Vol. 3 No. 53
May - June 2011
ERA Newsletter 1
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Economic Reform Australia
For a just and sustainable society.
ERA NEWSLETTER ISSN 1324-5929
Vol. 3 No. 53 May - June 2011
IN THIS ISSUE
Page
D. Phelps The Worship of Economic Growth
3-5
G. Jukes A plea for brevity in understanding Economics
5
J. Hermann Do banks lend out their depositors funds?
6-13
D. Dorney Debt Sinks Revisited
13-14
ERA Media Release Nuclear energy fails the cost effective test 15
L. Manning & R Manji A New Financial Deal for Christchurch 16-17
D. Keane Recent Australian Economic Trends
18-20
W. Mitchell Limits of public assistance
21-22
C. Hamilton Tackle Big Coal at your own risk
22-24
J. Coulter The cost of nuclear generated electricity
24
D. Elliot Fukushima Fallout
25-27
R. Buckley Resilience and global financial governance
28-32
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Disclaimer: The views expressed in these articles are the sole
responsibility of their authors and do not necessarily reflect those of
Economic Reform Australia.
Editor
Co-Editor
Peter Lock, 4/20 Everard Street,
Frances Milne, 14 Gallimore Av.
Largs Bay SA 5016.
Balmain NSW 2041.
Phone-Fax 08 - 8242 0566
Phone-Fax 02 - 9810 7812
Email pblock@arcom.com.au
Email frmilne@aol.com
Vol. 3 No. 53
May - June 2011
ERA Newsletter 2
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ECONOMIC REFORM AUSTRALIA
ERA is a non-party-political organization, formed in 1993 as a
union of the Economics Review Association and other economic
reform groups. Its long-term goal is to achieve a socially, environmentally and financially sustainable economic system. ERA’s
commitment to economic sovereignty seeks to return control of the
economic and financial system to the people. This requires full public
scrutiny and accountability for all economic processes and a
recognition that economic systems must serve the people for the
global good.
Membership of ERA is open to all who agree with its objectives
and overall philosophy, and may be effected by sending A$20.00 per
annum to the Treasurer (address below), together with address,
telephone and fax numbers, and email address. It would be
appreciated if new members would calculate the part of the year
remaining and remit the appropriate pro-rata amount, or
alternatively pay for the following year as well. All members are
entitled to receive the regular 32-page ERA newsletter, and are
entitled to vote at monthly meetings and participate in organized
activities.
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ERA Patrons : Professor Stuart Rees, Professor Frank Stilwell,
Professor Michael Pusey, Associate Professor Evan Jones, Associate
Professor Steve Keen, Professor David Shearman, Dr. Ted Trainer,
Dr. Shann Turnbull.
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ERA (NSW DIVISION) Inc.
We are committed to maintaining our links and meet twice a year.
All Meetings are normally held at 14 Gallimore Avenue, Balmain
2041. Details : Frances or Bruce Milne Ph. 9810 7812
ERA (SA DIVISION) INC.
Meetings are held on the last Saturday of the month at the
Conservation Council Centre, Level 1, 157 Franklin Street Adelaide.
Meetings start at 2pm with the policy recommendation forum before
official business begins. Details - John Hermann Ph. 8264 4282
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ERA Web Site Home Page: www.era.org.au
EMAILnetwork editor: Dr John Hermann: hermann@picknowl.com.au
Postal address: PO Box 505, Modbury, SA 5092, Australia
National Treasurer and Membership Officer: Victoria Powell :
PO Box 505, Modbury, SA 5092, Australia
Vol. 3 No. 53
May - June 2011
ERA Newsletter 3
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The Worship of Economic Growth
Doris Phelps ERA SA
Economists and politicians hold up "economic growth" as an ideal to
be aimed at, but this worship of growth leads to some contradictions.
One is that we welcome the invention of labour-saving devices, and
yet governments go to great lengths, and brag about, the number of
jobs they have `created'.
Another contradiction is that while most of us can see that many of
our resources are finite, the need for economic growth means that
they are being used up faster and faster, instead of being saved up for
the use of future generations.
"But", we are told, "If we don't have growth, there will be a
recession. There won't be enough money in the community to keep
business and government supplied." Apparently there is no way in
which we can have a steady-state economy. We must always seesaw
between "growth" and recession.
What is overlooked is that the reason we must have growth in order
to keep the money flowing, is the way in which our money supply
comes into existence. It comes into existence when it is issued through
the banking system to businesses for all forms of production
(manufacturing, retailing, farming, mining, etc.) as an interestbearing
debt. It is not issued by governments as many people believe, and as
the populace is encouraged to believe.
Those who believe that our money supply is created and issued by
the Government, need to answer some relevant questions. First, how is
this money then distributed into the community? Second, why then do
governments ever need to borrow and get into debt? Third, why do
governments need to tax their citizens to raise money for necessary
expenses?
When, as an adult, in an effort to understand the economic system, I
studied high school economics and sat for the exam, I obtained a
number of previous exam papers. I noticed that not one of them
asked the question, "Explain where our money supply comes from and
how it comes into existence". And yet the answer is there in the text
books, "Bank advances create bank deposits".
When I said to a young man who had studied economics as one of his
uni subjects, that banks create our money supply in the process of
lending, he refused to believe me. He believed, as most people do, that
banks lend money which has been deposited with them, so I told him
to look up his text books and read the chapter on credit creation. The
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next time I saw him, I said "Well?", and he said, "That's incredible!"
What really is incredible is that thousands of economics students have
gone through their courses without the significance of this fact being
explained. (No doubt because it is not included in exam questions!)
When America issued trillions of dollars to save its financial
institutions from collapse, anyone who talked about it, referred to
the American Government "printing money". Did they really have
visions of trillions of printed banknotes? How many Fort Knoxes
would have been needed to store them? The bulk of money these
days is not even figures in bank books. It is just electronic figures
somewhere in a computer, and can be created or transferred with
the click of a computer key. The important point is to realise who has
the privilege of clicking the key, and an even more important point is
that the institutions who click the key and create this money and lend
it to businesses and governments, have the added privilege of
charging interest. So, if a bank creates and lends $10 000 at 5%
interest in one financial period, the only place the repayment of the
loan plus the interest ($10500), can come from, is from the next
round of borrowing. Because, as money (credit) is being borrowed
into existence all the time, it is also being paid back and cancelled all
the time. This is the reason that there is a necessity for continual
economic growth. Each round of borrowing must be a little larger than
the previous one in order to repay the loan plus interest. But this
does not apply to just one bank. It describes the whole private
banking system and the creation of our money supply. (In this
respect, our economic system could be regarded as a giant Ponzi
scheme, needing ever more injections of credit to prevent the whole
house of cards from collapsing.)
