Category Archives: Debt

Jeremy Corbyn’s economics 1

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corbynimages (12)I hadn’t even gotten out of my scratcher yesterday morning when I looked at my mobile and the BBC news web site to see what was happening in the world, only to see yet another attack on Jeremy Corbyn’s campaign for Labour party leader.  This time the Brlairite was Blair himself, looking skull-like and definitely not very well – all that chasing after money mustn’t be good for his health.  “Labour must come to its senses” he apparently said.  I didn’t read any more.

Corbyn has been criticised in just about every way imaginable, from the Mail prophesying a return to the “dark ages”, riots and intervention by international peace keepers, to the oh so condescending approach of Janen Ganesh of the ‘Financial Times’: that Corbyn’s policies, “eccentric” and a “joke” as they are, are not really the problem, it’s the “soft left” and Andy Burnham and Yvette Cooper who are the ultimate problem.  Poor Jeremy, he’s either responsible for a new dark ages or he’s such a joke he doesn’t deserve consideration, even as a problem.

At the centre of all this dismissal is contempt and ridicule of Corbyn’s economic proposals for “quantitative easing for people instead of banks.”  Our local biggest daily ‘The Irish News’ had its own columnist to hurl his own critique, this time mixing both dire prediction and condescending ridicule.

The author, Newton Emerson, thinks that fewer than 1% of the population will understand “why Corbynomics is ridiculous” even though “it takes little more than an A-level to understand why.”

Emerson is normally an acute commentator on politics in the North of Ireland, frequently exposing the hypocrisy of political culture here and the rottenness of the political arrangements.  Unfortunately he has two problems.  First, when it comes down to it he actually supports the rotten political arrangements, and secondly, he gives every indication of having been educated in the dismal science of economics as taught in the universities.

He is undoubtedly correct that the general population is seriously under-educated in economics and this is a real problem for them identifying their interests in any debate.  On the other hand I don’t believe that Corbyn’s ideas are very radical and certainly not ridiculous, so going to university or doing an A-level really isn’t the answer.

So let’s see if we can understand what the issues are in this case.

Quantitative easing as practiced by the Bank of England involves the bank loaning newly created money (created as an electronic entry in the bank’s accounts) to a fund which has to pay it back, so theoretically it’s a loan and not just giving away newly created money.  This fund then uses these loans to buy government issued bonds (IOUs payable by the Government) that are held by pension funds.  These pension funds now have money instead of these bonds.

The theory is that these pension funds will then want to use the money to buy other assets from banks such as bonds to replace the ones just sold back to the government or buy other sorts of securities such as private debt instruments (IOUs issued by private corporations to raise money for investment).

The end result is that money has been created electronically by the Bank of England and it now rests in the banks which, it is hoped, will use the new money to buy debt issued by private firms that will in turn help them invest directly through the money just received.  This investment will create jobs and economic growth.   That’s roughly the theory anyway.

However, once the banks have the money they can do what they want with it.  They could buy bonds or securities issued by other countries; they could buy existing shares or securities which would give no more money to firms to invest but simply increase the price of these pieces of paper; they could buy commodities or property and cause inflation in these assets or they could simply sit on the cash.  In each case there would be no increased employment or contribution to economic growth.

Even if they bought newly issued debt from private companies, these too could decide not to invest the money in new factories, offices or equipment and instead do any of the above and join in the great speculative boom in property or share prices etc.  Many banks and companies appear to have done just this, which has made them richer but not helped economic growth.

In other words the ‘money printing’ that has been carried out has helped the banks and made the rich who hold financial assets richer by increasing their price.

Hence the alternative proposed by Jeremy Corbyn in which the newly created money, which is also in the form of a loan, is given to a State investment bank who then loan it out to state agencies which would invest in state-owned infrastructure such as “housing, transport , digital and energy networks.”  The objective would not only be to create jobs in the short term and promote economic growth, so reducing the debt burden, but also contribute to the longer term productivity of the economy, which is recognised as going through something of a productivity crisis.

To be continued.

Greece Crucified

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ws jimagesAlexis Tsipras justified his humiliating U-turn, and commitment to imposition of austerity worse than he had just rejected, by saying that he had no mandate for Greece to exit the Euro.  Very true.  But he had just claimed that the referendum a week before had not been about the Euro.  By 61 to 39 per cent he has no mandate for austerity, which is what he said the referendum was really about.

He came into office promising an end to failed bail outs and has ended with a third one bigger than the first.  He called for debt reduction and now seeks support for debt inflation.

Such is the scale of the crushing terms of the latest ‘bailout’ that no one is attempting to say that it is nothing other than complete humiliation for Greece.  Even the Eurozone bureaucrats stated the truth behind the unpalatable words spewed out by their leaders – Tsipras had been subjected to “mental waterboarding” and had been “crucified”.

What has been mental torture for Tsipras will be brutal and catastrophic austerity for the Greek people.

I could write a whole blog on the capitulation of Tsipras and what looks like the majority of Syriza, and there would be good political reasons for doing so.  The policy and strategy of Syriza has been endorsed by Irish opponents of austerity such as Sinn Fein and these now lie in tatters.

In fact in my own view Sinn Fein is not even as radical as Syriza and this is an easy claim to substantiate.  It has already implemented austerity in the North of Ireland while hiding behind opposition to some welfare cuts.   In the South it supported the fateful decision to make the debts of corrupt banks and property speculators the burden of Irish workers and in doing so made the struggle against paying this odious debt much more difficult.

But there will be plenty of voices pointing out that what radical politics Sinn Fein has to offer have been trialled in a real life laboratory and been found wanting.  The capitulation of Syriza is in principle no greater than the Republican’s own acceptance of British rule in Ireland, acceptance of partition, surrender of weapons and dissolution of the IRA.  But that is all now a history that no one wants to talk about.

What is more important therefore is to try to understand what has happened and whether it could have been any different.  Not that it must be accepted that the ‘coup’ against Greece cannot or will not be resisted.  It can and will but it would be blindness to reality not to acknowledge that under Syriza the fight against austerity has suffered a demoralising defeat.

