Sunday, January 17, 2010

Financial alchemy (2010)

The Cooking the Books column from the September 2010 issue of the Socialist Standard

When the Bank of England introduced "quantitative easing" last year is was popularly described as the government having recourse to the printing press. This was not meant to be taken literally – the Bank of England did not arrange for more notes to be printed – as it was done electronically. Nor, as Charles Bean, a deputy governor of the Bank of England explained in a speech to the London Society of Chartered Accountants on 13 October (see here), was it the same process that leads to more currency (notes and coins) getting into circulation (through banks being put in a position to have to convert some of their reserves with the Bank of England into cash).

Bean described it as "a programme of large scale asset purchases financed by the issuance of extra reserves". A new fund called the Asset Purchase Facility was set up to which the Bank of England has so far lent £200 billion. This did not come out of the Bank's existing assets but was literally created out of nothing:
"Technically what happens is the following. The Asset Purchase Facility buys assets funded by a loan from the Bank. In turn, the Bank funds that loan through additional reserve creation. If that sounds like financial alchemy, consider how the money flows through the system. When the Asset Purchase Facility buys a gilt from a pension fund, say, it can be thought of as paying with a cheque drawn on the Bank of England. The pension fund will then bank the cheque with its own commercial bank, so the latter now has a claim on the Bank of England – that is what reserves are. In reality, these payments are not made by cheque, but rather are carried out electronically. But the principle is the same, though one key difference is that we pay the Bank Rate to the commercial bank on its claim on us, as well as charging the Bank Rate on the loan we make to the Asset Purchase Facility."
So, what is involved is a circulating IOU from the Bank which can be used to buy financial assets and which, from an accounting point of view, takes the form of a notional increase in the reserves which the commercial banks keep with the Bank of England, except that it is the Bank not the commercial banks that has increased these reserves.

Will this cause inflation? After all, what the Asset Purchase Facility spends does represent an increase in purchasing power. However, the immediate aim is not to cause a rise in the general price level but a rise only in the price of government bonds and stocks and shares:
"If the Asset Purchase Facility buys gilts from pension funds or asset managers, they will then have to look for another home for their money. As it is not very rewarding just to hold it on deposit, they are likely to look to put their money into other assets, including equities and corporate bonds. Thus not only does the price of gilts rise as a consequence of the Asset Purchase Facility's initial purchases, but also the prices of a whole spectrum of other assets".
This limited aim seems to have been achieved as prices of bonds and shares on the stock exchange have risen, helping to repair some black holes on financial company balance sheets. But there is supposed to be a wider aim: to "boost spending and activity" as Bean put it. Which hasn't been achieved. Bean, in fact, honestly admitted that if and when economic activity revives there will be no way of telling whether or not this was due to quantitative easing "for the simple reason that we can never know with precision what would have happened in its absence".

The intention is that, as the real economy recovers, the process will be reversed. The Asset Purchase Facility will sell the bonds it purchased and repay its loan from the Bank of England. The Bank will then liquidate the corresponding commercial banks' reserves with it. If this happens there will be no general inflationary effect as the extra purchasing power pumped into financial markets will be taken out again. But this could be years away. In the meantime the extra purchasing power will continue to go towards financing a stock exchange revival, even perhaps a speculative bubble – while the real economy goes its own way, recovering in due course for real economic reasons not through financial alchemy.

Why are we waiting? (2009)

A Short Story from the September 2009 issue of the Socialist Standard

Reflections of a man in a queue
What are you waiting for? For a certain little lady to come by? For world peace? For that moment when you can slap a parking ticket on that stationary vehicle whose owner has committed the heinous crime of being one minute longer than they should have been? For the chance to appear in ‘Big Brother’? For the dentist to call you in and prove that you have nothing to fear but fear itself? For the weekend when your life feels like it belongs to you and no one else? For the arms of Morpheus to envelop you? For the price of petrol/train season ticket to become more affordable? For your team to win promotion this season? For someone to bid on that eBay item you’re trying to sell? For the replacement of a social system predicated upon the pursuit of profit, profit and more profit?

The local newsagents/post office. Lunchtime. Three counter positions. Two of them closed. Surprise, surprise! Long queue building up behind me. Metaphorically, I pull out my flask, sandwiches and copy of the Beano and settle down for a long wait. I try uttering the mantra, “patience is a virtue,” but this doesn’t work as my concentration is disturbed by the mucky magazines in my eye line. Ian Drury’s song, starts running through my head, “In my yellow jersey, I went out on the nick. South Street Romford, shopping arcade, Got a Razzle magazine, I never paid, Inside my jacket and away double quick.” (Razzle in my pocket)

Last time I was rooted to one spot for so long without moving was in a traffic jam just outside Worcester. On the satnav I watched an hour of my life go to waste as I fumed in the queue. I’m just on the point of turning to someone and saying, “When I was a lad we didn’t have queues this long you know!” Fortunately, I manage to avoid turning into bore number 147.

