To mark publication of the “bigger and better” 360-page paperback (at £16.99 from Amazon, with a new 38-page preface) this and the following posts list the book’s main themes, by Chapter, each with an update. Seen from November 2013, how have recent developments changed the analysis and/or policy prescription?
Currrent Economic Outlook
Although the short to medium-term outlook has improved in a number of economies, it has deteriorated in others. As a broad generalization, it remains true that confidence in the broad direction and sustainability of official policies has yet to be restored. Capital investment remains sluggish. Business and markets are dogged by fears of further financial turbulence.
After their collapse in the Global Financial Crisis (GFC), the big banks have yet to regain the trust of society. As money creation depends on promises, the springs of monetary growth remain broken. There is nothing central banks can do in the short term to fix the monetary mechanism. True, there have been some useful innovations, and larger capital will cushion the big banks against future shocks. But as long as the monetary and macro-economic environment remains unstable, banking will be also.
Structural roots of financial instability
I wrote the book in an effort to draw attention to the structural roots of this instability. These are still not being addressed. Although there has been some re-thinking of particular policies, including monetary policies, this has stopped short of the profound changes needed, especially in our attitudes to, and relations with, global financial markets. In particular, there is a reluctance to appreciate our collective interest in setting new limits to national monetary sovereignty. We remain in the grip of the cycle – which is both a policy and a financial cycle. Thus the case for systemic reform remains pertinent. (Numbers refer to chapters of the book.)
Part I IN THE TRAP
1. Into the Danger Zone: Governments and central banks enter the trap when they base macro-economic policies on the assumption that each country can ‘go it alone’ – by setting policy levers at just the right levels – and reach its objectives for growth and employment without the need for an international monetary system – i.e. without being required to pay attention to the interests of other countries in any systematic way. At most, they assume that any policy inconsistency or clash of national interests can be resolved by ad hoc measures of international cooperation through bodies such as the IMF and BIS. Such beliefs offer seductive attractions to politicians seeking re-election – it means they keep ultimate control of the printing presses. But they blind governments to the underlying causes of the global malaise. So governments continue to follow poor policies. That is the money trap.
2013 Update: Are policies still caught in a “doom loop”? Some economies seem to be back at the point of the cycle close to where they were ten years ago; just as in 2003-04, central bankers in the US, Euro zone, Japan and the UK agonise about how long to maintain ultra-loose policies in the face of incipient asset price booms. Governments have given them new macro-economic “prudential” tools in the hope that this will allow them to keep the upswing going longer this time while controlling the risks of a “bust”. Yet already investors, non-financial businesses and commentators are worrying about the next downturn. This would hit a financial system that is still in convalescence.(Among mainstream economists William White is one of the few to perceive and grapple with the true nature of the problem – see his Dallas Fed paper).
2. Why Players Need a New Rulebook: the loss of an external monetary standard and of monetary control leads inevitably to a decline in the ethical (internal) standards of financial market participants. The temptation to cut corners becomes too great – as innumerable scandals testify. In many parts of the world, this has opened the way to a progressive corruption of the political system and its exploitation by powerful interests – official and private. Under crony capitalism, control over money becomes a tool in the everyday struggle for existence. A financial crisis is when the bill is presented and the public pays.
2013 Update To distract the public, even while picking their pockets, government most promise it won’t happen again. It is now governments that must claim that “next time will be different” – whereas investors think it will end in tears. Thus the cycle is widely expected to repeat itself. Basel III and structural reforms will, officials say, provide the rulebook markets need. Yet there is widespread scepticism. The risks involved in a further asset price boom and bust are systematically under-rated.
3. How Monetary Systems are Born: Chapter 3 argues that to fulfil their economic and social functions, markets need governments to reach agreement on a sustainable international monetary system as well as rules for banks. The latter is being presented as a substitute for the former, but this won’t work. How can such an order be brought about? History shows it may evolve organically through a mix of market forces and political leadership, or may be created by collective official action.
2013 Update: No progress towards such an agreement – still less implementing it – has been made. The reason is clear: existing arrangements suit public and private sector elites, who have grown richer and more powerful by exploiting the opportunities they offer for quick pickings – “money left on the table” from episodes of monetary injections. Central banks have reached positions of policy supremacy only through the faults of the existing system, which they are asked to “fix”. Crony capitalists have acquired a firmer grip on national policy levers.
4. World Money without an Anchor: This Chapter explains how the absence of an international monetary standard and agreed mechanisms for reducing imbalances means there are likely to be growing pressures to relapse into monetary nationalism.
2013 Update: recent developments point to a retreat from globalisation and a readiness to sacrifice its potential benefits; we witness the “re-nationalisation” of banking (meaning governments increasingly protect and fund their nationally-based banking institutions) , growing financial and trade barriers, financial repression, differential regulatory rules, national champions, and competitive currency depreciation. Meanwhile, governments and central bankers of debtor countries like the US, UK, and peripheral countries of Europe harshly criticise the policies of surplus countries countries like China, Germany and Japan, raising international tensions.
Amazon – The Money Trap
1. In the Trap
To mark publication of the “bigger and better” 360-page paperback (at £16.99 from Amazon, with a new 38-page preface) this and the following posts list the book’s main themes, by Chapter, each with an update. Seen from November 2013, how have recent developments changed the analysis and/or policy prescription?