As that new aphorism says: it’s not the despair, I can take the despair.  It’s the hope.  Syriza gave hope.

Working out what has happened is not easy. For the man or woman on the street they see television reports of quantitative easing by the Eurozone involving the figurative printing of  millions of Euros by the European Central Bank, yet this same institution is involved in the vindictive pursuit of Greece for sums it could easily accommodate.

The proposals of the conservative leaders of the EU seem equally hard to understand or justify.  In fact for many they seem stupid, if not crazy. So draconian are they that they seem designed to achieve the very opposite of what they claim to be for.

The imposition of yet greater austerity when this austerity has demonstrably failed might be explained by ideological blindness.  And the humiliation involved might seem to invite rejection while being another attempt to remove Syriza from office.  But many commentators have explained that Syriza may possibly remain the only force that can push austerity through without complete chaos and collapse.

This humiliation is perhaps not just a message to a small and weak Greece but an unmistakeable one to a larger Italy and France: that the development of the EU will be under a model defined by Germany and its allies.  Yet even here the degree of malevolence can only invite small countries with parties equally blinded by reactionary ideology as Germany to wonder just what fate would befall them in an EU with such a definition of ‘solidarity.’

So while ‘good’ reasons might be found for what would appear to be ideological blindness the proposal for a “timeout” exit by Greece from the Euro appears as simply stupid; unless of course it is also a means of pushing Greece out permanently. But then it is such a stupid idea as justification that its purpose might only seem to be how open the imperial bullying can become, ‘pour encourager les autres’.

For the Greek people the surrender of even nominal control of their affairs is way beyond what has gone before.  The original proposal to ring fence €50 billion of Greek assets under German control,  to be sold at the discretion of its creditors, was such an open declaration of debt bondage as to render the humiliation utter and complete. What is yours is no longer even yours to sell.  Now it is reported it will simply be wasted on insolvent Greek banks with the needs of financial capital once again talking precedence not only over people but over real productive activities.

Thus in many ways, its failure to actually work being the first, its effects on undermining the legitimacy of the EU second and materially weakening the incentives to solidarity among its members third, all make the bailout deal a defeat for the idea of a European Union.  This is not even a European imperialism to rival the US, Russia or China but an imperial core and vassal periphery.

The price being paid seems so unnecessary because the main demand of Syriza – in order to give hope and reduce the impact of austerity, i.e. debt forgiveness, will be given and is already hinted.  Not in the shape of outright reduction but in the form of postponing or extending repayments and similar measures on the interest due.  After all, what cannot be repaid will not be repaid.

What matters however to the right wing conservative leadership of Germany, the Netherlands etc. is that their strength, and by extension that of the European imperialist project, is not diluted by the weak European nations and that the Euro remain in position as a world currency and not a vehicle for default and certainly not by what is considered an advanced nation.  Greece must be bled dry in order that the Euro remains strong and the pretensions of the EU remain in place.

The vision of a united Europe is not being abandoned by Germany etc, but it is one in which austerity is the bond that unites. It can be claimed that austerity will be inflicted on German workers if crisis hits the German banks; except of course that Germany has broken the rules before and would do so again.  It is easier to be ideologically blind when the price is paid by someone else.

Could it have worked out differently?    Syriza had hoped that enlightened self-interest would have combined with pressure from the US and the legitimacy gained by the referendum to mitigate the demands for austerity by Germany, The Netherlands and all the other little right-wing led states that curry favour with the powerful.  They have been rudely disabused of their illusions.

The more fundamental reason for this outcome is the weakness of the alternative at an international level.  Where were the left wing Governments calling for debt forgiveness, an alternative to austerity or even its reduction?  Where were the mass movements pressurising their Governments to accede to Greek requests?  Greece could not push back the demands of much stronger states on its own but on its own it was.

The demand for a revolutionary socialist alternative seeking the destruction of the Greek capitalist state and take-over of the Greek economy by its workers fails to provide any sort of immediate alternative, which is what we are discussing, for two rather obvious reasons.

Such a strategy relies on the aspiration and activity of the working class and the Greek working class neither desires nor is organised to destroy the existing state, create its own and take over the running of Greek production.  The anti-capitalist ANTARSYA for example got less than 1 per cent of the vote and Syriza, it should not need to be said, is not a revolutionary party.  How does a revolution arise out of this except through a long and painful process of learning lessons and making advances on this basis?

I was recently reading an article entitled ‘Marxism and Actually Existing Socialism’ written, what seems like a long time ago, before the collapse of the Soviet Union, and which defended Marx’s theory and politics.  In it the author wrote that:

“Marx envisaged that socialism would come first in the most advanced industrial societies of Europe, and it has not done so. Arguably, however, Marxism is capable of comprehending this fact. In any case, this is a matter of detail, even if an important one; and it seems difficult to resist the conclusion that, in its broad and general outlines, Marx’s account of the historical tendencies of capitalism has been remarkably confirmed by historical events.”

But of course the coming of socialist revolution not to the most advanced countries is not a detail, not even an important one.  It has been fundamental to the development and future possibility of socialism and has led to the very definition of socialism being distorted and disfigured.

Socialism is not possible in Greece alone any more, and certainly less, than it was in Russia not least because it is too weak and poor.   It is obvious that no other working class within any other country in Europe is at a stage of development where it could either join or support working class rule in Greece.

This does not mean Syriza should not have taken office or that it should not have engaged in negotiations with the Troika. Its strength however derives fundamentally from the class consciousness and organisation of the working class and not from any superior moral position.  The building of an international European party of the working class, of a militant current within the working class movement including trade unions, and of international workers’ cooperatives is the only road to creating the foundations for a successful conquest of political power.

On the other hand capitalist economic and political crises and socialist propaganda are, respectively, simply the occasion for such a conquest and the means of spreading word of the need for it.

