Sunday, 26 April 2015

Lairs or Slaves

Are our politicians liars or slaves to an economic framing story? Many of us possibly accept that our politicians don't always tell us the whole truth. They will tell us what they think will put them in a good light while hiding the real truth from us. This year's UK election campaign is possibly more blatant in this half truth telling than any other that I have observed. Maybe I am more aware of it because I am now focused on economic reform and changing the framing story that we live by.

I can possibly pull many examples from the election campaign but the one that I want to look at relates to the cause of the economic crash. The Conservatives stand on the election platforms claiming loudly that Labour caused the crash and that Labour can not be trusted to manage the economy. Labour doesn't stand up and deny this claim and instead focus on the impact of Conservative policies while still believing that if they become government, they will have to continue a regime of austerity but just at a different pace. The minor parties all tell their own perversion of these pronounced truths that fit with their policy objectives.

So what caused the economic crash that gave the Conservatives justification for their austerity policies? Wasn't it sub-prime lending by American banks and the purchase of these high risk debts by British banks or the interconnectedness of the banking system? How could the behaviour of these banks be blamed on any political party? Yes, Labour was in power when the crash hit and it was the Labour party's decision to bail out the banks rather than let them fail but what were the alternatives. If the banks had failed how much would the government had to pay out in the deposit guarantee system? Regardless of which political party was in power at the time, they were going to incur a large hit on the government accounts to either support the banks so they didn't fail or to meet deposit guarantee requirements. If the government (possibly more accurately the poor people) is the guarantor of last resort then what are the financial mechanisms available for it to raise funds to meet its monetary obligations?

To try and understand this, we have to look at what led to an environment where banks could lend at high risk without feeling under any obligation. History shows that it was the previous Conservative government under Margaret Thatcher that deregulated the banks removing the reserve ratio requirements. The following Labour government never took any action to address these regulation changes and neither has the current Conservative / Liberal Democrat coalition. From a political perspective, none of these three parties can side step blame but neither can the minor parties who also ignore the problem caused by this deregulation. Only the Green party has anything in its manifesto that addresses the power of the banking system but even they are not standing on the hustings shouting this message for all to hear. In fact, I wonder whether their candidates really understand what their manifesto says.

So what was or is this deregulation that undermined our economy so badly? Removing the reserve ratio meant that there was no restriction on how much money banks could create through lending. Banks no longer had to hold any deposits or reserves to lend other than what was required to maintain liquidity and to settle with other banks with their reserves at the central bank. Don't be fooled. The reserve ratio didn't mean that banks had to have the reserves to back their lending either or that somewhere there were resources to back all the money in circulation.

Let me explain. If you deposit with my bank £100 and I then lend out £50 of your deposit, I have increased the money supply by £50 unless I restrict you from withdrawing more than £50 of your deposit. If you can still spend all of your deposit and the person who lent can do the same then I have effectively increased the amount of money in circulation. You could argue that I will take in from other depositors enough deposits to cover my loans but the reality of the reserve ratio is that as a bank only needs to hold enough reserves with the bank of England to cover the reserve requirement. They rely on the principle that not all of their depositors will want to withdraw all their funds at once. We should note that in making a loan, I create a new deposit for the person taking out the loan. It is likely that they will spend it immediately but then that payment is likely to return in full to the banking system so effectively the amount of deposits has increased by the loan amount. Even with this reserve ratio, the possibility of a banking collapse is quite high but this reserve ratio was removed by the previous Conservative government and some would argue making the banking system more fragile.

Taking away the reserve ratio and now I don't need your deposit to create a loan or deposit. You have to trust me that I have the funds to give you when you go to spend the deposit. I can start the process without any reserves. The problem is that if the borrower spends that money in a way that it doesn't come back to me immediately, I don't have any reserves to payout that money. So in order to ensure that I can meet my obligation to settle with other banks, I will impose my own reserve ratio but it will be based on what I believe I need in order to settle and not on what I hold in deposits. In effect, if I was the only bank in the world, I can survive because all deposits come back to me and ultimately cancel out when all loans are paid off. People will be trading with my IOUs. I get the additional bonus in that I get to say who gets the initial use of my IOUs.