Early forms of money came into use as a convenient means of
exchange to replace barter, and eventually came to be issued by
rulers and governments. If money were still to be issued by
governments (as, ironically, many people believe it is) it could be
issued interest-free, and the need for continual "growth ", could be
eliminated.
There have been some attempts by members of governments to
regain control of the money supply, such as Abraham Lincoln with his
issue of greenbacks, and Australian politician, King O'Malley, in
conjunction with the then Governor of the Commonwealth Bank, Sir
Dennison Miller, in financing the 1914-18 war effort (see D.J. Amos
"The Story of the Commonwealth Bank" or Peter Lock "The Saga of
the People's Bank"). But these sensible measures were nipped in the
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bud by those whose interests they threatened.
It is just amazing when you think of all the brilliantly clever things
that man can do in the way of electronics and medicine and space
exploration, that the short-comings and the contradictions of the
money system, which, after all, was invented by man, have not
been sorted out. The reason cannot be that man is not clever
enough to sort them out. The reason is, of course, that it suits some
very powerful people to keep things the way they are.
During the past 100 years the flaw in the system, and possible
ways to remedy it, have been pointed out in numerous books and
pamphlets, but unfortunately the above-mentioned powerful
people have control of the media. One early advocate who
received much publicity and then dropped right out of the news,
referred to it as a conspiracy of silence.
In recent times we have seen things happen that we would never
have believed possible. They have happened because individuals now
have the ability to communicate with thousands of other individuals
without depending on the controlled and controlling media. The
conspiracy of silence is now not so easy to impose. Perhaps there is
hope that, before all our finite resources are used up and our world laid
waste in this passion for "growth", voters will learn that there is a way to
avoid the need for extravagant growth, and will insist that their
politicians put it into practice.■
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A plea for brevity in understanding economics.
A quote from "Critics of Henry George" by Robert V. Anderson.
Professor of Philosophy Auburn. U.S.A. Quote. A book should be so
written that it's message can be presented in a single sentence, The
argument of "Progress and Poverty" may be stated thus "That the
natural land ought everywhere to be regarded as a community,
rather than as a private resource and that it's rental value should be
recaptured as public revenue by the Community, thereby eliminating
the need of any taxes upon productive enterprise.”
The root cause of so much of the world's misery, poverty, war,
unemployment and famine, can be traced directly back to this same
single abuse, i.e. the unlimited individual appropriation of the fixed
resource of land, the sole source of all life.
Henry George said. "I do not say that Justice is the greatest
quality in the Moral Hierarchy but it is the FIRST."■
From George Jukes ERA SA
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Do banks lend out their depositors’ funds?
John Hermann ERA SA
There is a large amount of misunderstanding and confusion in the
minds of both the general public and the business community about
the nature, operational status and legal status of banking deposits.
And it is my contention that much of this misunderstanding has
been created by the banking industry itself, as a by-product of its
ongoing (and largely successful) attempt to obfuscate and mislead
others about the mechanics of banking in the modern world.
Make no mistake that financial economists fully recognise the role
of commercial banking institutions in introducing new credit money
into the economy. This is money which is created out of nothing
when depositories expand their portfolio of financial assets. Most
of the money supply (money accessible to and used by the nonbank community) is bank credit money - that is, it has no tangible
existence and only takes the form of entries in the accounts of
bank customers. In the modern world those entries are digitized
using computers.
The role of reserves
Most of the reserve funds used within the banking system also
take the form of entries in creditary accounts - but in this case the
accounts are those of commercial banks with the central bank.
Currency (coins and notes) in the hands of the public make up
only a small fraction of the money supply, while currency in the
hands of bankers usually make up only a small fraction of their
supply of reserves.
In practice reserve funds are required for (a) net exchange
settlements at the end of each day (either by the central bank or
by a check-clearing agency answerable to the central bank), and
(b) maintaining sufficient liquidity to allow for spending,
advancement of loans, and withdrawals from banking institutions in
the form of legal tender (both "normal" withdrawals and withdrawals
under a stress scenario). None of these require, as a necessity, a
one-to-one correspondence between reserves and deposits.
There are never enough reserves in existence (under a normallyoperating fractional reserve banking system) to allow for an
exchange of bank credit money with legal tender. If a major run
on banks occurred, then the shortage of liquidity could only be
addressed by the rapid injection of a large quantity of new reserves
into the banking system, insofar as this is possible. And that would
amount to a complete abandonment monetary policy, probably for a
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considerable time-span.
Reserve funds in Australia
Whenever money is exchanged between two commercial bank
accounts via cheque or electronic transfer, an equal quantity of
reserve funds is transferred. This transfer is manifested as an
exchange of reserve funds in the accounts of those banking
institutions with the central bank.
The U.S. maintains a statutory requirement, meaning that
commercial banking institutions are obliged to hold reserves equal to
a prescribed fraction of their deposits. Australia, New Zealand and
Canada have no statutory reserve requirement. However they do
possess reserve funds, in the form of cash held in their tills and
vaults in conjunction with positive balances maintained in their
accounts at the central bank.
In Australia the balances with the Reserve Bank of Australia
are not called reserves, they are called exchange settlement funds.
In the process of implementing liquidity and risk management
practices, each Australian commercial banking institution effectively
determines the matching ratio - between reserve funds and demand
deposits - which is perceived to best meet its needs.
The Australian institutions authorised to create credit money,
known as ADIs (authorised deposit taking institutions), are the
registered banks, credit unions and building societies. All of these
are legally authorised to describe themselves as "banking
institutions" and their business as "banking".
What is "bank funding"?
The bankers' use of the term "funding" in regard to deposits is
often misinterpreted. The term "funding" more properly applies to
an ordinary intermediary, e.g. a finance company, which borrows in
order to lend at a profit. If the word "funding" is to be used at all in
the context of banking, I believe it should be applied either to the
acquisition of funds from financial markets (which funds are
subsequently used to purchase financial assets at a higher rate of
return) or to the acquisition of excess reserves. My objection to the
use of the word "funding" in the context of deposits is that it can
give the impression that commercial banks on-lend their customers'
deposits. However neither deposits nor reserves are ever loaned out
to the retail customers of banking institutions.
In regard to fractional reserve banking, commercial banks
obtain a substantial part of their stock of excess reserves from the
acquisition of interest-bearing deposits (that is, reserves are usually
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freed up whenever credit money is transferred from a demand
account to an interest-bearing account). This is a strong incentive
for banks to retain those deposits, since by doing otherwise they
would lose the excess reserves.
Assets and liabilities
A bank's financial assets are its loans, investments and reserve
funds, while its financial liabilities are its deposits and its
borrowings. The difference between the two categories are the
bank's net worth, or capital.
The essential requirements for an expansion of bank lending
are (a) adequate capital, (b) adequate reserves, (c) a willingness
to lend and (d) a willingness to borrow. "Adequate capital" refers to
an excess of capital over that required to accommodate the bank's
existing loans. "Adequate reserves" refers to an excess of reserves
over that required to accommodate the bank's existing deposits.