As I have said before: the worst result would be Syriza implementing austerity.  It should now reject the bailout, call fresh elections on such a platform and if elected pursue an alternative.  If in opposition it should develop a movement as set out above.

The alternative it should pursue is that which the Irish should have carried out in 2008.  Let the banks go bust and let its owners and lenders take part in a ‘bail-in’ in which they pay the price for their investment in insolvent companies.  This is sometimes known as capitalism.

A radical Greek Government would encourage Greek workers to turn the banks into cooperatives that would shed their bad debts into a ‘bad bank’ (like NAMA in Ireland, in theory if not in its practice) and guarantee deposits that would fund development of worker owned enterprise.

The Greek debt would thereby suffer default and the reactionary gamblers Merkel, Juncker, Schäuble, Draghi and Dijsselbloem would see where the chips fall.

The blogger Boffy has suggested that a solution to the currency problem would involve electronic Euros that would allow circulation of money without the requirements for additional notes etc. from Brussels.  While this could work for the domestic economy I cannot see how it could function as a means of payment for international trade and, while Greece is a relatively closed economy, it cannot function without it.

In any case the leadership of the EU would, on current form, expel Greece from the Euro and introduce its own capital controls on the country.

Greece would be forced into issuing a new currency, a new Drachma, which the people do not want.  This could not be done quickly or without significant disruption.  It has been asserted that the argument that this would result in devaluation and a massive reduction in Greek living standards is false because the catastrophe predicted has already happened.  ‘Internal devaluation’ has already achieved what external devaluation of the new currency would otherwise have done.

I am not convinced by this argument but this too might be academic if the EU decided that Greece would no longer be part of the Euro.

The strategy suggested therefore provides no guarantee of success.  There is no ‘technical’ solution or answer in this sense.   And why should one be expected?

I have said that socialist revolution depends on the prior creation of a working class power consisting of an international party, international trade union action and development of workers’ cooperatives on an extensive scale.  What on earth could substitute itself for these?

What is suggested is a strategy for struggle and not a ‘solution’ but we have reached the stage where not even the leaders of the EU can present false promises on this with any credibility.  Austerity will continue not to work.  Struggle is what we have.

 

Syriza and Ireland

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syrizaimagesThis Sunday the Greek people will go to the polls in an election that could see the beginning of the end of austerity in Europe.  That anyway is the view of some on the left across Europe.

The potential election of a Coalition of the Radical Left (Syriza) Government, promising a radical reduction in the debt burden, has the potential to galvanise and set an example to the rest of the PIIGS.  It could incite a combined movement in Portugal, Ireland, Italy, Greece and Spain that would reduce the debt of these countries which has been a prime driver of austerity.  Through radically reducing the requirement to service and pay down enormous debts such a step could launch a definitive movement away from neoliberalism towards a radically different Keynesian social democratic alternative.

The elections in Greece will be followed this year by elections in Spain, in which a like-minded Podemos movement has grown, and in Portugal, and may also be joined by an election in Ireland despite the claims of the current Government that it will run in office until 2016.  Of the five PIIGS therefore at least three and possibly four may see elections this year.  Even elections in Britain could see the ousting of the Tory devotees of austerity and neoliberalism.  In fact the policy that might inspire the PIIGS is not confined to them but might apply right across Europe.  And Syriza is in the vanguard of this movement.

Is such a scenario a real possibility?

Let us notice what makes such a claim plausible.

Firstly the proposals of Syriza are not solely on behalf of the Greek people although as a Government it will be able to negotiate only on their behalf.  Syriza proposes a European Debt Conference modelled, with delicious irony, on effective debt forgiveness of (West) Germany in 1952.  This was carried out explicitly in order, or so it was claimed, to normalise relations between Germany and its creditors and to promote economic development.   That deal wrote off half of the debt, stretched repayment of the rest and for the first few years provided only for payment of interest, which was also limited.

Syriza proposals are more limited. Their policy could be based on an academic paper which proposes that half of the debt would be bought up by the European Central Bank (ECB) with either an interest holiday or interest charged on the remaining debt at a low rate.  The debt taken on by the ECB would not be written off but would be paid back only when the remaining debt left to the country had been reduced to 20 per cent of Gross Domestic Product (GDP).  In effect economic growth and inflation will have eroded the real value and real impact of debt repayment.

However in one very important sense the proposals are much more radical than the German precedent, because the Syriza proposal is that this plan applies to every country in the Eurozone with debt over 50 per cent of GDP (all but three countries).  The Irish state for example would see its debt reduced from 108 per cent of GDP to 50 per cent, saving €3.7 billion each year in interest payments, so reducing the need for cuts or tax rises and facilitating greater state spending and investment.[i]

It has been estimated that this would reduce sovereign debt in the Eurozone area by about €4.5 trillion.  It is asserted that this would not risk inflation because the ECB debt purchases would be funded by massive borrowing from private banks.  There would be no money printing since the money is borrowed.  And sure why worry about inflation when deflation is so clearly the enemy?  And who pays the interest on these loans?

Well, it is recognised that there will be losses in paying back the private banks, between €50bn – €60bn in each of the first 5 years, and €1trilion over 40 years, but it is argued that the borrowing costs of the ECB would be low and that renewed economic growth would compensate.  It would be cheaper than the current policy of austerity and expansion of the ECB balance sheet required to bail out the banks.

It is recognised that this may not be enough in the short term for some countries so that, for example, in order to prevent continued austerity in Greece the ECB would have to take over the debt that would be required to be issued in the next five years.  This would also be required because over 50% of outstanding debt has to be paid back within the next 5 years in Italy, Spain, France, Holland and Belgium and to cover this new debts would have to be taken on.

For Marxists the point is not that some monetary scheme has been devised that will solve capitalisms’ problems.  Nor is it the point that Syriza will go into negotiations and cannot expect, as in all negotiations, to get its original plan agreed, even discounting some conscious intention to betray the hopes of its supporters in order to accept the logic of capitalism.