I move through ninety degrees and peruse those behind me. I’m not that sensitive to other people’s moods but even I could sense their resentment. Their blood pressure is rising exponentially with every minute of inactivity that passes. I gauge this by the angry flush which is appearing on their faces and the muttered imprecations which are beginning to sound more and more and like an audition for a collective of Wiccan worshippers in that Scottish play by Shakespeare.

I too join in the muttering. I am debating with myself whether I should give in to an overwhelming urge to fix them with a glittering eye and expound upon the benefits of a social system based upon production for use, not profit.

After all, my fellow wage slaves are the ones who actually run the system on behalf of a minority.

Waiting for Godot is a play by Samuel Becket. There are two characters called Estragon and Vladimir who, in a two day time frame, engage in various activities whilst waiting for a character called Godot to arrive. In the first scene Estragon after trying hard to remove his shoe, and failing, says, “Nothing to be done.”

“Nothing to be done!” has resonance amongst those who are constantly propounding empirical reasons why this global social system, capitalism, has fulfilled its historical purpose and needs to be replaced. “Nothing to be done!” is an oft-repeated response from other members of the working class when real socialism is explained to them.

Go on the comments section of some internet blogs or media sites. Amongst the jeering, insults, and puerile name calling you will find countless posts complaining how tough times are and how they are going to get tougher. These tirades are often directed at individuals, e.g. politicians, organizations, e.g. political parties, or institutions, e.g., the European Union, who appear, in the eyes of those posting, to hold some malignant influence over their lives. For the sake of veracity, it has to be said, that ‘socialism’ is often cited in less than complimentary terms.

It doesn’t take a genius to work out that the ‘socialism’ referred to as being more scary than the bogeyman is state capitalism as practised by the ex-Soviet Union and by regimes such as North Korea, Cuba and others today. Moaning and whinging seems to be becoming an art form. In the art of not doing anything. A pervasive fatalistic air is apparent. Amongst many who are who are posting on the internet anyway, “The philosophers have only interpreted the world, in various ways. The point, however, is to change it,” (Karl Marx). Well, here’s the tough love; whining about it ain’t gonna change anything!

The local branch of the bank that likes to be international and local at one and the same time. Mid-morning. Once upon a time there were five counter positions. Now there are only two. One of which is shut. Yet another queue. The frustrations emanating from the increasingly exasperated wage slaves wasting time trying to avail themselves of the banks ‘services’ are palpable. Are those queuing behind me are aware of their role as wage slaves within a capitalist system that daily exploits them in its ever more desperate attempts to fulfil it’s raison d’ĂȘtre? The thing about capitalism is that it’s fulfilled its historical function to lay down the necessary social conditions for a transition to a wageless, moneyless, leaderless, classless, stateless society. It’s just that the vast majority of paid and unpaid members of the working class don’t know that yet.

The couple at the counter finally sorts out their business. She apologies to us all for keeping us waiting. I say out loud, it’s not your fault, it’s the banks. In my mind I’m screaming, “We don’t need banks! Abolition of the wages system! Free access of goods and services! From each according to his/her abilities, to each according to their needs! Had I said all this aloud in one of the temples of the moneychangers what response would I have got? Would I have been dragged kicking and screaming into a police van or into a conveyance to the local mental health hospital. Well! What a looney! (Political correctness in the use of language hasn’t permeated to my part of the world). Elimination of money? Cor, we might be getting seriously peed off wasting our life in this queue but that suggestion is just ridiculous. Isn’t it? Hell, I don’t want to bring back more counter positions in banks and post offices. I want a social system where money and the need for financial transactions of any kind are no longer necessary.

“I'm so tired, Tired of waiting, Tired of waiting for you.” (Ray Davies and The Kinks). I’ve reached an age where “Time’s winged chariot hurrying near” resounds much more loudly nowadays. I think I can legitimately describe myself as a ‘grumpy old man.’ Thing is, I don’t think that you have to be old to be grumpy and dissatisfied to know that there’s something wrong with the way that we live. Like the Kinks I’m getting increasingly frustrated waiting for the transition to a better social system which will supersede the one we have now. Capitalism has outlived its usefulness and is inhibiting the personal, and collective, growth of everyone on this planet. The problem is this better life isn’t going to happen without us all putting in some serious effort to bring it about. “It's your life, And you can do what you want.” So what do you want to do? Are you happy with your life? It’s down to us all. What are we waiting for?
Dave Coggan