Neither borrowing from the financial markets nor the acquisition
of deposits change a bank's capital (because in each case the assets
and liabilities acquired are equal), however by expanding a bank's
capability to advance new financial assets - resulting in new
interest income - they indirectly generate the growth of new capital.
Security of deposits
Deposits are "secure" in the sense that they are a special class of
liability which - unlike funds borrowed from the wholesale markets must be held securely by the depository for the sake of the stability
of the payments system and the workability of the prevailing
monetary model. Banks also have an incentive to do so in their own
self-interest, because they would like to retain the excess reserves
which they obtain with interest-bearing deposits.
However, under a fractional reserve monetary system, deposits
are not necessarily "secure" in the sense of protecting depositors
from the risk of a bank's default on its obligation to pay all of its
depositors legal tender on demand -- unless adequate insurance
and/or government guarantees on deposits are implemented.
Is a deposit a borrowing?
Some arguments advanced for the proposition that bank
deposits are borrowings rely on a scenario where a customer
walks into a branch of a bank carrying either legal tender (cash coins/notes) or a precious metal like gold (coins/bars) with the
intention of making a deposit. Firstly, that is not how most
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deposits are made in the modern world. Overwhelmingly,
deposits take the form of (a) credit money transferred between
two bank accounts, or (b) newly created credit money, placed in
a demand account of a bank's customer when the bank advances
a loan to that customer. And secondly, for the small component
of bank deposits which involve the transfer of something
tangible, currency is the accepted form - not bullion. Moreover,
after that currency has been handed over to the custody of the
bank, it is no longer regarded by the central bank as being part
of the money supply. Any currency (coins and notes) held by a
depository forms part of its stock of reserves.
Thus all funds held in depository accounts consist of credit
money, and as such form the overwhelming part of the money
supply (currency held by the public form a much smaller part). It
is essential, for the workability and the stability of the monetary
system, that those funds should be held by the depository and
not on-loaned at the discretion of the bank. In practice - and
without a single exception - that is how it works, notwithstanding
any legal decisions which might imply the contrary. The simple
fact is that the payments system could not work otherwise, nor
could fractional reserve banking.
One of the characteristics of borrowed funds is that they
become the property of the borrower, and may be disposed of in
any way the borrower sees fit. That is demonstrably not a
description of deposited funds. I have never observed any
notices of withdrawal in my credit union account, made at the
discretion of the institution, in order to accommodate loans to
new borrowers.
Legal status of deposi ts
It has been argued (see, for example, J.H. de Soto: Money,
Bank Credit, and Economic Cycles, 2nd Ed., 2009) that a deposit
contract is different in nature to a loan contract. I reproduce
extracts from the early part of this book:
The Deposit Contract
Whereas loan contracts (commodatum and mutuum) entail the
transfer of the availability of the good, which shifts from the lender to
the borrower for the duration of the term, another type of contract, the
deposit contract, requires that the availability of the good not be
transferred. Indeed, the contract of deposit (depositum in Latin) is a
contract made in good faith by which one person - the depositor entrusts to another - the depositary - a movable good for that person to
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guard, protect, and return at any moment the depositor should ask for
it. Consequently, the deposit is always carried out in the interest of the
depositor. Its fundamental purpose is the custody or safekeeping of the
good and it implies, for the duration of the contract, that the complete
availability of the good remain in favor of the depositor, who may
request its return at any moment. The obligation of the depositor, apart
from delivering the good, is to compensate the depositary for the costs
of the deposit (if such compensation has been agreed upon; if not, the
deposit is free of charge). The obligation of the depositary is to guard
and protect the good with the extreme diligence typical of a good
parent, and to return it immediately to the depositor as soon as he asks
for it. It is clear that, while each loan has a term of duration during
which the availability of the good is transferred, in the case of a deposit
this is not so. Rather a deposit is always held and available to the
depositor, and it terminates as soon as he demands the return of the
good from the depositary
Resulting effects of the failure to comply with the essential
obligation in the irregular deposit
When there is a failure to comply with the obligation of safekeeping
in a deposit, as is logical, it becomes necessary to indemnify the
depositor, and if the depositary has acted fraudulently and has
employed the deposited good for his own personal use, he has
committed the offense of misappropriation. Therefore, in the regular
deposit, if someone receives the deposit of a painting, for example, and
sells it to earn money, he is committing the offense of misappropriation.
The same offense is committed in the irregular deposit of fungible goods
by the depositary who uses deposited goods for his own profit without
maintaining the equivalent tantundem available to the depositor at all
times. This would be the case of the oil depositary who does not keep in
his tanks a quantity equal to the total deposited with him, or a
depositary who receives money on deposit and uses it in any way for his
own benefit (spending it himself or loaning it), but does not maintain a
100-percent cash reserve at all times.
The Spanish criminal law expert Antonio Ferrer Sama has explained
("El delito de apropiadEndebida", Publicaciones del Seminario de
Derecho Penal de la Universidad de Murcia: Editorial Sucesores de Nogu
1945) that if the deposit consists of an amount of money and the
obligation to return the same amount (irregular deposit), and the
depositary takes the money and uses it for his own profit, we will have to
determine which of the following situations is the correct one in order to
determine his criminal liability: at the time he takes the money the
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depositary has sufficient financial stability to return at any moment the
amount received in deposit; or, on the contrary, at the time he takes the
money he does not have enough cash of his own with which to meet his
obligation to return the depositors money at any moment he requests it. In
the first case the offense of misappropriation has not been committed.
However, if at the time the depositary takes the deposited amount he
does not have enough cash in his power to fulfil his obligations to the
depositor, he is guilty of misappropriation from the very moment he takes
the goods deposited for his own use and ceases to possess a tantundem
equivalent to the original deposit.
The essence of this is that the receiver of a financial deposit, if
intending to do anything with the deposited money, is obliged to have
on hand an amount of money equal to the deposit. The implication is
that, under a fractional reserve monetary system, depositories which
attempt to on-lend their depositors' funds should be liable for criminal
prosecution for misappropriation of funds. The author favours the
original interpretation of the word deposit under Roman law. He
implies elsewhere that fractional reserve banking would have been
"fraudulent" under the Roman rules of law on these matters. Some
authors within the Austrian school of economics apparently prefer to
view fractional reserve banking as fraudulent in itself, as do authors
from other schools and disciplines. DeSoto is saying "the Romans got it
right", and advocates changes in the rules for banking.