Currrent Economic Outlook
Although the short to medium-term outlook has improved in a number of economies, it has deteriorated in others. As a broad generalization, it remains true that confidence in the broad direction and sustainability of official policies has yet to be restored. Capital investment remains sluggish. Business and markets are dogged by fears of further financial turbulence.
After their collapse in the Global Financial Crisis (GFC), the big banks have yet to regain the trust of society. As money creation depends on promises, the springs of monetary growth remain broken. There is nothing central banks can do in the short term to fix the monetary mechanism. True, there have been some useful innovations, and larger capital will cushion the big banks against future shocks. But as long as the monetary and macro-economic environment remains unstable, banking will be also.
Structural roots of financial instability
I wrote the book in an effort to draw attention to the structural roots of this instability. These are still not being addressed. Although there has been some re-thinking of particular policies, including monetary policies, this has stopped short of the profound changes needed, especially in our attitudes to, and relations with, global financial markets. In particular, there is a reluctance to appreciate our collective interest in setting new limits to national monetary sovereignty. We remain in the grip of the cycle – which is both a policy and a financial cycle. Thus the case for systemic reform remains pertinent. (Numbers refer to chapters of the book.)
Part I IN THE TRAP
1. Into the Danger Zone: Governments and central banks enter the trap when they base macro-economic policies on the assumption that each country can ‘go it alone’ – by setting policy levers at just the right levels – and reach its objectives for growth and employment without the need for an international monetary system – i.e. without being required to pay attention to the interests of other countries in any systematic way. At most, they assume that any policy inconsistency or clash of national interests can be resolved by ad hoc measures of international cooperation through bodies such as the IMF and BIS. Such beliefs offer seductive attractions to politicians seeking re-election – it means they keep ultimate control of the printing presses. But they blind governments to the underlying causes of the global malaise. So governments continue to follow poor policies. That is the money trap.
2013 Update: Are policies still caught in a “doom loop”? Some economies seem to be back at the point of the cycle close to where they were ten years ago; just as in 2003-04, central bankers in the US, Euro zone, Japan and the UK agonise about how long to maintain ultra-loose policies in the face of incipient asset price booms. Governments have given them new macro-economic “prudential” tools in the hope that this will allow them to keep the upswing going longer this time while controlling the risks of a “bust”. Yet already investors, non-financial businesses and commentators are worrying about the next downturn. This would hit a financial system that is still in convalescence.(Among mainstream economists William White is one of the few to perceive and grapple with the true nature of the problem – see his Dallas Fed paper).
2. Why Players Need a New Rulebook: the loss of an external monetary standard and of monetary control leads inevitably to a decline in the ethical (internal) standards of financial market participants. The temptation to cut corners becomes too great – as innumerable scandals testify. In many parts of the world, this has opened the way to a progressive corruption of the political system and its exploitation by powerful interests – official and private. Under crony capitalism, control over money becomes a tool in the everyday struggle for existence. A financial crisis is when the bill is presented and the public pays.
2013 Update To distract the public, even while picking their pockets, government most promise it won’t happen again. It is now governments that must claim that “next time will be different” – whereas investors think it will end in tears. Thus the cycle is widely expected to repeat itself. Basel III and structural reforms will, officials say, provide the rulebook markets need. Yet there is widespread scepticism. The risks involved in a further asset price boom and bust are systematically under-rated.
3. How Monetary Systems are Born: Chapter 3 argues that to fulfil their economic and social functions, markets need governments to reach agreement on a sustainable international monetary system as well as rules for banks. The latter is being presented as a substitute for the former, but this won’t work. How can such an order be brought about? History shows it may evolve organically through a mix of market forces and political leadership, or may be created by collective official action.
2013 Update: No progress towards such an agreement – still less implementing it – has been made. The reason is clear: existing arrangements suit public and private sector elites, who have grown richer and more powerful by exploiting the opportunities they offer for quick pickings – “money left on the table” from episodes of monetary injections. Central banks have reached positions of policy supremacy only through the faults of the existing system, which they are asked to “fix”. Crony capitalists have acquired a firmer grip on national policy levers.
4. World Money without an Anchor: This Chapter explains how the absence of an international monetary standard and agreed mechanisms for reducing imbalances means there are likely to be growing pressures to relapse into monetary nationalism.
2013 Update: recent developments point to a retreat from globalisation and a readiness to sacrifice its potential benefits; we witness the “re-nationalisation” of banking (meaning governments increasingly protect and fund their nationally-based banking institutions) , growing financial and trade barriers, financial repression, differential regulatory rules, national champions, and competitive currency depreciation. Meanwhile, governments and central bankers of debtor countries like the US, UK, and peripheral countries of Europe harshly criticise the policies of surplus countries countries like China, Germany and Japan, raising international tensions.
Amazon – The Money Trap
Written on November 14, 2013 at 6:38 pm, by robert
Categories: Banking, Homepage, News and Comment, Official Money, RP's Diary | Tags: banking, central banking, central banks, euro, financial crisis, global financial system, International Monetary System