Nationalism, Governments and Currency.

The political left has always been suspicious of nationalism. Certainly it is easy to think of examples where nationalism has been taken to extremes with disastrous results. However we do, like it or not, all have to recognise we live in nation states. We might consider ourselves citizens of the world, or citizens of Europe or whatever, but that has to go along with being a citizen of a particular country too.

The traditional model is that we have a country, a government and a currency to go with it which is essentially an IOU of that government. So, for example, we have a country called Vietnam with its own government which issues a currency called the Dong. A neighbouring country, Cambodia, has its own separate government and uses the Riel. You might want to remember these names if you are into pub quizzes!

The people of Cambodia and Vietnam could, if they chose to, unite into a single country, have  a single government and a unified currency. That could make sense, but it would be entirely up to them to decide to do that. What would make much less sense is for them to try to share a currency without unifying their countries. The power of being able to control a currency is very considerable but not easily shareable. If we write our own IOUs as a settlement of a debt we want those IOUs to be unique. We don’t want anyone else writing them out on our behalf. So if Vietnam and Cambodia were to try sharing a currency it probably would not work at all well. There would soon be a dispute over how many IOUs each could create and the two countries would revert to separate currencies very quickly.

This is a similar pattern the world over. Canada has a different dollar from the USA. Australia has a different dollar from New Zealand and so on. There are seemingly some exceptions. Ecuador uses the US dollar. But it cannot create any US dollars of its own. Only the USA can do that, and as many as it likes to stimulate its own economy when needed. That puts Ecuador at a big disadvantage. I would recommend them to introduce their own currency! There is a similar situation in Puerto Rico which also uses the US dollar. But Puerto Rico is not considered part of the USA. If that were to change it would make much more sense for them to use the US dollar. Puerto Rico citizens would become American citizens and pay taxes to the US Federal Govt and receive the benefits of spending by the Federal Government. There would probably be more spending than taxation just as there is in other less affluent US States.  Then they would be truly sharing a currency and not just using someone else’s.

So one way we can define our own feelings of nationalism is by asking ourselves who we would like to share a currency, and a government, with. At present we, in the UK, share a currency, which we call the pound, between the countries of England, Scotland, Wales and Northern Ireland.  Other parts of the world, like Gibraltar and the Channel Islands use the pound but do not share the pound and so are not part of the United Kingdom. If Scotland were to become independent it could not share the pound, it could only use the pound. I am not sure if those Scottish nationalists who argue for a shared currency really appreciate the difference or the potential difficulty.

The big exception in the eurozone. We’ll look at that, and the problems it has, next.

Is a Happy New Year Possible for 2016?

In April 2014 I wrote:   Stand by for the next UK crash! ETA 2016

I didn’t use my crystal ball which has never proved very reliable, in any case, when it comes to forecasting football scores or racing results. The reasoning was based  on the rate of fall in the financial position of the UK private domestic sector. It was obvious, then, that serious private sector debt problems would start to arise in mid to late 2015 if government policies carried on as they were.

Two recent articles by Owen Jones in the Guardian and Nigel Morris in the Independent  bear this out. Government policies have indeed been carried on as they were.

There is a very real danger of an economic crash as Owen Jones argues although he doesn’t have quite the right explanation. It’s really not much to do with the need for increased industrial productivity. The productivity of  UK and European industry is higher than it has ever been. Yet the economic problems are worse than they have been since the 30’s. Clearly Owen Jones, much as we might admire his political stance,  is barking up the wrong tree.

Simply, if the UK wants to run a 5% of GDP deficit in its Current Account Balance of Payments, someone has to fund that by borrowing. Usually it is government which has assumed that role but increasingly the burden is being shifted onto the Private Domestic sector.

It may work in the short term but soon the private sector will be increasingly unable to raise the necessary loans especially if there is a fear of higher interest rates, and a general credit crunch in the economy. The words ‘credit crunch’ started to become a cliche of all 2008 financial commentary  just prior to the GFC. We are starting to hear them again on a more regular basis.

It’s not looking good!

PS/Edit

The graphical basis of my concern. A modified screen shot from Neil Wilson’s blog “3poken”.

The British left needs to discuss more than the UK’s membership of the EU.

As the EU debate swings into life in the UK we’ve so far heard the most from the business sector who have been most pro in their advocacy of the UK’s continued membership. It is perhaps quite natural that big business would like the EU to remain as it is. Those on the traditional left would say that’s because they want to have a large pool of unemployed workers to keep wages down and maintain worker discipline!

Are they correct in saying that? As things are at the moment it is hard to say they aren’t. It is hard for big business to argue that they only want the EU for its expanded, but much depressed, market.

The modern supposedly progressive left has been seduced by the powers-that-be in the EU into thinking the EU to be a socially progressive organisation too. Recent events in Greece, for example, are shaking that view. That needs  to be shaken  some more. A first step would be to get them to actually discuss the problem. We might well think the election of Syriza in Greece, with its band of ex-Maoists, ex- Trotskyites, ex-Communists would be a topic of interest for them. Not so. They are shell-shocked into silence at the moment. The main Labour websites have nothing at all to say on that.