The significance of the proposals is that it provides a concrete platform around which workers across Europe can organise and struggle together, and a series of elections that can be a focus for such struggle.  This is not to invest illusions in either elections or Syriza, who are condemned by some for having shifted from a policy of debt repudiation to one of simply extending repayment under more favourable terms.   If a practice of simply condemning the limitations of reformist politics were the answer we would no longer have the problem.

The Syriza programme is one that workers and socialists can support because it reduces the burdens they face and would deal a big political and ideological blow to austerity and the parties who have peddled it.  It would deal a real blow to reactionary political parties seeking nationalist or fascist solutions.  Through a successful campaign workers could gain strength and confidence to build up their organisations, their own social and political power and their own confidence and class consciousness.  The latter is the role that Marxists can play by advancing a programme that does all these things.

The victory of Syriza would allow an opportunity to directly organise workers on an international programme on an international basis.  It is remarkable that this significance has been somewhat missed.  So, for example, the call promoted by the Fourth International correctly argues that “their victory will be ours, but their defeat too” but appears to fail to appreciate that this can be so because other European workers will not just be in solidarity with Greek workers but can actually be part of the same struggle, demanding the same deal for their country, so that “our victory will be ours and our defeat will be ours too.”

This is made tactically easier by Syriza not proposing either to leave the Euro or leave the EU.  There can be no pretext that the demands of Syriza can be dismissed because they no longer want to belong to the club.

These policies have been condemned as examples of betrayal of earlier more radical promise but they are not just tactically recommended.  As argued before in the various posts on ‘The Left Against Europe’, the growing unity of capitalism provides the material basis for the international unity of the working class.  This is why a united international struggle against austerity is more immediately and concretely possible in the Eurozone than one against similar policies pursued more or less independently by separate capitalist states each with their own currency.

So to return to our question – is such a scenario possible?

It is possible to argue that it is, for the simple reason that the Greek debt is too big to be paid back anyway.  Some means of addressing it is required and the Syriza route is eminently preferable for workers than the slow death march of austerity and repeated minor debt ‘haircut’ so far embarked upon.

The second is that by the very fact that the Syriza plan is reformist there is no necessity for a life and death struggle by the forces of capitalism to defeat it.  The Syriza plans do not call the system into question, which both sets limits to what it can achieve but also provides scope for negotiations between a Syriza Government (and other PIIIGS Governments should they be elected or so inclined) and the IMF/ECB /EU/German State alliance.

The rallying of the Greek workers behind Syriza is one of many proofs that a revolutionary overthrow of Greek capitalism is not currently on the cards and is not therefore a realistic immediate alternative.  The revolutionary alternative today consists of preparing for such an eventuality tomorrow.

Not by either passively or even ‘aggressively’ preparing for socialist revolution but by the cumulative development of the power of the working class suggested above, with the certain knowledge that a revolutionary break with the capitalist state and system will be required.

To condemn Syriza for negotiating with capitalism when it cannot be overthrown is a bit like condemning trade unions for negotiating a pay award when they should be overthrowing the wages system.

The third has been pointed out here – Syriza will be damned if it does not get some sort of result and the executor of that judgement may be the fascists of New Dawn.  It is not only Syriza who has an interest in ensuring this doesn’t happen.

‘Ireland is not Greece’ we have been told repeatedly over the past five years or so.  If Syriza is anyway half successful Ireland will look pretty stupid if it isn’t.

[i] It is interesting that the authors go beyond the argument that this is some sort of socialism saying that “The left ought to be strategically against privatizations, having at the same time as an ultimate target the gradual historical replacement of “state control” by democratic forms of social control (unfortunately this type of discussion has not been adequately developed within the left).”

The new bank deal and the working class

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debt maturityThe most important aspect of the deal that has replaced the promissory notes is not what it entails but what it does not entail. It does not involve a write off of any of the debt so that less would have to be repaid and interest burden on the debt lowered. It does not involve the European Stability Mechanism, in effect the EU, directly funding the banks which appeared to be the deal offered last June and it does not affect all the bank debt.

The deal on the promissory notes affects €28 billion of a total debt at the end of last year of €192 billion and relates to less than half that incurred in bailing out the banks. The Government has not changed its austerity targets. The editorial in the Financial Times stated that ‘restructuring the promissory note does not make the public liability for bank losses lower, just easier to bear.’ Easier to get workers to pay is more accurate. All the questions regarding how the deal will work have not been answered, which also demonstrates continuity with the promissory note arrangements that were understood fully by very few despite the enormous impact on people’s lives.

Never mind, the Taoiseach proudly told us that the “stains on our international reputations and dents to our national pride, have now been removed from the financial and political landscape”. This is a statement so revealing of the shallow moral argument for the deal, so instructive of the concerns of the elite as distinct from the majority and illuminating of the poisonous demands of national identity that despite its odious character it would be good to see it repeated again and again and again. The Irish people have decades to ponder how satisfying it is to pay for so long to erase such an embarrassment.

As for the new deal itself, it involved the liquidation of IBRC, which was the combination of Anglo-Irish bank and the Irish Nationwide building society. The Government will still pay €1bn to the bondholders of Anglo, as part of the 2008 guarantee, so no bondholder is left behind, and more rotten loans in Anglo will transfer to NAMA, which promises further losses down the road. Loans left in Anglo totalled €15bn.

It involves tearing up the promissory notes that provided the means for the State to get money from the Irish Central Bank (ICB), the local branch of the European Central Bank (ECB), to be replaced by ordinary government bonds, which are really just a more regular IOU used by states. This allows the state to keep the money loaned to it on the back of the promissory notes instead of having to pay it back when the notes were torn up. The state will still have to pay the money back and pay interest but will have much longer to pay and with what appears a lower rate of interest. Both of these are good things – having longer to repay and being charged less for the loan, but both are not as good as they appear.

