaged (and unrecognised) overhang of private debt – so long will recovery be impossible. 

The consequence of the financial crisis 

•	Since 2008 approximately £250bn hollowed out of the UK economy. 
•	If the UK had grown at 1% then the assumed loss is £400bn 

•	That is a very big ‘crater’ of economic inactivity – unemployment, bank losses, SME bankruptcies etc. 

•	The Coalition government plans to hollow out another £85 bn in the next few years – in public sector spending cuts. 

•	Because of the private sector’s high levels of debt, companies are hoarding cash. They need that cash to deal with their debts if the banks should call in the debt. Furthermore, they are reluctant to invest, because they cannot see ‘customers coming through the door’ – either now, or in the near future – in the numbers needed to justify further private investment. 

•	Because individuals are heavily indebted, and made insecure about future job losses etc., they too are saving, or paying down debt. 

•	The economy is therefore stagnating. 

•	Only the government has the capacity – and the resources – to kickstart economic activity, by investing wisely in sound infrastructure – e.g. retrofitting houses to improve energy efficiency; expanding and increasing access to fast broadband; building sustainable and affordable housing in inner city areas. 

How to deal with private debts? 

•	Some debt may well have to be written off – a ‘debt jubilee’ – because it cannot ever be repaid. Market economies have, since the 18th/19th centuries recognised this reality, which is why we have bankruptcy law – the acknowledgement that some debts can never be repaid – and that the state must play a role in the orderly re-structuring or write-off of the debt. 

•	However, the best way to deal with an overhang of debt is to generate the income (wages/salaries/profits (for firms) and tax revenues (for govt) -  with which to repay debts. 

•	The best way to generate income – is by creating employment. 

•	In the words of John Maynard Keynes, “look after unemployment and the budget will look after itself.” 

Government can’t cut the deficit: differences ‘twixt government and you and me 

•	One of the myths peddled both by the Coalition and to an extent the Labour Party, is the notion that the government can cut the deficit- by e.g. cutting spending and increasing taxes (e.g. VAT). 

•	This is a fallacy. 

•	Not only does the Coalition believe that government can cut the deficit, politicians (and the Treasury) believe this can be done quickly.  Labour believes it can be done too - only it must be done gradually. 

•	But, unlike yours or my household balance, government cannot cut the deficit. 
•	It can only cut government spending. 

•	The government’s budgetary outcome is not a consequence of government action – but is a result of the actions of the economic system as a whole. 

•	Government can cut spending, but not the deficit – which is the budgetary outcome. 

•	It’s like a small businessman arguing that he can cut back on his debts, by cutting down his cash flow! 

•	While you and I can cut back on spending, take in a lodger, increase income, and cut our deficit - government cannot do that. 

•	The government’s budget balance is dependent on economic activity in the economy as a whole. 

•	If the economic ‘cake’ expands – i.e If economic activity and with it income increases -  the government’s deficit will fall, because it will be paying out less in benefits, and collecting more in tax revenue. 

•	If the economic ‘cake’ contracts – especially if government deliberately contracts it – then the reverse happens. 

•	The argument, therefore, is not between deficit-cutting and stimulus, but between expenditure-cutting and stimulus. 

Government spending generates income – for the economy as a whole – and for government
 
•	Sound (i.e. not speculative) economic activity (wise investment in e.g. ‘green’ infrastructure, training, employment)  generates income for both the private and public sectors. 

•	Income = wages, salaries, profits and taxes. 

•	Just as you and I are better with an income than without, so government is better off as income in the economy rises, and worse off as it falls. 

Government spending reduces the budget deficit – and the public debt 

•	It gets better. Unlike for you or me, there is a ‘multiplier effect’ for government spending – which there is not necessarily for personal spending. (For more on the multiplier effect read here at PRIME)  

•	In other words, if I pay a builder to fix the roof, I may benefit indirectly, but he does not pay me back. If the government employs builders – then they will pay taxes, go shopping and pay VAT, improve the profits of the shopkeeper who in turn pays corporation tax etc. etc…- all of which goes back to government in the form of (tax) income. 

