In a piece in June, ‘The unhappy marriage of democracy and capitalism’, I discussed the then situation in Greece and the way democracy was being ignored by the wielders of economic power, particularly the bankers and the power brokers of the financial system. Since then the bankers have won, the Greek parliament has passed legislation to introduce further austerity measures and the people have rioted in the streets.
Greece was in a cleft stick. A majority of Greeks did not want to leave the Eurozone but nor did they want more austerity. The European Central Bank, the IMF and the European Commission (representing the other European governments that had provided funds to Greece) left them with Hobson’s choice — accept austerity or leave the Eurozone. The Greek government still opposed the outcome in principle but felt it had no choice: it could meet only one of the democratic demands placed upon it by the people, not both. The bankers had won by backing the Greek people and its government into a corner.
The Greek situation, however, is symptomatic of a much wider problem across most democracies in the world today but has brought it clearly into focus: it is now the bankers, the financial system, and the so-called rules of (neo-liberal) economics that dominate government thinking, not the will of the people. In an article in The Guardian in July, George Monbiot referred to it as ‘the financial elite’s war on democracy’:
The IMF is controlled by the rich, and governs the poor on their behalf. It’s now doing to Greece what it has done to one poor nation after another, from Argentina to Zambia. Its structural adjustment programmes have forced scores of elected governments to dismantle public spending, destroying health, education and all the means by which the wretched of the earth might improve their lives.
It is a gloomy picture but, I think, we can all recognise it. In this new world, it is not governments, but the bankers, who rule. We have only to look at a common approach in many countries, namely the central banks adopting inflation targets, generally around 2%. Predictable inflation is considered necessary for economic planning and allowing consumers to feel confident, but for consumers and producers it is the predictability of inflation, not so much its rate (unless it has become hyper-inflation), that is important.
The same programme is imposed regardless of circumstance: every country the IMF colonises must place the control of inflation ahead of other economic objectives; immediately remove barriers to trade and the flow of capital; liberalise its banking system; reduce government spending on everything bar debt repayments; and privatise assets that can be sold to foreign investors.
Financiers are more fearful of inflation because it has a major impact on financial assets. A simple example: I borrow $10,000 at 10% with an estimated 0% inflation, meaning I pay back $11,000; but if inflation rises to 5%, that $11,000 I pay back then has a purchasing power of only $10,475 — the bank has effectively lost $525. When we are talking of major international financial institutions, and the huge amounts they are dealing in, small variations in inflation can affect their bottom line, unless it is kept low and within a small predictable range.
Australian banks learned that lesson during the high inflation of the 1970s. Until then, most home mortgages were on a fixed interest rate (set by the government as I recall) for the life of the loan but banks stood to lose heavily in the 1970s and now are allowed to offer ‘variable’ interest rates so they can adjust to inflation. But that also means the borrower never gets ahead. Previously, as the years went by, the repayments became a lesser portion of the take-home wage, leaving the borrower with more disposable income — to boost consumption and thereby the economy — but now that is less likely to happen, or occur at a much slower rate and only to the extent that wage rises exceed inflation and the bank’s interest rate. So the overall economy doesn’t benefit from the current approach.
So the question is who benefits from all these efforts to keep inflation at 2-3%? Who benefits when a country adopts austerity measures which often cause deflation? Using that same example of the $11,000 loan repayment, if inflation became a deflation of minus 5%, I would effectively be paying the bank $11,550 in purchasing power.
But deflation is bad for the economy and for government coffers, as Greece knows. If growth turns negative, that means not as many goods and services are being purchased, not as many people are required to produce goods and provide services, and less tax flows to the government. It doesn’t, however, stop the financiers making money: they may even make more as people (even governments) may borrow more to overcome the loss of income.
So who do you think benefits the most?
It is not the people, as shown in the Greek situation. Governments have abandoned the people and, therefore, by definition, democracy. They no longer listen to the people but to the financiers and ‘the markets’.
In an article in The Monthly, Richard Denniss argues that we, the people, are being blinded by ‘econospeak’ and being led to believe that governments in making their decisions have to be conscious of the reactions of ‘the markets’. He writes that we should remember that ‘markets’ per se do not have feelings, do not have needs or demands. What we refer to as ‘markets’ is actually people buying and selling and attempting to manipulate trading for their own advantage. Denniss gives an example of ‘econospeak’ with his own translation into everyday English, which emphasises that it is really the feelings, needs and demands of rich and powerful individuals we are talking about:
We are being fed this propaganda constantly with the media now reporting numerous times each day on ‘the markets’ and stock exchange indexes from around the world. It suggests, as Denniss writes, that the markets ‘are watching and judging us’. We are meant to believe that this constant diet of market reports is important.
- Markets reacted angrily today to news that the government is considering tightening thin capitalisation provisions that have provided foreign investors with strong incentives to expand their Australian operations.
- Rich people overseas reacted angrily today to news that they might have to pay tax on the profits they earnt in Australia. After the government announced that it was considering clamping down on some of the most lucrative forms of multinational profit-shifting, some very wealthy Americans threatened to take their bat and ball and go home if they were forced to pay tax.
It is all crap!