Anyone believing in a united Europe, as many of our EU advocates clearly do, should feel as passionately about unemployed young people in Spain or poverty in Greece as they do about it in the UK. The progressive left  say they like everything about the current level of EU integration, and like the EU as it is. If they ever remember to make a critical comment, it is not because they wish to change anything or intend to vote against any of its measures.

If the UK today had ultra high levels of youth unemployment as the south of the EU currently suffers,  the progressives would never let anyone hear the end of it. Rightly so. There would be marches  from the most depressed areas to London to demand some action.

If the UK had Greek levels of unemployment, and a Greek cost of living crisis which has depressed average real incomes by almost a quarter since 2007, again we would not hear the end of it, as the ‘progressives’ would rightly think it completely unacceptable. If the unemployment in Greece or Spain had been brought about by a right wing military coup, again there would be uproar. So why is it that these people who believe in pan European solidarity have nothing to say about the scandal of poverty and joblessness in large areas of Euroland? Why are they not insisting on new policies for the EU?

Now’s a good time to be saying something about that in connection with the EU referendum. The British left needs to discuss more than the UK’s membership of the EU. It needs to discuss the EU itself too.

Never mind the deficit just vote for the recovery!

It’s difficult to know who to back in next month’s UK elections. Europe is a major issue which the most normally sensible parties, or at least the parties who the public normally consider to be the more sensible,  have largely chosen to ignore  in the run up. The events in the eurozone are highly significant, in particular the Greek crisis,  yet those in the most pro-EU parties don’t want to talk about them at all.

There’s next to nothing about it on Labour’s main website, Labourlist, for example.

Funny that!  Those who believe in a united Europe, as many of our more ardent EU advocates clearly do, should feel as strongly about unemployed young people in Spain or poverty in Greece as about hardship in the UK.  Yet, if they ever remember to make a critical comment, it is not because they wish to change anything. The just expired Parliament has seen a complete absence of Labour opposition to any new laws or powers for the EU.

If the UK today had 50% youth unemployment as the south of Euroland currently suffers, Labour would never let us all hear the end of it – and rightly so. If the UK had Greek levels of unemployment, and a Greek cost of living crisis which has depressed average real incomes by almost a quarter since 2007, again we would not hear the end of it, as Labour would rightly think it completely unacceptable. So why is it that these people who believe in pan European solidarity have nothing to say about the scandal of poverty and joblessness in large chunks of Euroland? Why are they not insisting on new policies for the EU?

The situation is far from ideal but it’s probably best to vote for the party who you feel will produce the best recovery. The recovery, when it happens, will fix all deficit problems. Firstly a healthy economy will mean increased taxation revenue. Secondly, if the economy is healthy no-one is going to worry about debts and deficit anyway. The US$ is surging at present as investors buy up $ securities. Are they worried about a $17 trillion (or is it $18 trillion by now?) debt?

I don’t think so. There are those in the USA who can’t make head nor tail of it all and are pushing for a balanced budget. I can’t see them getting anywhere but heaven help us all if they do!

The Euro could work so why doesn’t it?

Arguably, it did work reasonably well for the first few years of its public existence from 2002 onwards, but now, unarguably, it does not. Recession and high levels of unemployment is the norm, not just in the peripheral countries of Spain, Greece, Portugal, Ireland, Poland, etc but increasingly in the original group of six too. Italy and France are both experiencing double digit levels of unemployment; and the problem is now spreading to Germany itself, as its export markets in the Eurozone start to dry up. The high levels of unemployment in the peripheral regions of the Eurozone naturally leads to increased levels of migration to other areas of the EU which are performing better. Whatever we feel should be the case, our observations tell us that this is causing social and political problems too, especially in the UK, which we would be foolish to ignore.

There are many theories offered to explain the origins of the problem. The stated opinion of German right wing politicians and their ordo-liberal economic supporters is that there is nothing wrong with the Euro. If they can manage perfectly well with the Euro then so should everyone else. If they, like Germany would only just get close to balancing their budgets then all would be well.

See for example:

http://www.theguardian.com/business/2014/aug/20/angela-merkel-scolds-italy-france-eurozone-faltering-growth

Furthermore, there tends to be a lot of finger pointing in the German circles directed particularly, but not exclusively, towards Greece. The criticisms generally include a past reliance on an oversized pubic sector, an inefficient system of tax collection, a past over-reliance on ‘money printing’ to fund government spending leading to higher than desirable levels of inflation and even systemic corruption. They probably do have a something of a point, no countries are ‘perfect’ not even Germany; but are the German right missing the point completely? From an understanding of just basic economics we can clearly see they are.