The longer you have to pay the more you have to pay back, just like any mortgage. The lower interest rate is not such a change for the reason explained in the last article. This is because the high rate of interest paid by IBRC (8.2 per cent) to the Irish Central Bank, which the taxpayer ultimately funded, was used by the ICB to pay the ECB which charged a much lower rate of interest. The difference was returned to the Irish State so the effective rate of interest was not they headline rate of the promissory note. The reduced interest cost between the promissory notes and the government bonds is therefore not what it might appear.

But this is not the only reason the savings might not be so great. The ICB will have an asset, the bonds, the ownership of which entitles it to receive interest every year and receive repayment of the principal. Part of the deal is that the bonds are sold to private capitalists, €6.5 must be sold by 2022. How quickly they must be sold is not at all clear and thus neither is the cost of the deal, although this has not prevented the Government, media and commentators continuing to welcome the deal and proclaim its savings as if they were hard fact.

In selling the bonds the Government will in effect be raising new loans. If for example it attempts to sell €1bn worth of these bonds and investors don’t think the interest they would get on them is high enough they may be willing only to pay €980m, €950m or €930m instead of the €1bn. In other words the bonds would be sold at a loss and the tax payer would foot the bill. To replace the loss would require more loans costing more.

The rate of interest charged on the bonds over their lifetime is not known so calculations of how much the new deal will cost must make more or less educated guesses of how much the deal will actually cost over the long term. The longer the term the more the ‘educated’ guess becomes ‘pure’ guesswork.

Nevertheless within a couple of days estimates of savings on an NPV basis were quoted and savings of €8bn announced. Net Present Value (NPV) analysis allows one to calculate and compare amounts over different time periods recognising that someone would rather pay €1 in 10 years’ time than pay €1 today. It allows one to say whether it would be better to pay €1 for each of the next 9 years and €11 the following year or pay €2 for the next 10 years. In both you pay €20.

The money paid in the future is discounted so that €1 paid in ten years’ time is less than €1 paid in 5 years’ time which is calculated as less than €1 paid in 3 years’ time. How much you reduce the amount depends on the discount rate and this rate can have a big effect on the result. The rate chosen is another variable that is a guess, first educated and then pure.

The higher the discount rate the less costly future costs become which offsets the fact you are paying longer and on the face of it more. So one could be paying €21bn equally over 20 years instead of €19bn equally over 12 years but because the first means the money is paid off later it is worth less and the total cost on an NPV basis is less. In the example above an NPV calculation at a discount rate of 6 per cent shows that the first payment schedule costs €11.2 in NPV terms, where €11 is paid in the last year, and €14.7 in the second where equal yearly payments of €2 are made.

In the new deal the first repayment of principal is not until 2038 and the last in 2053. The NPV savings in the new deal were worked out by one economist as €8bn and then by a couple of others as €4bn, a whopping difference of 50 per cent of the first estimate. Another economist has stated that almost all of the calculated savings disappear if the timing of the sale of the government bonds to the private sector is accelerated. Factor in the loss on sale to the capitalists plus increased interest costs and the deal might very well cost more.

A final argument has been much quoted, and certainly more often than the lack of robustness of the savings estimates. This is that inflation will erode the real value of debt repayable by our children, who will be middle aged when they might finally pay it off. This means that, if say the interest rate is 5 per cent and inflation is 3 per cent the effective rate of interest is only 2 per cent. Also the real value of the money repaid in thirty years’ time will be less because of the cumulative reduction in the real value of the debt by this inflationary process.

It might otherwise be amusing to listen to these experts, who gave us a property ‘soft landing’ and now the wonderful benefits of inflation, except that we can state with absolute certainty that they will also be lecturing us in the future on the evils and futility of seeking pay rises to compensate for inflation because these will only increase it. Not only will interest rates rise in response to higher inflation thus limiting the effect above, which will also put up the cost of mortgages, car loans and credit card debt etc. but higher inflation will also erode living standards. What workers might gain from erosion of the real value of the debt they will surely lose by the reduction in living standards caused by an increased cost of living.

By now it should be apparent that the deal’s main benefit is putting off repayment of the loan principal thus making it less likely the state will have to default. In other words the main beneficiaries are the State and the ECB, which is sanctioning the lending of the money and protecting the European banking system. What is good for the state, that it continues to pay and does not default, is bad for workers who will really do the paying.

The second benefit is that the low interest rate charged for the money the state gets in exchange for the bonds will be around longer. However as we have seen, how much longer we don’t know. It won’t be our decision when it goes up (through selling the bonds to the capitalists) because this is a decision of the European Central Bank. Such a decision will cost us billions but we have absolutely no say in the matter. Yes, we live in a democracy.

Once again it is necessary to educate workers that they must distrust the state as much as they would distrust an email from Nigeria asking for their bank details. (The power of the state means it doesn’t need them.) We need to remind them that the state is able to foist the debt of Anglo and Nationwide on them because it nationalised these institutions. We need to inform them that both the Irish Central Bank and European Central Bank are institutions of the state deliberately designed to be protected against any kind of democratic pressure.

This brings us to a couple of questions a reader asked me about the promissory note deal. He asks how the government borrows from the central bank as if it is separate institution. “To me it looks like the government is borrowing from itself, but if that is the case why doesn’t it borrow some more?”

The first answer is that with so much debt the Irish State cannot borrow more from the markets (private capitalist funds) which is why the EU and IMF stepped in to loan the money. It can’t borrow more from these institutions because they want the state to reduce its indebtedness and pay them back their existing loans.

The second answer is that the Irish Central Bank is a branch of the state and a normal central bank can both provide loans and ‘print money.’ There are limits to the former if, as we have just noted, the state won’t be able to pay the loan back. In this case it is if it makes a loan that isn’t repaid just printing money. Printing money will at some point lead to a devaluation of the currency meaning that the Euro will be worth less and buy less making everyone across the Eurozone worse off when it has to buy goods from countries that don’t sell in Euros.

To protect against this the ECB has a firm grip on money printing and the deal on the promissory notes and the new one involving the issuing of bonds required its approval. The Irish state is part of the Euro so doesn’t control its own currency or it could try to get away with printing some money, although in reality it is too weak to be able to do so even if it went back to the Punt.