Deposits are not on-loaned under the system as we have it. But this
is for a different mechanical reason than it would be under Roman law
without fractional reserves. Essentially an irregular deposit of money
in Roman law treated the depository as a "money warehouse" similar
to a grain warehouse or a warehouse of fungible money. A regular
deposit (enclosed in a tamper-proof container) and a loan (interest
paid meant the depositor implicitly authorized on-lending of the sum)
were also quite separate entities. We have modern equivalents using
slightly different terms and rules for all of these things. But the
modern legal interpretation of a deposit is not the Roman view. Today
fractional reserves are held against deposits, and contemporary
courts have tended not to treat this as a fraudulent or illegal
custom.
Does bank credit money represent base money?
To what extent does bank credit money represent base money?
Base money is the conjunction of exchange settlement funds (the
creditary component of reserves) and all currency (coins and notes
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held by both the public and by banking institutions). Thus base money
is money which has been created by the central bank.
Despite what many economics text books might claim, it is arguable
whether bank credit money is ever exchanged (or exchangeable) with
base money. When a bank customer makes a withdrawal and
demands payment in the form of currency, the monetary
mechanics is quite clear: (a) currency is exchanged between the
bank and the customer, (b) the bank's stock of reserves is reduced by
that amount, and (c) bank credit money is destroyed - by the same
amount. Neither base money nor the money supply are affected by
the overall transaction. There has been no exchange between bank
credit money and base money in this transaction. The word exchange
can be taken to imply that something was destroyed in one form and
created in the other form. In this case, bank credit money was
destroyed but base money was unaffected.
And the reverse argument applies in the scenario where a
customer takes currency into a bank branch and requests a deposit.
The counter-argument is that the scenario described above is not
complete. When a bank customer withdraws currency against an
account, the depository loses reserves. Other things being equal, that
would cause a shortage of reserves in the banking system and thus an
increase in the interest rate on central bank funds. To maintain control
of that interest rate, the central bank would feel obliged to inject
additional base money into the system to replenish the lost reserves.
As a result, this argument goes, base money normally would increase
when currency is withdrawn from a bank, and conversely.
However I don't believe that the operation of monetary policy is a
good argument in favor of the viewpoint that bank credit money is
inter-convertible with base money. For a financial system which
embraces the use of base money in the form of currency, one may
argue that
(a) although the operation of monetary policy is a possible reaction to
any (actual or likely) loss or gain of reserves by the financial system, it
has no direct connection with the transaction mechanics of deposits
and withdrawals;
(b) the gross withdrawal of currency is roughly counterbalanced by the
gross return of currency to the banking system, even if there is a net
growth or decline in currency over time (which I would expect to be a
small fraction of gross turnover) due to other factors such as
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population growth and seasonal preferences; and
(c) currency may be viewed as an intermediary, or catalyst, which
facilitates the ultimate movement of bank credit money between
different accounts (with a time delay) - so there is an association
between currency and bank credit money - rather than an interconversion. ■
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Debt Sinks Revisited
Denis Dorney, ERA Dunedin New Zealand
In the last edition of the ERA Newsletter, Richard Giles
commented on my previous article on Debt sinks but appears to
have completely misunderstood it even though I thought the
logic of my argument was simple. Is it possible, when space allows,
to publish the attachment which I hope clarifies the issue.
Incidentally the article refers obliquely to the need for clear
definitions. Your article on negative money values emphasises the
importance, since, if people realised that money is issued as a
negative value, there is absolutely no way that it can be cancelled,
or acquire an intrinsic value. It therefore annoys me that, even
within ERA, some correspondents talk as if money is merely a
symbolic token. It is much more that that.
I think it is important that ERA not only discusses but comes to a
definition of what money is. I would like to contribute such a debate
and also to a debate on land tax and ownership, which is where I
was hoping my article on debt sinks would lead.
I was initially pleased that someone chose to respond to my
article on debt sinks, because I think the concept is important, and
was then bewildered that Richard Giles had written a learned thesis
to reject my definition of 'economic rent', a phrase that I did not
mention, even less define, and would not have used even if I
understood it.
All too often the layman is told that economics is too hard for his
little brain and he should leave it to the experts. Events of the last
few years (and ongoing) show there are no experts and the layman
has a right and duty to get involved in economic debate, so it
bothers me immensely when people use esoteric jargon, which
exclude him, sometimes quite deliberately, from the discussion. Dr
Bill Mitchell's article on deficit spending was totally jargon free and
was, I believe, understandable to all who read it, whatever their
views on the matter and should set a standard.
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The essential point in my article was that if the value of all goods
or commodities could be measured purely in terms of the labour
input, which can only be altered slowly, and since the quantity of
such goods cannot be increased rapidly, especially in an over-heated
economy, then there is little opportunity for banks to dump large
amounts of debt into the economy because of the time lag in
dramatically changing either the value or quantity of goods.
Booms and busts could not then easily happen. The trouble is
that debt sinks (commodities which are not measurable by their
labour input) do exist, the value of land being one of the most
important ones. Rent, economic or not, is irrelevant to the logic of
the argument. However, as the writer of "Henry George and good
government" would be quick to point out, land tax is one of the
possible solutions.
I still hope that someone will agree, or not, with my argument
because the ramifications are quite fundamental to monetary
reform.
Lastly, thanks for sending my newsletter by post but I am quite
happy to receive it by email, if that is not a problem, since it saves
you money and I can more easily forward bits of it to other likeminded people. I had tried initially to send this by email to Peter
Lock unsuccessfully. The error message implied a wrong address. ■
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This short article by Dennis Dorney, in response to the criticism
by Richard Giles which appeared in the most recent (March-April)
issue of the ERA Newsletter, points out that Dennis did not mention
the term economic rent, which is correct. However I mentioned the
term in my introductory remarks, because I identified "debt sinks"
with financial and real estate asset bubbles. Richard rightly pointed
out that - in classical economics - economic rent is not a super
profit, but a surplus production due to location. Although this might
be technically correct, I would prefer to define economic rent in
terms of the generation of economic value and wealth independently
of labour input and human productivity. This seems to align with
the views of Dennis. Thus the component of interest received which
exceeds the level of inflation would fall within this definition, and
those who receive such interest income may be described as the
rentier class. John Hermann.
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Vol. 3 No. 53
May - June 2011
ERA Newsletter 15
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Economic Reform Australia (ERA)
MEDIA RELEASE Wednesday, 12 April, 2011
Nuclear energy fails the cost effective test
A range of items must be considered when comparing the overall
costs of nuclear and other technologies as sources of electrical
power. Modern nuclear fission power plants are horrendously
expensive to construct. We are talking about an order of magnitude
higher than comparable plants which use other technologies. Not to
mention the radioactive materials storage and transport costs, and
the decommissioning costs.
Also largely hidden from view is a need to use fossil fuels in
connection with construction, maintenance and decommissioning of
the reactors and other infrastructure. Hence it is simply untrue to
assert, as the nuclear industry often does, that nuclear power makes
no contribution to greenhouse gas emissions into the atmosphere.
