Fakirnomics or Don’t Shoot! or The Permanent Credit Economy and the Point of No Return

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George Osborne Needs You To Borrow Billions To Make His Plans Work

The Huffington Post UK  | By Asa Bennett tp://www.huffingtonpost.co.uk/2014/12/05/george-osborne-debt-obr_n_6274264.html?utm_hp_ref=uk

Revealed: how the wealth gap holds back economic growth

OECD report rejects trickle-down economics, noting ‘sizeable and statistically negative impact’ of income inequality

http://www.theguardian.com/business/2014/dec/09/revealed-wealth-gap-oecd-report

 

If a believable mainstream justification for Quantitive Easing is possible, it must centre on the restructuring of national economies in the aftermath of the Financial Crisis.

Both the Bank of International Settlements and the International Monetary Fund have called on national governments to use the window of opportunity provided by QE to carry out this restructuring. Indeed, they have expressly stated on more than one occasion that QE is only really justifiable if this restructuring happens.

But attempts at restructuring have met with at best mixed success; not least because it is very hard to get a concrete idea of that this supposed restructuring would actually mean. How can we know if restructuring has successfully taken place? Well this question at least does have a clear answer that everyone can agree on: there will be renewed growth in the economy.

By this measurement the most successful examples of economic restructuring are Britain and America. Unlike Europe and Japan, which have been balancing on the edge of recession for the past six years, Britain and America have experienced some level of growth. So if we understand what has changed in Britain and America we will have a pretty good idea of what restructuring actually is.

Have banks and financial institutions in Britain and America fundamentally changed their structure or the way they operate?

No.

There has been some regulatory tinkering round the edges of speculative banking operations but the core activity of manufacturing derivatives is largely untouched, even bonuses have not been substantially affected.

Does the financial sector play a smaller role in the economy now?

No.

Financial services continue to play an ever -growing role in the economies of Britain and America, there has been no real resurgence in manufacturing or traditional industries. These economies continue to be increasingly unbalanced in historical terms.

The growth we have seen in the domestic financial economy of Britain and America has centered on asset growth in the form of stocks and bonds, new derivatives and profits from privatised sectors like education, war, prison provision etc.

For ordinary people in the old fashioned economy there has been asset value growth in housing. This growth in the financial and legacy economies is financed though credit, not through wage growth. Mass immigration and an intensifying attack on trades unions and workplace rights means that wage growth is effectively impossible under the Monetarist regime.

In other words there is an ever increasing reliance on money itself as a vehicle for creating value, not only for the financial elite but for society as a whole. Rather than reducing the financial sector in favour of the real economy, the real economy is being made ever more like the financial sector. This is what restructuring has turned out to mean.

Contrary to the rhetoric of the Neo Liberal project, the mass scale extension of credit is effectively creating a fully planned economy. But instead of governments, it is private credit agencies that increasingly decide what resources are allocated where. The financial and political elite are moving towards comprehensive planning without the political problem of having to admit that the free market is a mirage. This will be quite some trick if they can pull it off.

This is the Permanent Credit Economy. Where credit is not an optional decision, but a permanent necessity of economic life.

But there is a cost to the use of credit as the brain and the heart of the economy. As more and more people integrate more and more credit into all their economic activity, the ever increasing burden of interest payments diminish earning power at an even faster rate than immigration and deregulation does.

Wages have to be allocated to paying off the interest on student loans, mortgages, car loans, credit card and other unsecured debt . This money taken out of the commodity economy is one major cause of the deflation we are now seeing across the developed world. People simply don’t have as much money to spend on commodities as they used to have. In other words there is less and less discretionary spending; you have less and less choice where your money goes.