The ECB is taking control of the timing of selling the bonds because printing money in exchange for bonds that don’t have to be repaid for years is so close to money printing it really is printing money.

The rules of the ECB prevent it funding states and public institutions directly for this reason. It has however ended up with Irish government bonds in exchange for funding the IBRC. Because it ended up in this position indirectly by funding a bank (public banks must be treated just like private ones)rather than a government and through the receipt at first of promissory notes rather than regular government bonds this has to a very little degree been hidden.

This is why they’re not very happy with the deal and might also be why they will quickly ensure the bonds are sold to private capitalists; thereby entailing an interest cost more reflective of the market. As I have said, this will cost the Irish people a lot of money.

In the next post I will look at whether the new deal has solved the debt problem.

Public Debt and Private Debt by Belfast Plebian

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public and private debtAbout three months ago I was listening to Max Keiser on Russia Today talking about his participation in the Kilkenomics conference in Ireland. Max is a former stand up comedian, turned Wall Street broker and now a TV commentator on the markets. What he brings to the role is a large dollop of cynicism as to the subjective integrity of the bankers and brokers drawing on his past experience, his collective name for them is ‘banksters’ or ‘financial terrorists’

In this particular show Max went into his cynical routine and the target was the STUPID IRISH. Max was especially indignant with the attitude of the young Irish people attending the economics seminar who consistently said it was the ethical duty of the Irish taxpayers to make good the debts stacked up by the zombie Irish banks. In the world of capitalist finance where Max used to work it is established lore that the only law that really matters is the law of the survivor, the law of the advancement of the strong and the elimination of the weak. Max finished with the sarcastic quip ‘so much for the fighting Irish.’

The truth is that these young Irish have not been educated in a global financial culture that is based on the perspective of the law of the economic jungle. When ordinary folk think about the debt burden it is usually in terms of subjective feeling.

Let us go back to the most basic subjective transaction. If I need 1000 Euro to do something urgent and I don’t have the money I will have to borrow from someone else. If I borrow from a family member or a good friend I might expect to not pay any interest on the loan and I may even expect to overshoot the pay back date, say a year. But no decent person thinks that having borrowed it is right to not pay the debt.

If I have to borrow the money from a creditor rather than a friend I will expect to pay an interest on the loan, say 10 percent. If I honestly can’t make the loan and the interest on the due date then I will try to delay the terms of payment schedule. But I would still think I have an ethical obligation to pay back what I had borrowed.

There are various reasons why I might think that way, one reason being that I might not ever be able to borrow again if I defaulted. This would be a rational reason but the ethical reason is that if I entered an agreement based on a promise to pay then I feel honour bound to keep to the word of the promise. This is a way of thinking that does not belong to the law of the jungle, it is ethical but it might also be inappropriate for the present context.

Some of the young Irish are following a rational way of thinking when they contemplate the country’s debt and they infer that if the debt is not honoured the country won’t be able to borrow again. Others are following the subjective ethical way in their thinking, that is, if a financial promise or agreement is made then it ought to be kept.

Yet there is a big flaw in the way of thinking in the above. The problem is that the young Irish do not see that there is a distinction in kind to be made between private debt and the public debt and a moral rule generally applicable to the former does not necessarily carry over to the latter.

One way of approaching the matter is to argue there is a difference in kind between private debt and public debt. If this is the case then we might be more able to drop our previous adherence to subjective ethical feeling. There is a ready made version of this argument on the Mises web site (Mises Daily Feb 26, 2013).

Making use of the thought of the Austrian economist, Murray Rothbard, the author argues that it would not be unethical for the American President to repudiate the now 17 trillion dollar public debt pile because the people as private citizens had no part in the making of the debt encumbrance; that was all the work of Congress . He quotes an earlier essay by Rothbard from 1992 when the debt pile was thought to be too high at a mere 4 trillion dollars. The argument is directed against those economists who say that it would be a grossly immoral act and in fact a theft on a grand scale to refuse to honour the loans granted to the Federal Government in good faith

‘If sanctity of contracts should rule in the world of private debt, shouldn’t they be equally as sacrosanct in public debt? Shouldn’t public debt be governed by the same principles as private? The answer is no, even though such an answer may shock the sensibilities of most people…When government borrows money it does not pledge its own money, its own resources are not liable. Government commits not its own life, fortune and sacred honour to repay the debt but ours’.
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The argument continues that the contract between the private creditor and the public authority is an inherently disingenuous one from the beginning. This is because the political authority is not borrowing in its own name but in the name of the taxpayer and secondly the creditor is not taking any risk with his friendship or his promise, for they know the government will always seek to pay the debt because it can expropriate somebody else’s money, and even worse they know in advance that governments will always come asking for another loan unlike the private individual who will eventually realises they have to stop borrowing.

The conclusion is that private borrowing and lending is something honest and is guided by an ethical code whereas public borrowing and lending is inherently crooked.

This is not a bad argument as far as it goes especially if it shocks the subjective ethical feeling out of its subordination to the public debt. In fact repudiating the public debt because it is not our subjective debt is a position that all too easily unites the left and right of the political spectrum. The economists of the Austrian school do provide arguments why the public debt should be repudiated in certain circumstances but it comes with a lot of heavy social baggage. This is the sort of economic thinking that is the basis of the Tea Party movement in the United States. It serves as a useful reminder that the slogan ‘repudiate the debt’ is a slippery one. It is important to know the reasons why we should repudiate the debt.

The problem is that some of the public debt can be construed as our debt and so the Irish government is not without the appearance of a rational case though certainly not an ethical one. Some of the public debt exists to fund crucial social services.

If we try to simplify things by going back to our original loan situation. Say for instance a third party known to me but not a friend borrowed the 1000 Euro on my behalf because he knew I really needed the money and could not get it for myself, how would we stand to this kind of borrowing and debt.?