Moreover, there is also a hidden effective insurance cost, which
thus far has not had to be borne by the nuclear industry for
accidents of the type we are now witnessing in Japan. In every
country the size of the required coverage has been limited and in
the event of an accident the general public has been required to
carry the financial (to say nothing of the health) risk of a serious
accident. Regardless of the final expense of coverage, the “openended” liability for governments remains elusive.
‘Most governments have effectively hidden the reality of costs
from the public’ said economist Dr David Robinson, of the Oxford
Institute of Energy Studies.
This raises the question: if the nuclear industry had to pay the full
cost of insurance against these catastrophic accidents, what would
be the impact on the consumer price of nuclear generated
electricity? The answer to this question is becoming increasingly
clear to us. ■
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For an harmonious social order, it is not a question of individual
rights preceding the demands of society, nor who comes first or last,
the individual or the community, the part or the whole. Parts are
only parts when they are parts of a whole. Otherwise, they are
merely accumulations of bits of stuff. The parts of the whole and the
whole itself together come both first and last. P. Lock.
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Vol. 3 No. 53
May - June 2011
ERA Newsletter 16
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Sustento Institute:
A New Financial Deal for Christchurch
By Lowell Manning and Raf Manji
CHRISTCHURCH RENEWAL AND NATIONAL DEVELOPMENT
There’s a much better way to pay for Christchurch’s renewal and
for national development too. It’s a win-win for the government and
the people of New Zealand.
While the government discusses borrowing yet more debt and
bringing in a new tax to pay the costs of rebuilding Christchurch we
propose issuing new cash E-notes to do the same job. E-notes are
exactly the same as the bank notes we all carry in our wallets and
handbags except that they exist only in bank accounts.
The New Zealand Reserve Bank needs no authority to issue new
cash. When the commercial banks want cash they buy it from the
Reserve bank and pay for it with a cheque issued against their own
accounts. The Reserve Bank deducts its costs of producing the cash
and passes the profit to Treasury. The profit, otherwise known as
seigniorage, is most of the face value of the currency, so selling
cash improves the Government’s accounts.
That already happens every day. There is no reason at all why
the Reserve Bank cannot issue new money in the form of electronic
cash or E-notes using exactly the same method. Instead of selling
the notes to the banks, the Reserve Bank simply gives the profit, or
face value of the electronic E-notes to the Treasury. The issue gets
treated in every other respect just like an "ordinary" cash issue.
The economic term for this is quantitative easing which has been
used very widely around the world since the Global Financial Crisis
began a few years ago, but not in New Zealand and, unfortunately
for the rest of the world, not in the form we are proposing. In major
economies like Japan and the USA, this process has been carried out
by buying securities from banks in return for new money. This has
improved the balance sheets of the banks but not helped the
economy.
In our proposal the Treasury receives the E-notes from the
Reserve Bank and then it simply disburses them in payment for
goods and services to improve New Zealand’s investment in
infrastructure, health and education, including earthquake relief for
Christchurch. The process is no different from any other Government
spending except that it is paid for using cash instead of using debt
and taxes. The money could sit in a Government Infrastructure
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ERA Newsletter 17
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account until required.
The important point is that the new money goes directly into the
economy and not onto the balance sheets of the banks. After the
Government has spent the E-notes they will pass into the bank
accounts of workers and businesses. The E-notes will then become
part of the banks' reserves that increase the liquidity of the banking
system without significantly increasing its lending capacity.
By using E-notes the Government will be doing the job the New
Zealand banking system should be doing, but isn’t: freeing up the
money we need to get the country moving again and get people
back to work. The banks have failed to do their job in part because
they are struggling to prepare to comply with stricter lending
requirements under the new international Basel III banking
regulations. That’s largely why they are being so tough on new
lending. While the banks fiddle with their regulations the New
Zealand economy and the economies of many other countries are
being destroyed because there is not enough money available to get
people working and to increase incomes and consumption.
An E-note injection of at least NZ$5b is unlikely to be inflationary
with current unemployment at close 7%. Our modelling suggests
$5b represents about $6.5b of new GDP, which would reduce
unemployment by around 3%. The E-note cash injection will help
get the country moving again. It will reduce the Government fiscal
deficit by, at the very least, reducing dependency on social welfare
as well as by providing about NZ$2.5b in new tax revenue. The new
money will fund new infrastructure projects and investments in
health and education and assist the rebuilding of Christchurch. It will
also save at least $200m in interest the government would
otherwise have to pay if it were to use NZ$5b of new debt instead of
the electronic cash E-notes we are proposing.
The rate of E-note injection will allow its effects to be
continuously monitored. If there are no major problems the E-note
issue should be extended to include retiring NZ$ denominated
government debt as it matures. That will quickly reduce the
Government’s debt burden. Allowing the Government to go back to
the failed old ways of tax increases and new debt will simply dig the
country further into the economic hole that has been growing for the
past thirty years or more. For further information please contact:
Lowell Manning 04 298 6890 manning@kapiti.co.nz
Raf Manji 0274 185 119 raf@sustento.org.nz
26/2/11 ■
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Vol. 3 No. 53
May - June 2011
ERA Newsletter 18
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RECENT AUSTRALIAN ECONOMIC TRENDS
By David Keane, 14/March/2011
PO Box 582, Gosnells 6110, WA
Email: keane@nw.com.au
Recent Trends
Let us first view an abridged table of recent liabilities as a % of GDP.
Date
GDP
$Billions
F Equity
%ofGDP
F Debt
%ofGDP
F Liab
%ofGDP
Dom Cr
%ofGDP
TotLiab
%ofGDP
AnnInc
%ofGDP
Jun-06
1150.644
45.7
77.6
123.3
123.3
246.6
1191.654
55.4
87.4
142.8
137.4
280.3
33.7
1237.320
51.5
92.1
143.7
150.1
293.8
13.5
1255.241
47.0
98.5
145.5
152.3
297.8
4.0
1258.077
53.8
97.9
151.7
152.4
304.1
5.3
1266.203
55.4
99.8
155.2
152.0
307.2
6.9
1273.610
55.9
99.8
155.7
152.7
308.4
10.8
1283.795
52.0
103.3
155.4
152.6
307.9
10.1
1292.333
54.4
101.0
155.5
152.2
307.7
3.6
1300.986
57.4
98.0
155.4
152.1
307.6
0.4
Jun-07
Jun-08
Jun-09
Sep-09
Dec-09
Mar-10
Jun-10
Sep-10
Dec-10
The first thing to note, is that Australia’s total liabilities as a % of
GDP has been stationary at 307% to 308% for over a year now. This
suggests very intentional government policy. It is a vast relief from
the bad old days when the Howard/Costello government was
increasing total Australian liabilities by 30% to 35% of GDP each
year. Under a Liberal government, the Australian economy was run
on exponentially expanding and uncontrolled debt. Yet the Liberal
Party economic platform seems just as debt driven as under the
Howard government. The basis by which the Liberals are able to
slam the present Labor government over new green taxes, is
essentially that the Liberals want the Australian economy to return
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to the running on increasing debt model. Thankfully, I believe the
global depression will hit before Australians go again to the national
polling booths. This will be an extremely hard lesson, but something
has to happen to bring the real economic issues to the forefront of
public debate.
