The markets are not in charge, sovereign currency-issuing governments are

And in the news……

The IMF warns this week that the world has run out of ‘fiscal fire power’ to fight the next recession because the balance sheets of central banks are so bloated that it leaves little room for manoeuvre. Christine Lagarde also adds her voice to the growing demands for reviewing outdated global corporate tax rules because ‘it denies exchequers vital funds for public services and welfare’. And Oliver Letwin, the former UK cabinet minister, claims in a debate in the Commons that if it hadn’t been for the Coalition in 2010 there would have been a ‘melt-down’ as a result of investors being unwilling to lend to the government.

These reoccurring tropes of damaging public debt and the need to rein it in, spending on public services being constrained by tax collection and investors being unwilling to lend to governments which are fiscally imprudent are all indicative of how firmly entrenched the ‘household budget’ narrative of the money system is in the public consciousness. Few of us challenge them, let alone politicians who make and deliver policies, or journalists who report on them. It’s a record stuck in the same old groove.

Such narratives have allowed governments across the world from the US to the UK and Europe (which has the added complication of a dysfunctional Eurozone) to pursue ideologically driven austerity policies to cut spending on public services and infrastructure and privatise public assets. This has had devastating consequences for those economies; rising unemployment, precarity, poverty and inequality.

For many decades now the International Monetary Fund has been part and parcel of this deception and caused huge economic damage to some of the poorest countries in the world; from South America to Africa and much closer to home Europe, where in Greece the infamous Troika, of which the IMF formed a part, laid waste to its economy and has caused unforgivable human suffering.

As Asad Ismi wrote in his report for the Halifax Initiative “Impoverishing a Continent: The World Bank and the IMF in Africa”

“The World Bank and the IMF have forced Third World countries to open their economies to Western penetration and increase exports of primary goods to wealthy nations. These steps amongst others have multiplied profits for Western multinational corporations while subjecting Third World countries to horrendous levels of poverty, unemployment, malnutrition, illiteracy and economic decline.”

In the same report Ismi draws attention to a study released by the Structural Adjustment Participatory Review International Network in 2002 which said that SAPS (Structural Adjustment Programmes) have been:

“expanding poverty, inequality and insecurity around the world. [They have] torn at the heart of economies and the social fabric…increasing tensions among different social strata, fueling extremist movements and delegitimizing democratic political systems. Their effects, particularly on the poor are so profound and pervasive that no amount of targeted social investments can begin to address the social crises that they have engendered.”

These global institutions, heavily influenced by the US which plays a dominating role in its operations, have, for decades, subjugated the developing world to economic exploitation through debt bailouts and enforced economic restructuring. The claim that its SAPs would reduce poverty belies the evidence, and yet politicians and institutions alike remain wedded to a neoliberal agenda lacking conscience, compassion and principle. People, not just in the developing world, have suffered as spending on health, education and investment in infrastructure development has been curtailed on the back of a forty-year-old lie that markets are in the driving seat and governments are simply captive passengers at the mercy of the bond markets. While people’s lives hang in the balance, the polity doffs its cap to capital and balancing public accounts.

Our politicians, when confronted with household budget narratives of how government spends and the dangers of public debt and inflation, play to the same orthodox chorus. When one side asks the question “How you will pay for your progressive agenda?” the other says “We’ll bring home the magic money tree planted in faraway tax havens”.  When the other side implements cuts to public spending to bring the public accounts into a desired balance and show that it is fiscally prudent, the opposite talks about its progressive agenda but still in terms of fiscal rules, costed budgets and balancing the accounts over the economic cycle, presenting what it sees as a kinder solution to the monetary constraints.

For nearly half a century, successive governments have been ‘reassuring the markets’ and leading the charge for financial deregulation. Beginning in 1976 with Labour’s Chancellor Dennis Healey, whose White Paper called for public spending cuts and deficit reduction. Its defeat led to a surge in sales of sterling and what become known as the ‘gilt-strike’ where the financial markets began refusing to buy government bonds until the government had ‘put its house in order.’  This was the beginning of a fundamental shift in economic approach.  It began a move away from Keynesian inspired policies of full employment and social welfare towards a monetarist vision whereby controlling inflation and putting breaks on government spending became the overriding objective and this remains the case today.  As Professor Bill Mitchell noted in his book ‘Reclaiming the State ‘it was a ‘deliberate move to put pressure on the government to curtail public spending and retrench the welfare state.’

In short, the government of the day adopted voluntarily and unnecessarily, as sovereign currency issuers, a programme of spending cuts in exchange for a loan from the IMF. It put in place a framework which conceded that the market was more powerful than sovereign governments to determine the nation’s future. Thus, when the world’s financial policemen, the IMF or the World Bank, give their considered opinions about the right course of action for rich and poor nations alike, politicians bow to their perceived economic expertise. When it proposed ‘growth-friendly’ fiscal constraints, aka savage cuts to public spending, to get economies back on course during the global financial crash, the consequences were devastating. They are still reverberating today in high levels of unemployment, precarious employment, rising poverty, inequality and shattered communities.

Whilst the political establishment, think tanks and institutions assisted by the media continue to promote these defective austerity narratives, we face the prospect of further economic, societal and environmental decay. As Greta Thunberg, the young environmental campaigner, notes ‘the house is on fire’ and those we expect to lead us are sticking their heads in the sand on every count.

With human survival on the line the message needs to be loud, clear and repeated ad nauseam:

• The spending of a government like the UK which is a sovereign currency issuer is not constrained by its ability to collect tax. In other words, it is not like a household budget which needs income before it can spend. Whilst it is a good idea to review global corporate tax rules as a mechanism to redistribute wealth and resources more fairly Christine Lagarde’s claim that doing so will allow governments to spend on public services is just a part of the same orthodox narrative which prevails and is incorrect.
• A government which is a sovereign currency issuer like the UK cannot run out of ‘fiscal fire power’. The IMF’s claim that the public debt is so large as to constrain future spending to deal with future recessions is quite simply a falsehood. What will constrain the spending of any government, however, are the resources it has at its disposal. Its public policy choices define their distribution, how they will be used and in whose interests. A government’s economic record must be judged, not on its monetary discipline, but whether it served public purpose and created economic and social well-being. There is no other measurement.
• A currency-issuing government like the UK doesn’t have to issue debt in order to cover its deficit and the bond markets can never bankrupt such a nation. When the government sells bonds, it can always service those liabilities provided they are denominated in its own currency. As Professor Bill Mitchell says, ‘The bond markets are supplicants not a source of spending capacity’. 

Let’s leave the last words to Sharan Burrow who is General Secretary of the International Trade Union Confederation who said:

“If you think the dominant orthodoxy, shrink your economy, render workers jobless, impoverish families and still grow, is an oxymoron…then you would be right.”