This in fact is what the Irish government’s rational case really comes down to. The government is presenting itself as the third party that is morally obligated to pay the public debt and the interest on it because the public debt is in fact just the sum of all our private debts. The government merely borrows and spends on our behalf.

In the above situation the simple ethical relation between borrower and creditor easily breaks down into the legal or the political and the moral. The honest person I think would contend that legally they were under no obligation to pay back a loan that was taken out on their behalf by a third party but they would still feel morally responsible depending on one other factor, namely the knowledge factor.

If the money was borrowed on my behalf with my tacit knowledge and approval then I still might feel morally obliged to take on the responsibility for repaying the loan. This track of subjective thought is probably what explains the thinking of those young Irish who still believe ‘we’ have to honour the nation’s public debt. To put it in a nutshell, the government borrowed money from its creditors on our behalf and with our tacit knowledge and approval so we have a moral obligation to help the government pay it back .

Of course it is evident to the not so naive that the Irish government is playing hard and fast with the private and public debt distinction. More and more people in Ireland simply want to burn the government’s creditors; are aware that the so called public debt is not the sum of private debts but the debts of only a handful of very wealthy borrowers concentrated in the private and institutional banking sector. If this is all there is to it then the public debt would I think be repudiated

It might take a while to remove the influence of the golden circle over the political parties but in a situation where the many are steadfastly set against the interest of the few the pressure would eventually count. A no frills Marxist of course would likely disagree, knowing that in a capitalist society the few in the form of the top rung of the capitalist strata do in fact have the political clout to dictate the terms any of economic settlement to a popular government. But even the capitalists have to win elections and socialists should at least concede that their control over the political process is at times precarious.

So why has it not happened yet? I can only offer a few stabs in the dark. Some people continue to look at the situation of the borrower and the creditor in subjective terms and transfer this mode of thought to the public debt situation. What this means is that they think about the public debt in terms of the feeling of the private person: if you expect to get a loan in the future you will have to pay off the loan from the past, and this rule they believe applies to whatever government we choose to elect.

What this reels out as is a way of thinking that accepts that the best the government can do is what we individuals would do in a situation of private debt ie try to roll over the debt. This tends to give the government the benefit of the doubt. Other people think of the government situation in purely subjective or ethical terms and are prepared to honour the public debt because the money was borrowed by a third party, namely the government, with our tacit knowledge and approval when they voted for the party of government .

We might like to call such people dupes but surely the bulk of the people are not STUPID. Some have even reached the conclusion that the debt should be repudiated because the government’s case for repayment is a fraudulent one, that the Irish people had no knowledge of what the government was doing in its secret dealings with the various creditors back in September 2008. They have already repudiated the government and good on them. The reservation here though is to worry over the reasons they have for repudiating the debt and what logic they will follow into the next phase.

What is missing in the present national context is an awareness of another key concept: that of class debt. When the national debate is conducted in term of private and public debt the majority of people easily falls into the trap of applying rule of thumb maxims of how private individuals think about borrowing and lending. Or they declare the government’s debt has got absolutely nothing to do with them. Both have no place for viewing things in terms of objective class debt.

The crucial point is that the public debt that should be repudiated is the debt built up by a wealthy minority and foisted onto the working class as their debt. The idea that a workers’ government should not borrow and take on expansive debt on behalf of the working class should also be repudiated.

A rational case can be made for the idea that Ireland should in fact be cancelling old debts and searching for new creditors, there is certainly no shortage surplus savings in the world, borrowing to invest in public goods and ending the artificial regime of austerity. So it is of the utmost importance to understand the class composition and derivation of the public debt and this requires special analysis, something this blog site is at least endeavouring to do.

The promissory notes and the working class

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The response of the mass media to the deal on the promissory notes was one of considerable praise to a Government that had won a deal that “appears as good as could have been hoped for”.

The world of finance is notoriously complex so in simplifying the deal for a mass audience the media felt free to simply lie.  Thus the headline in the Irish Times said that the ‘Bank debt deal to cut borrowing by €20bn and ease next budget’.  The small print revealed it would only reduce the amount paid in the next decade and the debate after the deal has revealed that there is no certainty that the next two budgets will be any less severe than planned.  The Troika and others are demanding the original targets are adhered to and being a poster boy of austerity might demand it.  The uncertainty surrounding important aspects of the deal leaves open to doubt many of the claimed benefits.

But one thing is very clear: the bank debt was unsupportable despite the responsibility of all the parties for placing it on the shoulders of the Irish people and something had to be done to prevent a disorderly bankruptcy.  This would have been caused by inability to raise the financing required to run the State at remotely affordable interest rates.  The average maturity of the main sovereign debt of about €80bn is around six and a half years, which has to be renewed by borrowing this amount again to pay it off – ‘rolling over’ the debt.  Combined with a possible promissory note repayment of over €28bn averaging five years and continued deficits this looked close to impossible.

Not that anyone dared point out that the deal exposed the lie of the Government parties, of the previous administration, and of the current Governor of the Irish Central Bank that the deb was ‘manageable’.

Ignoring this also allowed the media to largely stay clear of why this deal was necessary in the first place.  The Irish State had decided it would protect the investors in two thoroughly rotten institutions, run recklessly by their owners, by promising them that the Irish working class would pay off their gambling bets.

The Irish State never asked workers whether they wanted to, or whether they thought it was a good idea, but conceived the original bank guarantee in the middle of the night, as a scheme concocted without even the presence of cabinet ministers who were supposed to make up the Government.  In effect it decided to pledge money it didn’t have to people we still did not know and get everyone else to pay for it, including generations not yet born.

As ever we are bombarded with propaganda that cuts must be made in wages and services; increases must be applied to taxes, charges and working hours and all because we need to be competitive.  Yet billions that could not possibly be afforded were pledged and paid that bankrupted the State.  This in turn necessitated a ‘bail-out’ by the EU and IMF, which is akin to a blood transfusion to a dying patient so that she can work to earn money to pay the vampire.