The problem is, that by the Labor having a steady policy to not
increase total liabilities as a % of GDP, this does absolutely nothing
to offset the disastrous consequences of the inevitable global
economic collapse, global depression and crashing of the
commodities market. If the Australian government wants to offset
the disastrous consequences of a global commodities market
collapse, then we should have been reducing the Australian foreign
debt by 4% of GDP each year. But this has not happened and we
can tell it is not going to happen until a global economic collapse
brings new issues onto the public radar. When the global economic
collapse does happen therefore it will mean extreme pain for all
sectors of the Australian economy. We can no longer avoid that
pain. We can only lift up the true economic issues so that our
present youth generation have hope of living in a world where
common sense prevails and our economy becomes based upon
sustainable economic principles (in contrast to the present debt
driven economic principles).
When Will the Global Economic Collapse Happen?
The global collapse should have happened last year, when the
Greek economy was close to bankruptcy. But the economic spin
merchants have somehow persuaded the global public that good
(increasingly debt driven) times will continue.
Now both Greece and Ireland have massive loans from the
European Union, which only exacerbates the overall debt problem in
Europe. The crunch will come soon when the larger nations of Spain
and Italy approach bankruptcy. Many economic commentators
believe that their national economies are too large for the European
Union to bail them out, with the consequences that the Euro itself
would then go into free downfall.
Then there is the problem that the US economy has never really
pulled itself out of recession. They is no longer in a technical
recession, but the US economy is so sluggish and most States highly
indebted that a small negative factor could now throw the global
stock markets into panic selling. If the inevitable European debt
crisis does not bring that about, we have the Chinese dampening
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their over heating policies and the price of oil is starting to go
through the roof with war and turmoil emerging in the Middle East.
The debt promoting spin merchants are still holding the public
confidence, and it will take perhaps another six months for the
public panic to really set in. I look now to October 2011 as the time
for possible global economic collapse. I am waiting for the first
tangible sign of collapsing public confidence before I release my
second letter to Senators (and independents and Greens in the lower
house).
From April 2002, I have been producing analyses every three
months, and sending these assessments out in a quarterly
publication Recent Australian Economic Trends which is
available by email to anyone contacting me and requesting to
be placed upon the email distribution list.
Any assessment of Australian financial management and bank
regulatory policy, must begin with an assessment of the current
state of Australia’s financial affairs. In particular, it is vital that we
analyse such significant national financial indicators as Gross
Domestic Product, Gross Foreign Equity, Gross Foreign Debt, Gross
Foreign Liabilities, Domestic Credit, and Total Australian Liabilities.
Figures for these data are available on Internet at the website for
the Reserve Bank of Australia (http://www.rba.gov.au/statistics/ ).
In this article, I have taken quarterly data from June 2006. You can
confirm these data by looking up Gross Foreign Debt, Gross Foreign
Equity and Gross Foreign Liabilities on Reserve Bank table H4,
seasonally adjusted Domestic Credit on table D2, and Gross National
Product on table G10, and Net Foreign Liabilities (Equity and Debt)
from table H5.
These figures are provided by the Australian Reserve Bank every
quarter. The Australian Reserve Bank has on 3/March/11 published
the December 2010 figures for GDP. So now we have available all
the information for all these statistical categories up until the end of
September 2010. I simply rearrange the Reserve Bank figures which
helps with comparison and trend analysis, and so it can be easily
understood by the lay person. I add together the figures for Gross
Foreign Equity, Gross Foreign Debt and Domestic Credit to come up
with an overall figure of “Total Australian Liabilities”.
These three-monthly analyses tend to forecast turbulent weather
ahead, much in the manner of a barometer. [Other relevant tables
and comments can be obtained from David at above address.] ■
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Vol. 3 No. 53
May - June 2011
ERA Newsletter 21
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Limits of public assistance
This article has been extracted from a very recent blog by
Prof Bill Mitchell (University of Newcastle, NSW).
This is the part of the blog where I have to be sensitive. The
same situation occurs after a major bushfire which regularly is the
case in Australia. I recognise that economists (even the most
progressive of our species) take a particular view of things which at
times, might seem cold and calculated to those who live in the world
of emotion.
I recognise that many people have died in the floods. Sure, there
is some criticism of Australia that we are being insensitive to the
Brazilian catastrophe which in numerical terms is infinitely more
severe than our floods. The news coverage of the Brazilian situation
has been dominated by the Queensland floods that is true.
There has also been fairly detailed coverage of the Latin American
disaster.
But when the water is rising in your own backyard and people are
being airlifted off roofs then the attention does get focused locally. I
don't think we should feel guilty about that. I also recognise that
people to the north of me (Queensland, Northern NSW) and now
people to the south of me (Victoria) have been hit by very
severe floods which have cast aside their dreams and the more
concrete realities - their houses and all that was within them. So
empathy for the troubles that those who have lost their loved
ones and had their material lives compromised is important at all
times. Especially now that it turns out that the insurance industry is
once again taking the technical route to minimise their exposure - as
always.
In the mountain areas around Melbourne where I grew up there
are very salubrious houses (within commuting distance of the city)
and the bush amenity is gorgeous. The residents enjoy larger blocks
of land, an ambience with trees, peace, etc. The physical amenity
delivers rewards to these residents that are not enjoyed by other
people in the city. And no-one forces them to build houses in these
areas.
The reality is that bushfires ravage these areas from time to time
but when a major fire goes through there, considerable loss of life
and property is normal. At that point, everyone expects the public
sector to bail out the homeowners. The robustly private citizens thus
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do not take all the risk of their own decisions.
I always thought that if the insurance industry had any purpose it
was to assume this risk. The reality is different and the private
insurance industry does all it can to shed this risk - often with dodgy
small print in contracts that most of us cannot understand. And
when disaster strikes the private benefits give way to social bailouts.
There is a case to be made for a national insurance body to offer
low cost but full coverage insurance for all citizens. Those who live in
disaster prone areas would pay the premium commensurate with the
risk and not expect public handouts when disaster strikes.
I find it inconsistent that those who eschew government action
for the disadvantaged and the poor in normal times are always
ready to accept government aid during times of disaster for the
consequences of what are essentially (but not always) poor private
decisions.
Conclusion
So a rising budget deficit is required to meet this national disaster
and that will reflect responsible fiscal leadership from the Federal
government.