We have an environment that is intrinsically unstable by the very nature but this story has been compounded by a second strongly held belief that governments should not be able to create money. This belief argues that governments should only be able to obtain the money they require through taxes or through borrowing. This is not enforced by law since the Bank of England can create money and put it into government accounts. In fact the profit from the printing and selling of currency already does this. The government effectively owns all printed currency and when more is printed, it theoretically increases what the government has available to spend. However, we don't use printed currency for most of our transactions. Printed money is sold to the banks with the funds from these purchases going into government accounts. Since only about 3% of the money in circulation is printed currency, this makes minimal difference to government accounts.

There is an interesting question here since so little of our money supply has been created by printed money, we have to ask whose IOUs are we really trading with? Electronic or digital money is not government IOUs, yet through the deposit guarantee, it is backed or guaranteed by the government when it is held as a deposit. If this is the case then why doesn't the government get to say how many IOUs are created and why doesn't it get to say how its IOUs are spent initially into the economy?

There are calls for the power for money creation to be removed from the banks (Jackson and Dyson, 2012) or for money to be created and given to the government to spend into existence (sovereign money (Jackson, 2014) or helicopter money (Wren-Lewis, 2014)). Many reject these proposals and most political parties ignore or are ignorant of them. Now, Iceland is looking at sovereign money (Sigurjónsson, 2015). So what is holding the UK or other countries back from taking up these proposals?

It comes down to the way we believe things should work or the story that we live by, our framing story. There are many people who say that we can't trust our politicians to create money and spend it into circulation responsibly but they are prepared to leave it the hands of bankers who through their money creation policies (lending decisions) brought the economy down and history shows have regularly done so. We believe politicians are less trustworthy than bankers but there is more to it than this simple belief. At the heart of our framing story, we have given money power over our lives. A power that enslaves us to a work ethic, that encourages to sell ourselves to the highest bidder, and that drives our education focus so our educational institutes become exam factories (Coffield and Williamson, 2011) and subservient to the needs of the economy (employability measure).

This framing story becomes visible when we look at the words used by our politicians, in our news reports, and in the way we communicate and interact with one another (Stibbe, 2015). It can bee seen in the way we organise our society and interactions. Ellul (1984) talks of how we have given spiritual power to money so that our buying and selling transactions enslave and entrap us. They define our value and our relative position within society. They cause inequality and drive us apart. The heart of the matter is that we have created a destructive framing story or as McLaren (2007) says a suicidal machine.

So are our politicians liars or slaves? They rewrite their interpretation of the story to satisfy their own objectives, the retention of political power, and in that sense, I believe they are liars but they are also enslaved to the societal framing story. A framing story that they do not always make explicit because they know that part of that framing story isn't acceptable to a large percentage of the population but they cannot break loose from that framing story because it removes their claim to power and service. Predominantly, they are slaves to the framing story and the only way to overcome this enslavement is to challenge and change the framing story. Other changes will have some impact on society but unless the framing story is changed, we will keep coming back to a story that enslaves and leaves money with the spiritual power to enslave individuals, corporations, governments, and this world. The ultimate destination of the framing story is self destruction in a suicidal rush.

The question is are we prepared to change direction or are we going to rush to self-destruction holding firm to the myths that drive our framing story? I am seeking change and I hope that you re considering change as well.

References

Coffield, F., & Williamson, B. (2011). From exam factories to communities of discovery: The democratic route. London: Institute of Education.

Ellul, J. (1984). Money and power (L. Neff, Trans.). Eugene, Oregon: Wipf and Stock Publishers.

Jackson, A. (2013). Sovereign Money: Paving the way for a sustainable recovery. London: Positive Money. From: http://www.positivemoney.org/our-proposals/sovereign-money-creation/

Jackson, A., & Dyson, B. (2012). Modernising money: Why our monetary system is broken and how it can be fixed. London: Positive Money.

McLaren, B. D. (2007). Everything must change: when the world's biggest problems and Jesus' good news collide. Nashville: Thomas Nelson.

Sigurjónsson, F. (2015). Monetary Reform - A better monetary system for Iceland (1 ed.). Reykjavik, Iceland. From: http://www.forsaetisraduneyti.is/media/Skyrslur/monetary-reform.pdf

Stibbe, A. (2015). Ecolinguistics: Language, ecology and the stories we live by: Routledge.

Wren-Lewis, S. (2014). Helicopter money. Retrieved from http://mainlymacro.blogspot.co.uk/2014/10/helicopter-money.html

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