Increases in credit push up prices on student loans, mortgages, cars, and credit card debt. The more credit that is available the more can be charged for the things that are bought on credit. Were it not for the financialised restructuring of developed economies, the I Phone would cost no more than $200…

But even more insidious than the ratchet effects of interest and credit, is the control and planning effect of credit I refer to above. What you buy is increasingly determined by credit agencies. You are able to get credit for any purchase to the extent that the purchase has a commensurate value and to the extent that you are able to service the payments on that purchase. You can’t borrow $2000 to buy an old car that is only determined by the lender to be worth $1000. This is the flipside of the end of discretionary purchases, even if you are allowed to have the money (credit), you are not allowed to spend it as you wish.

Economies all across the developed world are now growing or not growing entirely to the extent that financial institutions are successful in getting people to take up the offer of credit. There has been some take up of credit for housing in Britain, the market has been goosed by government subsidy. This housing asset recovery is taking place in parts of America also. (San Francisco for example).

On the other hand the failure to take up credit is reflected in the gloomy headlines with regard to the economies of Europe and Japan. In Europe there is at best stagnation and more often contraction in housing credit. Japan is notorious for its domestic populations tendency to save and avoid credit. Shinzo Abe has resorted to shock and awe tactics to firebomb the savings of the Japanese public and force them into the speculative credit marketplace.

A recent article in the Huffington Post made explicit that George Osborne is counting on a further massive increase in secured and unsecured debt as the means to ‘grow’ the British economy.

The HP tells us that:

‘the Office for Budget Responsibility, …forecast that Britons will need to add £360bn over the five years to its levels of unsecured lending, which includes credit card debt, payday loans, and bank overdrafts’.

The £360bn figure represents a £41bn increase on the OBR’s forecasts just nine months ago and would take households’ unsecured lending, as a share of total household incomes, to a record 55%  by 2020. This would be well above the pre-financial crisis unsecured debt ratio of 44%.

And:

APPG member Willie Bain, member of the Commons business committee, told HuffPostUK:

“The chancellor promised in 2011 that the government would lead an export-led recovery, yet this week the share of growth coming from net trade was predicted to fall further in each of the next five years. As the Bank of England said recently, recovery needs to be based on policies which boost wage growth, raise productivity and create more higher skilled jobs. Growth based on soaring levels of personal debt is no recovery at all on living standards for millions of working people in Britain.”

 

Hand in hand with the extension of credit comes the shrinking of the real economy. When the real economy shrinks, the state that relies on the real economy is forced to shrink too:

This comes after the Institute for Fiscal Studies warned that Osborne has “colossal cuts” left to make in order to meet his deficit reduction plans that would leave the size of the state “changed beyond recognition”.

Despite ministers’ indications that the bulk of the austerity agenda is over, the economic thinktank said that just £35 billion of the cuts in spending by Whitehall departments have already happened, with £55 billion yet to come.

You cannot have a viable consumer society without a welfare state. The efficiencies and security that comes from knowing that education, health and housing are backstopped by the state means that people can afford to spend on consumer goods. Without this state guarantee, people are forced to take up private insurance to cover necessities. This is risk that has been transferred from collective provision to the individual.

This is money that no longer goes into the commodity economy which shrinks as a result. This shrinking in turn causes more redundancies and less income and lower tax receipts. Which shrinks the state, which further shrinks the economy, and the process starts all over again ratcheting ever tighter.

As reported in the Guardian:

[the data collected from the thinktank’s 34 rich country members] suggests it is inequality at the bottom of the distribution that hampers growth.”

Rising inequality is estimated to have knocked more than 10 percentage points off growth in Mexico and New Zealand, nearly nine points in the UK, Finland and Norway, and between six and seven points in the United States, Italy and Sweden.

The ‘old’ economy serviced by government issued is shrinking. The ‘new’ economy serviced by democratised money goes from strength to strength.

Indian fakirs are famous for holding an arm aloft for years and years at a time until it finally begins to shrink and wither away. It is a demonstration of extraordinary willpower. The population of the developed world has stood before the Monetarists with  hands in the air for six years now. They are withering away. Soon we will be past the point of no return.

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