Anyway whoever wants offsetting (more or less) tax rises and/or
spending cuts elsewhere does not understand how budgets work and
what their role is. Unfortunately, I suspect the government itself is
in that camp. ■
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Tackle Big Coal at your own risk
Clive Hamilton
February 3, 2011 The Age
As alarm among scientists about runaway global warming
intensifies so do efforts by the coal industry and its backers in
government to stifle citizen protests.
This week in Newcastle campaigners from the Rising Tide group
face prosecution for a protest last September that shut down for a
day the city's two coal export terminals operated by Port Waratah
Coal Services (PWCS), a company owned by the mining giants Rio
Tinto and Xstrata.
Those who engage in civil disobedience expect to face the legal
consequences, but PWCS has upped the ante by asking the police to
prosecute seven activists under victims-of-crime laws, demanding
they hand over hundreds of thousands of dollars.
In an Orwellian inversion of the meaning of words, corporate
goliaths whose activities threaten the conditions of life on earth -
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ERA Newsletter 23
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whose daily business is already, according to the World Health
Organisation, contributing to tens of thousands of deaths around the
world each year - claim they are being victimised.
The coal industry's action is designed to have a chilling effect on
protests against the burning and export of coal. The action by PWCS
has all the hallmarks of a SLAPP, a Strategic Lawsuit Against Public
Participation. The purpose of a SLAPP is to frighten citizens with the
loss of their houses and get them bogged down for years in court
proceedings. Legal costs can amount to hundreds of thousands of
dollars, chickenfeed for a big corporation but bankruptcy for
ordinary citizens.
The intimidatory effect can be paralysing. One favourite tactic is
to deliver writs on Christmas Eve so those who receive them have to
sweat for a fortnight before they can get legal advice that may allay
their fears.
A pattern is emerging in efforts to deter protests against
Australia's coal industry. After meeting with state attorneys-general
in December 2008, Martin Ferguson, the federal Energy Minister
(and climate science denier), urged state governments to toughen
up laws to impede protests against ''energy infrastructure''.
Ferguson seems to have been spooked by opposition to the
Hazelwood power plant in Victoria (the dirtiest in the country) and
by the acquittal of six Greenpeace activists over a protest at
Kingsnorth power station in Britain. The jury accepted they acted to
prevent greater harm. Since the meeting with Ferguson, state
governments have begun passing draconian legislation aimed
specifically at deterring protests against the coal industry.
The Labor government in Victoria introduced harsh new laws
against climate change protests, with up to one year's jail merely for
standing in the grounds of a coal-fired power plant, and two years
for anyone painting a slogan on a smokestack. The Kingsnorth
defence of ''lawful excuse'' can no longer be made in Victoria, no
matter how much damage Hazelwood is causing to the climate.
In Queensland, the Labor government is considering similar laws.
NSW has not yet followed the Victorian example, but since the
meeting between Ferguson and the attorneys-general, climate
activists have several times been threatened with victims'
compensation claims.
An adverse court decision in Newcastle this week would set an
alarming precedent not just for climate activism but for all protests
in NSW. A corporation experiencing any disruption due to protests
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would be emboldened to go after the assets of protesters.
A democracy in which citizens are afraid of going to jail for
peacefully protesting or losing their homes because of intimidatory
lawsuits is no democracy at all. Yet Labor governments have been
as willing as the Howard government was to silence dissenting
voices, especially in defence of the energy industries.
Victims' support legislation was designed to compensate victims
of violent crimes, including families of homicide victims, not to
provide global corporations with a stick to beat their critics.
The average amount received by a victim of crime in NSW is
$12,300. For having its coal loader shut down for a few hours, PWCS
is demanding the courts award the company $525,000.
Big Coal has taken the gloves off and has signalled it will use
every device available to defend its continued profitability. Its
attitude seems to be that if the rights of citizens are collateral
damage, then so be it. ■
Clive Hamilton is professor of public ethics at Charles Sturt University.
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John Coulter questions the cost of nuclear generated electricity.
So much has been claimed for the cheapness of nuclear generated
electricity and in recent times so much attention has been paid to
what is happening in Japan. However little coverage has been given
to the fact that across the world nuclear has not had to carry the
cost of insurance against the sorts of accidents that we are now
witnessing in Japan. In every country the size of the required
coverage has been limited and in the event of an accident the
general public is required to carry the financial (to say nothing of the
health) risk of a serious accident. The attached paper could not be
downloaded. It gave a brief run-down of the situation in a number
of countries and also comments on how this unsatisfactory situation
is often kept from public attention. It raises the question: if nuclear
had to pay the full cost of insurance against these catastrophic
accidents what would nuclear generated electricity cost?
It also raises the interesting question of how does one estimate
the acceptability of a technology in which the risk of an accident
happening may be very low but the consequences if an accident
does occur can be enormous and very long lasting. For example,
hundreds of square kilometres of country around Chernobyl are still
off limits and will remain so for decades or centuries. It's like asking
the mathematical question: zero x infinity = ? ■
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Vol. 3 No. 53
May - June 2011
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Fukushima Fallout
Posted by Dave Elliott on April 10, 2011
After the Fukushima disaster, Electricite de France CEO Henri
Proglio said ‘Nuclear is a formidable source of energy.’ Maybe a
nuance there lost in translation? Regardless, views do seem to have
changed. In a public opinion poll in France just after the Japanese
disaster, 55% said they were not in favour of a proposal by France’s
main green party to drop nuclear power, but 42% were in favour.
This in the most pro-nuclear country in the world.
As you might expect, in anti-nuclear Spain a 40-year old Spanish
plant built to the same design as Fukushima’s reactor 1, became
engulfed by calls for a shut down. In anti-nuclear Germany all the
old plants were shut and there were massive anti-nuclear
demonstrations, a swing to the Green Party in the regional elections,
and talk of closing all the plants by 2020, a position now backed by
the German Association of Energy and Water Industries (BDEW).
And even in allegedly pro-nuclear UK, support for nuclear fell 12%,
from 47% to 35%. A safety review followed in the UK, and stress
tests were carried out across the EU. Meanwhile China halted all new
nuclear projects and initiated a review of policy..
Given that the core containments seem mostly to have held so
far, the Fukushima accident wasn’t seen as being of the same order
as Chernobyl, although it did involve several reactors, rather than
just one, as well as several spent fuel storage ponds, including
material stored above the reactor, some of which was evidently
scattered around. But we have yet to see what exactly the final
impact will be. [Changed now to the same order as Chernobyl. Ed.]
At the time of the quake/ tsunami in Japan, there were 3,400
tons of spent fuel in seven storage pools at Fukushima, some of it
still very active, plus 877 tons of active fuel in the cores of the
reactors. That totals 4,277 tons of nuclear fuel at Fukushima - the
storage pool above reactor 4 alone contained 135 tons of spent fuel.
For comparison, the Chernobyl reactors had about 180 tons when
the accident occurred in 1986 and about 6% of that was released
into atmosphere. We don’t know yet what percentage was released
in the air, land and sea at Fukushima - it will presumably be much
lower in percent terms - but leakages are still ongoing.