•	This is called ‘the multiplier’ – a concept developed JM Keynes, and to which he held strongly, but which most neoliberal economists deny exists…. 

•	According to a recent report by L.E. K., £1 spent on construction output generates a total of £2.84 in total economic activity (i.e. GDP increase). (LEK UK Contractors Group. Construction in the UK economy. October, 2010 update.) 

More on why the government budget is not ‘like with a credit card’ (G Osborne. Conservative Party Conference, October, 2010.)
  
•	George Osborne at the 2010 Tory Party conference said: “Let me tell you what a structural deficit is…It’s like with a credit card. The longer you leave it, the worse it gets.” 

•	The govt is not like an individual or firm: governments cannot, like a company ‘go into liquidation’ or bankruptcy – not even Zimbabwe. 

•	Unlike you or me, governments can get their own nationalised bank (e.g. the Bank of England) to conjure money out of thin air (or by entering a number and charging it to the government’s account….) 

•	The Bank of England currently does that in a roundabout way through ‘Quantitative Easing’ (the Bank of England gives the money to private banks, for the purchase of government bonds). But central banks have been financing governments since 1694 when the Bank of England was founded. 

•	As a result, and because the Bank of England is a nationalised bank (regardless of all the loose talk about its ‘independence’) the government effectively owes money to itself. 

•	You and I do not have such a bank to call upon. We, regrettably, cannot borrow, spend and owe money to ourselves. 

•	Governments can (except for those trapped by the Lisbon Treaty, which forbids the ECB to lend directly to governments. Instead, governments like Spain and Greece have to turn to private sector banks (‘the bond markets’) for finance. (For more on this see here: An Open Letter to Europe’s Leaders. Abandon the Euro’s ‘gold fetters’ by Ann Pettifor. ) 

•	Angela Merkel: “One should simply have asked a Swabian housewife: she would have told us her worldly wisdom: you can’t live beyond your means.” 

•	Governments with sound central banks and well developed monetary and banking systems – can live beyond their means. That is how they finance wars, and other emergency government expenditures.

•	At the end of World War ll, government debt was 246% of GDP. Times were tough. But the Labour government responded by: spending – wisely. The NHS, schools, housing, infrastructure. 

•	The result: government debt fell steadily to about 20% of GDP. It stayed at that level until the 1970s/80s – and only began to rise with the liberalisation of finance. 

•	And yes, Britain managed to ‘live beyond its (private) means’ from the late 1970s through to 2008! See chart below. 

Conclusion: 

Given the scale of private sector debt; given the vast crater of economic inactivity caused by the global financial crisis – and given that the easiest way to reduce government debt at such a time of crisis is for government to spend – given all that, the argument for increased and wise public investment in forms of economic activity that generate income, is water-tight and unanswerable. 

All it needs is for citizens to rebut and challenge the fake arguments currently made in support of austerity, and for understanding of the economic facts outlined above to be known and explained to the wider British public. 



Recommended reading: 

The coming first world debt crisis – by Ann Pettifor. Published by Palgrave Macmillan, 2006. 

The real world economic outlook – edited by Ann Pettifor. Published by Palgrave Macmillan, 2003. 

The cuts won’t work – by the Green New Deal Group. Published by the new economics foundation. 

For more on public debt, go to “The Economic Consequences of Mr. Osborne” at PRIME economics. http://www.primeeconomics.org/wp-content/uploads/2011/06/The_Economic_Consequences_of_Mr_Osborne.pdf

Read: Ann Pettifor’s blog: www.debtonation.org 

Also Policy Research in Macroeconomics: www.primeeconomics.org 

Steve Keen: Debtwatch – blog http://www.debtdeflation.com/blogs/

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