When I was growing up we didn’t hear about the stock market. There was a page somewhere in the newspaper giving the previous day’s prices but we skipped that page. The stock market was called ‘rich man’s gambling’: where I lived, people gambled on the horses, most often with the local, illegal SP bookie. What changed? Why did ‘the markets’ become the be-all and end-all of economic progress? (And we could ask why in a free market economy was the off-course SP bookmaker made illegal and driven out of business?)
Joint stock companies have existed for a long time, in which people raise money, and spread risk, by allowing other people to purchase a share in the company. Stock markets (exchanges) were meant to be an organised way of allowing trade in those shares. It did mean that shares could be traded without affecting the company itself — it was only a change in ownership of a small portion of the company.
When companies are successful, more people want to buy shares in them and the share price rises purely on the old law of supply and demand. Hence England had the ‘South Sea bubble’ early in the 1700s. It involved the South Sea Company taking over a large portion of the English government’s debt following the ‘War of the Spanish Succession’, in return for trading rights in the Spanish colonies of South America and in the West Indies (referred to as the ‘south seas’ at the time). By the treaties at the end of the war, the company, however, was allowed only one ship per year to South America. Despite that, it was able to sell its shares because the government was paying 4% on its debt and the company ran an effective marketing strategy. Share prices rose quickly from £100 to £1000 before the bubble burst. The company had also encouraged share purchases by lending money to people to buy its own shares. Of course, it was those who were leveraged in that way who lost most when the shares crashed: the crash was started by the directors of the company selling their shares because they knew the ten-fold increase in the value of the company existed only in the shares and was based on nothing substantial. As a result, in 1720, the British government banned the issuing of stock certificates. (It was enforced for only a short time although not repealed until 1825.)
Bubbles keep happening, usually followed by a depression or a recession. Apparently the only difference between a market ‘crash’ and a ‘bubble’ bursting or a market ‘correction’ is the size of the devaluation of the market. (One article I read suggested that the fall had to be greater than 20% to be more than a ‘correction’, but that still means that many people will lose a lot of money.) Often, as after the South Sea bubble, these bubbles are followed by a burst of government regulation but ‘markets’ can now avoid such intervention by claiming it is only a ‘correction’.
Has anything changed? We have returned to laissez-faire capitalism under the new guise of ‘market liberalism’ and neo-liberalism. As George Monbiot wrote:
Neoliberalism is inherently incompatible with democracy, as people will always rebel against the austerity and fiscal tyranny it prescribes. Something has to give, and it must be the people. This is the true road to serfdom: disinventing democracy on behalf of the elite.
Monbiot argues that the imposition of budget surpluses as the target of governments (it is, for example, written into Eurozone rules) is the new ‘gold standard’ that limits public spending and what governments can do to stimulate employment. A limit on spending, either by the gold standard, or the new requirement for budget surpluses, effectively leaves the rich and the financiers in control. If a government needs more money it either has to take more ‘gold’ from the wealthy — and they have the ‘gold’ to be able to fight that as we saw when the mining companies successfully fought the mining tax — or borrow money. Borrowing money: doesn’t that mean the financiers are involved? — funny that! And if governments allow inflation to rise, they effectively pay back less money, so the financiers also want low inflation so they don’t lose.
The big financial institutions (and rich individuals) also invest their surplus funds in stocks as a way to make more money — or so as their surplus money is not sitting idle, as they would see it. So who has a vested interest in ensuring that we are all worried when the markets fall, or that we should be worried by the market’s reaction?
We gave the Reserve Bank the power to determine interest rates and the guideline that it should aim to maintain inflation between 2% and 3%. We were told that it removed monetary policy from politics. But why should it be removed from politics? Governments are meant to make political decisions and to the extent that inflation and interest rates affect people, they involve political decisions. By removing that power from political considerations, we effectively abandoned a part of democracy’s capacity to influence the market: that is control, in the broader interest of society, the behaviour of banks and wealthy individuals. That can only be a neo-liberal decision (even if Labor originally set the inflation target) that supports laissez-faire capitalism and its financiers.
And running the sidelines we have our current government. Abbott and Hockey have repeatedly told us that surpluses are sacrosanct and that, when we don’t have one, we have to cut government spending to ensure that eventually we do. They look to the markets to justify their decisions, but who do the markets represent? — it is not the people. They say we need less government regulation in the market but who benefits from that? — they tell us it will benefit workers in the long run but that’s what ‘markets’ always say, while the corporation owners and the bankers reap the benefits now.
I will end with something said by Sir Isaac Newton, after he lost £20,000 in the South Sea bubble:
I can calculate the motions of heavenly bodies, but not the madness of people.
I think ‘the madness of people’ still dominates the markets, despite what the neo-liberals, the economic rationalists and the Liberals tell us. In that regard, it is not a firm basis on which to run an economy.
What do you think?
Ken may have nailed his colours to the mast with this piece but has he also nailed the bankers there? Around the world new grass-roots political parties are emerging and, in some countries, enjoying electoral success, as people become disillusioned with the way the current political system is dominated by financial interests. It is not yet happening in Australia but Labor should remember that it began as a grass-roots party, created to give the workers a political voice. If Labor returns to its roots, it can still be the people’s party in Australia.
For next week, you can ponder what is the link between the (former) planet Pluto and Tony Abbott? Find out in 2353’s ‘Pluto and the conservative mindset’.