As the Croke Park deal is ripped up and more draconian conditions inserted – not ‘extended’ as claimed – on the back of demands for austerity, no austerity is to be inflicted on the capitalist gamblers.  While money can be wasted on dead banks money must be cut out of wages and services because ‘we’ can’t afford it.

This is the logic of the capitalist system but it is hidden not just by the mass media and politicians but by the opaque workings of the capitalist system itself, made more complicated by the complexity of the financial system.  This complexity is useful because when it is more difficult to understand and appreciate what is going on it is more difficult to fight against it.  Only vague ideas that you are being screwed do not help give you confidence to say stop!

That is the importance of understanding as much as possible what the promissory note deal involves.

When the State guaranteed the liabilities of the banks in September 2008 it claimed the problem was one of liquidity, that is the banks were basically sound but were in danger because they would not lend to each other.  There might also be a withdrawal of money by depositors.  This was the purest rubbish and the gamblers who had put their money into Anglo-Irish Bank and Irish Nationwide didn’t buy it.  They took their money and ran.  Deposits in these institutions, packaged together as the Irish Bank Resolution Corporation (IBRC), fell from €65.8bn at the end of 2007 to €1bn at the end of 2011 while the value of debt securities funding the IBRC fell from €30.85bn to €6.3bn during the same period.

So if the IBRC was bust where did the money come from to give to the depositors and holders of the IBRC debt?  The answer is that it came in the form of Exceptional Liquidity Assistance (ELA) from  the Central Bank of Ireland (CBI).   This ELA funding to the IBRC was zero in 2007 and €40.1bn at the end of 2011. ELA is money so the question is where did it come from, how did the CBI get it?

In many ways the CBI may be thought of as the Irish branch of the European Central Bank (ECB).  The ECB has strict rules about money creation (money printing) so the local branch in Ireland could not just print Euros (metaphorically speaking) although this is one of the things Central Banks can do.

Nevertheless the CBI was able to give money in the form of ELA to IBRC which then paid off its depositors and holders of debt securities.  Since this bank and building society were broke the state nationalised them making all their reckless speculation our reckless speculation and making their debts everyone else’s debts.  Because the State didn’t have the money either to pay back the speculators they issued IOUs to the Central Bank of Ireland in return for their money’ the ELA.

The result was that the CBI gave money to the State in the form of IBRC and the State gave the CBI promises to pay this money back with interest.  Although the two institutions that became the IBRC had issued loans which were due to be repaid many of these were worthless so only through the state intervening could the capitalist investors in these institutions get their money back.

The promissory note IOUs were the promise by the State that through tax increases, wage cuts and public service cuts the working class would ensure they got their money.  This is what prevented the ELA being simply money printing and thus prevent the CBI holding worthless pieces of paper.

So the cuts to wages and public services that are justified by the claims that we need to be competitive are partly in order to pay the debts of a very uncompetitive bank.  So uncompetitive it is now dead, having been in a zombie-like state for the last few years.  When the State pays part of the promissory note IOU to the CBI the Irish Central Bank has ‘taken the money out of circulation’, again to ensure the problem is not solved by printing money.  In other words the money workers paid through austerity is simply burnt (again metaphorically speaking).

What could be more uncompetitive than maintaining dead banks on life support through burning money by putting real people on the dole and cutting services such as education?  The promissory note episode is one object lesson in the irrationality of the capitalist system.

This course of action could not have been taken by the Irish Central Bank and the Irish State without the approval of the European Central Bank and the European Union and its Commission.  For them the over-riding concern has been the protection of the European banking system just as the main objective of the Irish State has been the protection of the Irish banks.  Nationalist complaints that the Irish have made sacrifices for everyone else, much trumpeted by trade union leaders, has to ignore this.

If Irish workers have paid more so far it is because the Irish banks have been weaker and more rotten and Ireland remains a subordinated country which is dependent on foreign money for its speculative bubbles.

If the Irish State’s attempt to save the banking system required the ultimate liquidation of the IBRC this is because there was, in the end, little left to save after all the depositors and holders of its debt securities had been paid.  Again only the workers, in this case of the two institutions, are threatened with picking up the bill through redundancy.

For the Irish State this promissory note device to ensure that it did its best for European banks (and its own) had some advantages and disadvantages.  Of course inability to actually afford it is one big disadvantage but if it can get workers to accept austerity then this is not such an insurmountable obstacle.

The ECB does not want to lend money to institutions that cannot pay it back and since IBRC was bust its actions in approving the lending by its local branch raised some controversy.  If for example it lent to a bank that went bust and which didn’t pay back the money lent this money would then have entered the economy (through those people the bank did pay back, its employees or new loans) and this would amount to money creation/printing.  This can create inflation and low inflation is the primary objective of the ECB.  A strong currency allows a state, or in this case the Eurozone, to command greater resources on the world stage and is thus integral to the project of a strong EU imperialism.

The ECB thus regularly monitors (every few weeks) its ELA so their approval or otherwise was always hanging over the Irish State, although even without this it remains under close and regular scrutiny.

An advantage of the promissory note arrangement that will be lost at some stage with the new deal is that because the State owes the money to the Irish Central Bank profits by the ICB on the loans can be returned to the Irish State.  Given the high interest rate of over 8 per cent this is important.

Because a lot of the ELA created by the Irish Central Bank has ultimately been paid by IBRC to banks and institutions in other EU states the ECB has had to lend money to the ICB so that the reserves of the Irish Central Bank do not decline dramatically.  The ECB charges the ICB for this money but at a low interest rate so that the difference between this low interest rate charged to the ICB and the higher interest rate charged by the ICB to IBRC is a profit which can go to the Irish State.

What this means in terms of the current benefits of the new deal is that the move to a lower interest rate on the Government bonds that replace the promissory notes is not a gain since the effective rate of interest actually paid on the notes is the rate charged by the ECB to the Irish Central Bank and not that charged on the promissory notes.  As explained the profit generated by the latter is taken by the Irish Central Bank and returned to the State.

In the next post I will look at the new deal to replace the promissory notes.