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A welcome Covid-19 casualty

As governments around the world wake up to the economic harm caused by the ill-prepared lockdown of their people, the establishment media are keen to ensure that the costs do not fall on the shoulders of their metropolitan liberal class.  Early on, the BBC’s economics obfuscator Dharshini David attempted to resurrect the austerity policies of 2010:

“The deficit leaves the government with a choice: increase borrowing, raise taxes, or cut spending. In the end, it may well do a mixture of the three – but those decisions haven’t been taken yet.”

This is the usual nonsense that comes from comparing the state to a household while ignoring how currency is created to begin with.  For a household, of course, getting out of debt involves some combination of cutting spending and raising income.  We mere mortals might long for the day when the interest on our mortgage and credit card debt goes negative.  But it isn’t going to happen.  Governments, though, are not like households.  To begin with, governments – particularly of developed western economies – are regarded as far safer than households like mine or yours.  As a result, while investors might shrink away from loaning money to us, they are more than happy to park it in the safe haven of government bonds… even if those bonds offer little interest in return… even if – as is threatened – they offer negative interest.

There will be a cut-off point beyond which even governments cannot continue to borrow.  Many thought it would come after governments and central banks conjured billions of dollars, euros and pounds into existence to bail out banks and prop up markets after 2008.  But no, the system kept going for more than a decade before SARS-CoV-2 arrived.  And even now investors seem more than happy to loan money to governments because, when the wider economy is breaking down, governments are still the safest place to invest.

Even within the terms of the prevailing (i.e. wrong) economic orthodoxy, governments could create long-term bonds of the kind issued to finance wars in order to effectively park the pandemic date for centuries to come.  After all, we are still paying taxes to repay debts from the Napoleonic Wars, the First World War and, until recently, from compensating slave owners for giving up slavery.  If we can create long-term debt for something as immoral as the latter, we can certainly do so to avoid the cost of the pandemic falling on the shoulders of the contemporary poor.

If this is not enough, however, governments have another little trick that would result in ordinary households going to jail.  Governments can create currency out of thin air.  If a government chose to, it could add, say, £50,000 to every household bank account in the country as part of a debt jubilee in order to overcome some of the stagnation which has bedevilled the economy for the past 12 years.  Those with outstanding debt would have to pay it off first; those who were debt-free would have to spend it.  Governments won’t do this because they have not yet exhausted more conventional methods of borrowing which favour the already wealthy.  Nevertheless, currency printing is something that governments could do; and may do as a last resort.

The common objection is that currency printing is inflationary.  Those making this point seem to forget that governments and central banks have been trying and failing to generate inflation since 2008 because – alongside economic growth (which has also failed to put in an appearance) – inflation is one of the ways that we get to write off debt.  Indeed, by comparison with tax increases and austerity cuts, inflation is a far better option for ordinary working people provided that their wages and basic pensions rise with inflation.  This is because the elites cannot avoid and evade the inflating away of their wealth in the way that they routinely avoid and evade taxation.  Indeed, no matter how clever government tax officials get with any new taxes they levy, the elite can afford the services of even cleverer tax avoidance specialists.  Inflation, though, can be a great tax collector.

One thing the UK government will not be able to do, no matter what its tame media cheerleaders might hope for, is to make the ridiculous household analogy this time around.  Because as of this month, as a result of the damage done so far by the pandemic and the lockdown, if the UK government were a household it would be well on the way to bankruptcy.  As the BBC reported on Friday:

“The UK’s debt is now worth more than its economy after the government borrowed a record amount in May.  The £55.2bn figure was nine times higher than in May last year and the highest since records began in 1993.

“The borrowing splurge sent total government debt surging to £1.95trn, exceeding the size of the economy for the first time in more than 50 years.”

When your debt is greater than your income there is no longer any point in talking about tightening your belt; it makes no difference.  In any case, the bigger hits to GDP are only beginning to unfold.  It is only when the various forms of government support come to an end that we will see the full scale of the damage done to the economy.  By the end of the year government debt may well be 150-200 percent of what remains of GDP.

Taxes are equally irrelevant – you can’t tax what doesn’t exist; and raising taxes might well be the final straw which drives many more businesses to bankruptcy.  Spending cuts would be an option if the government hadn’t spent the last decade paring public services and social security to the bone.  Indeed, given the rise of political extremism which has gathered pace as the living standards of the majority collapse, further cuts of the kind made after 2008 may prove politically impossible (although some massive cuts in the lavish corporate welfare that is routinely doled out to the already wealthy might be well received).

Investment-driven economic growth is likely to be the easiest road for the government to go down.  Not least, because the budget immediately prior to the pandemic included measures which suggested that the government was moving in that direction anyway.  Labour-style tax-and-spend and print-and-spend policies might be back in favour after all.  Even growth, though, is problematic as there is not enough of planet Earth remaining to provide the energy and resources upon which to base a new round of growth for everyone.  We might, of course go full-on imperialist and stimulate our growth at the expense of other less fortunate countries – although given the dire straits of the post-North Sea Oil/post-Brexit UK, we are likely to end up on the wrong end of any final splurge of imperialist growth.

Inflation it is then.  Because unless government spending can produce a significant – and real (i.e. not financial sector) – growth, then all of the currency printed and borrowed into existence is going to end up chasing ever fewer goods and services.  And arguably, by bringing the value of the currency back into line with the true value of the real economy we will be doing ourselves a favour in the long-term.

Ironically, the biggest losers will be the dwindling band of investors whose algorithms, supported by central banks, have continued to propel stock markets to new highs even as Covid-19 tears apart the fabric of the economy.  In no sane world does the biggest crisis in living memory correspond to record highs in stocks.  But that is exactly what has been happening while the media has been distracting you.  But for the most part, those shares have no buyers other than the central banks and the computer algorithms.  And so, when the time comes and the central banks can no longer print currency and the algorithms head for the exits, those stocks too will be collapsing to a level more in line with the real economy.

Only then, perhaps, will we be able to overthrow the economic orthodoxy which has spent four decades leading us to this sorry place and replace it with something far more grounded in an ecosystem that can no longer support the toxic industrial lifestyles that so many feel entitled to.

As you made it to the end…

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