The fundamental problem is none of the above. There is also a widely accepted, but not necessarily correct, argument that countries need their own currency, which should be allowed to vary to allow countries to devalue or revalue their way out of economic trouble. That certainly would help but neither is it the core problem. Rather it is a problem of financial transfers, albeit an easily solved one, that is to be expected whenever two or more countries decide to share a common currency; one or more of which are large net exporters and one or more of which are large net importers. There is nothing wrong with wanting to be a net exporter, if that is what countries want to do. Of course, for every net exporter there has to be a net importer willing to buy those exports. So, we firstly have to disabuse ourselves of the idea that the net exporters, like Germany, the Netherlands, Austria, Switzerland (even though the Swiss are not in the EU) are somehow more virtuous than the USA and the UK (in the EU but not the EZ) who are net importers.

It makes sense, all round, to allow countries to choose whether to be net exporters or net importers. The alternative would mean clashes over trade, the imposition of high tariff barriers, and currency wars. It is no exaggeration to say that these clashes can lead, and have led in previous eras, to real wars too. No-one wants to see any re-occurrence of that.

How does it work when a net importer and a net exporter trade together using their own and, therefore, different currencies? Assuming that the two countries have the same trade pattern with each other as they do globally, there is an inevitable imbalance when it comes to the net importer being able to pay in its own currency. There is always going to be a ‘glut’ of that currency on the market, which if left alone would cause the currency to depreciate. That country would then be able to afford fewer imports, its exports would look more competitive, and so its trade would naturally move into balance. Neither country wants that, so the importer issues bonds which are obligingly bought by the exporter using the excess of the importer’s currency. The importer then re-issues the money obtained from the sale of those bonds into its economy by government deficit spending. In other words, the supplier lends money to its customer to be able to continue to be a good customer. The central bank of the exporter then stores the purchased bonds and just creates, or ‘prints’, extra amounts of its own currency to satisfy the need of its internal exporting companies to be paid in that currency.

So, despite  all German assertions to the contrary, the policy of the Bundesbank has never been solely the minimisation of inflation. The Bundesbank was quite willing to ‘print’ as many DMs as was considered necessary to hold down its value to maintain the sales of German exports. An artificially lower exchange rate also translates into higher prices in German shops and so contributes to a higher level of inflation than may be the case otherwise.
This kind of arrangement can continue indefinitely. Of course, as the currencies are separate, they can vary over time in value in relation to each other, but, providing that inflation rates in the two countries are approximately the same, they do not need to. In principle they could be fixed, providing the exporter and importer co-operate to equalise their monetary transfers by the necessary issuance and purchase of government securities.

Therefore, if this arrangement can work with fixed exchange rates, it must be able to work with the same currency too. The process is simply same one, as before, of the exporting country lending back its surplus to the importing country so that it can continue to be a good customer. As the currencies are the same there does not have to be any bonds involved, it just needs money to be lent back, but there can be a transfer via bonds if that is mutually preferred. Money and bonds are just different forms of government IOUs in any case.

In the case of the Eurozone these would be the so-called Eurobonds which are widely being discussed, but adamantly opposed by German ordo-liberals. I fail to understand why. These are essentially the same people who were happy to lend their customers money when their currencies were different, so why do they have a problem now they are the same?

Ordo-liberals compound their mistake of not wanting to lend back the surpluses of the exporting countries in the EZ to the importing countries, by insisting that the importers should not borrow from anywhere else either. It may make sense for an exporter to have a balanced budget, but not an importer. The importer needs to sell securities and   deficit spend the money received back into its economy. That deficit could be 3% of GDP, the Euro limit, but equally it could be higher. It makes no sense to even try to impose arbitrary limits on government deficits, which are also affected by the desire of populations to save financially. The deficits can, and should be, varied, as need be, to ensure the consistency of levels of inflation in different EZ economies. So a possible strategy for the ECB would be to set an inflation target of something like 3% for every EZ economy and issue Euros either via the process of quantitative easing if the exporting countries were unwilling to recycle their surpluses, or the encouragement of bond issuance or even straight lending of euros if they were, or a mixture of both.

3% inflation may be too high, even if only for a limited time, for many in the more prosperous regions of the EZ to contemplate, and they have said so in no uncertain terms. See for example:
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/11211973/Mario-Draghis-efforts-to-save-EMU-have-hit-the-Berlin-Wall.html
However, the alternative is to leave things as they are. It will only be a matter of time before France is ruled by their National Front. Greece ruled by Syriza, Spain by Podemos,   Ireland by Sinn Fein, the UK by UKIP. There will be an upsurge in support for new Eurosceptic movements emanating from both the extremes of left and right as the EZ economies, including the now prosperous ones,  go from bad to worse to disaster. It is hard to see how that could be any preferable than paying a small price by way of an acceptance of slightly higher inflation, and the issuance of as many Euros and Eurobonds as are required to fix the problem right now.

PS Another similar view
http://www.3spoken.co.uk/2014/02/its-exporters-stupid.html