How the state favours big business and causes inflation with ‘Quantitative Sleazing’
Many of us in local economics and community development believe that the global economy will fail us sooner or later and our work will be more appreciated. A new essay on the economics of the pandemic suggests that the recent inflation is a sign that that failure is accelerating towards us. It’s an important reminder for us to ask ourselves how ready we are to both cope and help others in a crumbling economy.
The money system, national and global, is not something designed and fixed like a constitution, but something which evolves as part of on an ongoing struggle for control of resources between different Power interests. Prof. Jem Bendell’s essay describes how, under cover of the pandemic, the monetary system in Europe and the US has evolved faster than usual, through the expansion of corporate bond purchases which he calls Quantitative Sleazing.
Central bank intervention started in as a response to financial panics in the 19th Century, although most people weren’t aware of them until the enormous bailout of 2008. But 2008 wasn’t a one-off event, and it quickly evolved into a monetary policy called quantitative easing, and more recently, corporate bond-buying.
These mechanisms can be very technical and descriptions are often confusing and contradictory, especially if writers do not understand that money is credit and only exists in the interval between being being lent and being paid back.
A systemic, urgent need for new money arises when the price of assets suddenly drops, as in a financial crash, and everyone in the market finds themselves underwater – just like homeowners are underwater when the value of the house drops below the value of the mortgage on it. In that situation you can’t sell your assets because then you would have no way to pay your debt, but you can’t make money by trading either because you don’t have any surplus to trade with.
In the 19th Century the Bank of England was given a new role – the lender of last resort – to lend money to help the markets climb out of such holes, into which they would fall periodically. This ‘liquidity’ helps to kickstart the markets, helps prices to recover and shennanigans to return to normal, at which point the emergency loans can be repaid. By dint of its size and its inability to go bankrupt, the government backstops the markets, but in so doing, losses incurred in markets can be transferred on to the taxpayer, if for example those loans are never repaid.
Fast forward to 2008, which wasn’t just a bailout, but the start of a continuous process of bailing out. The crash was comparable in size to the 1929 crash which caused a decade of recession while all the lost money was repaid. But government planners had no intention of making the same mistake again, and, wanting the economy to return to ‘growth’ as quickly as possible, continued pouring good money after bad in the following years. Markets soon found it much easier to make a profit using low-interest loans subsidised by the taxpayer. It was the end of capitalism, and you can see the change of direction in the national debt statistics.
The net result of the government’s lending faster than loans are being paid back is an increase in the money supply, and if that increase is not the result of an increase in productivity, or consumption, inflation is likely.
At the outset of the pandemic, central banks widened their support, buying bonds not just from distressed financial institutions, but directly from large companies who issued them. A bond is a piece of paper that says whoever is holding it will receive an interest payment of x% for x number of years until the issuer buys it back for the same price. It is, in effect, an interest-bearing loan, but one which requires legal expertise to draw up, and which can then be traded on bond markets. Governments and businesses raise money for their day-to-day operations by issuing bonds, which can be done on their own terms rather than borrowing money as you or I would, from banks. Governments’ purchasing of corporate bonds, often without a full audit, means that taxpayers are bearing risk, even while companies are profiting and paying shareholders.
Thus since government is now more and more in the habit of borrowing money to support the largest corporations, more and more large companies are issuing lower quality / high priced bonds confident they will be bought. The government is lending our money to keep large and otherwise unviable organisations afloat, and keep the top executives in bonuses, and if those companies fail once in a while, the government (which is us) take the loss. And therein lies the change to the money system. Formerly credit (money) was backed by assets like houses and businesses bonds which had been commercially assessed and valued in a free market, but increasingly the money supply is backed by substandard financial assets issued by patrons of the ruling party, and it bodes ill.
Just before COVID started some commentators were expressing alarm at the unprecedented levels of debt and the kinds of rule-bending and -breaking that was going on to accommodate it. They hadn’t seen anything yet. Two years ago a fresh round of bailouts dwarfed those of 2008.
In part it was necessity, but what also seems clear is that governments have understood that they don’t ever have to repay those debts as long as they can keep up the interest payments. The government and the lenders are in a bind. Interest rates can go no higher than what the government can afford to repay. Thus, for evermore, the nation’s creditors can extract as much interest from the economy as it can bear.
Bendell’s essay goes into more detail about the normalisation of corporate bond-buying and the inherent corruption and growing inequality that comes from supporting the largest businesses through hard times while letting small business go to the wall. As the founder of Deep Adaptation, his larger concern is that economic policy as bad as this inhibits societies’ ability to adapt, and hastens societal collapse. None of these financial problems are insoluble or irreversible, and solutions such as the one he co-authored with me, are constantly being put forward, but the larger problem is that the executors of Power lack either the desire, or the courage to turn the ship around.
Inflation means that the money we have saved up will buy less and less, while assets, like our houses and businesses, land, gold and probably bitcoin, will retain their value. For people lucky enough to have savings, the way to prepare for inflation then, is to buy such things, that will keep their value. People living a more hand-to-mouth existence will need to rely more on each other and the value they can create instead of buying it.
We all of us need to find other ways to invest, produce, share risk and exchange which is why we are advocating mass adoption of mutual credit systems.
[To find out more, see our topic introduction and the Credit Commons Society.]
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