Chernobyl recounts
Although there were deaths due to the explosions, so far no
radiation deaths have been reported at Fukushima, and some
commentators have argued that it will remain so. This hopeful view
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was buttressed by a new report from the United Nations Scientific
Committee on the Effects of Atomic Radiation published in February,
which says that the known death toll from Chernobyl was just 28
fatalities among emergency workers, plus 15 fatal cases of child
thyroid cancer by 2005, some of which may have been avoided if
iodine tablets had been taken (as they have now in Japan). And it
says ‘To date, there has been no persuasive evidence of any other
health effect in the general population that can be attributed to
radiation exposure’. It doesn’t speculate about future deaths
‘because of unacceptable uncertainties in the predictions’, but
previous IAEA/WHO reports have talked of around 4000.
For a very different view see ‘Chernobyl: Consequences of the
Catastrophe for People and the Environment’ published in 2010 by
the New York Academy of Sciences and authored by Russian
biologist Dr. Alexey Yablokov; Dr. Alexey Nesterenko, a biologist
/ecologist in Belarus; and Dr.Vassili Nesterenko, a physicist and at
the time of the accident director of the Institute of Nuclear Energy of
the National Academy of Sciences of Belarus. Its editor is Dr. Janette
Sherman, a physician and toxicologist involved in studying the
health impacts of radiation.
It concludes that, based on records now available, some 985,000
people died, mainly of cancer, as a result of the Chernobyl accident,
between when the accident occurred in 1986 and 2004. More
deaths, it projects, will follow.
High estimates like this raised some hackles, including some
bitter comments from the Guardian’s George Monbiot, a new convert
to the nuclear cause. However, there are clearly differing view on
the impacts of radiation, one view being that some low level
emitters, if ingested/breathed in, can cause much more damage
than is usually assumed. A review of the New York Academy’s report
in the journal Radiation Protection Dosimetry .concluded that it
makes clear ‘that international nuclear agencies and some national
authorities remain in denial about the scale of the health disasters in
their countries due to Chernobyl’s fallout. This is shown by their
reluctance to acknowledge contamination and health outcomes data,
their ascribing observed morbidity/mortality increases to nonradiation causes, and their refusal to devote resources to
rehabilitation and disaster management.’
The debate over numbers will no doubt continue. One might
hazard a guess that the truth is somewhere in between the
extremes. For example the independent 2006 TORCH report
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estimated the final death toll as likely to be 30,000-60,000, which
seems more credible. www.chernobylreport.org
However it’s clearly an area of continuing dispute, which will no
doubt become even more fraught given the estimate by Prof. Chris
Busby that there could eventually be over 400,000 deaths from
Fukushima: http://llrc.org/fukushima/fukushimariskcalc.pdf
While predictions like this may be provocative, the reality seems
to be that we just don’t know for sure, or at least can’t agree, and
it’s that uncertainty that may be the most worrying thing to many
people. What next?
We now await the various safety reviews and policy responses
Some other countries have already moved quickly (some say too
quickly) to change, or reassert, existing policies. But it seems
unlikely that the UK government will make radical changes. Although
he accepted that there could now be more financial problems,
Energy Secretary Chris Huhne was still upbeat. He told the House of
Commons on 24th March ‘We have to put an emphasis on safety.
That is why we commissioned Dr Mike Weightman’s report’.
However, although he said that ‘we will have to wait to see its
results and base the debate on the facts’, he added ’ I do not
anticipate that it will lead to enormous changes’. And later on he
was quoted as saying ‘There is no intention for us to do anything but
learn the lessons… for example, about the back up for cooling.’
That seems to be the very minimum necessary, and even that
would surely require the government to reconsider the conclusions
of its ‘Nuclear Justification’ exercise: the still to be completed
‘Generic Design Assessment’ for the new plants has already been
extended. One thing seems clear, if we still do go ahead, with all the
proposed new plants and their waste stores being at sea level on the
coast, the extra cost of improving safety, tightening regulation and
upgrading insurance cover and evacuation procedures could be
large.
Huhne has said that: ‘We can do the 80% reduction in emissions
by 2050 without new nuclear, but it will require a big effort on
carbon capture and storage and renewables.’ It could well be that
the balance has now tipped and that this alternative approach, with
energy efficiency also included, could be preferable and could cost
less. U.S. Energy Secretary Steven Chu recently claimed that wind
and solar may compete with fossil fuels, without subsidies, within
the next decade. Can the same be said of nuclear? ■
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Vol. 3 No. 53
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Resilience and global financial governance
Ross Buckley is Professor of International Finance Law at the
University of New South Wales (This chapter appears in Resilience
and Transformation: Preparing Australia for Uncertain Futures.
Steven Cork (Editor). CSIRO Publishing, Melbourne.)
Resilience is generally seen as a positive attribute that should be
enhanced. When a system is dysfunctional and needs to change its
structure and identity, however, resilience can be a negative. As this
chapter illustrates, our system of global financial governance works
to benefit the elites in international banks and developing countries
at the direct expense of the common people in those countries. The
system is deeply unfair and dysfunctional and displays great
negative resilience. This chapter analyses ways in which this
negative resilience could be reduced.
Introduction
A range of concepts is commonly used in analysing the global
financial system, including stability, volatility, efficiency and others.
Resilience is not among them. Yet we have a very resilient global
financial system. It is unstable, volatile, narrowly efficient and highly
resilient, principally in the negative sense of being resistant to
change.
Resilience is the capacity of a system to withstand external
shocks and retain its essential characteristics; its identity. Generally
resilience is a positive feature. But when a system needs to change
fundamentally and be restructured, resilience can be a marked
negative. The global financial system is somewhat functional from
the perspective of OECD nations and the international commercial
banks, and quite dysfunctional from the perspective of developing
countries. It displays a high degree of negative resilience.
Even the global financial crisis (GFC) has so far led to little
substantive change in the system that produced it. The GFC has led
to higher capital requirements, particularly for trading, tighter
liquidity controls, closer supervision and restrictions on bankers’
bonuses, but none of these changes are fundamental. If one
considers how profoundly different the global financial system is
today from what it was 30 or 40 years ago, these changes are
merely cosmetic. Even the macro-prudential regulatory function in
which systemic risk across the financial system is to be assessed
and monitored, which is to be carried out by institutions such as the
new European Systemic Risk Board, is but a belated example of
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regulation beginning to catch up with market changes that are
decades old.
The only real change to the system as a result of the GFC has
been the handover of economic coordinating authority from the G7
to the G20 nations. Comprising 19 nations and the European Union,
the G20 represents 85% of global gross domestic product (GDP),
80% of world trade and two-thirds of the world’s people. In addition
to the G7 nations, it includes Brazil, China, India, Indonesia, Turkey,
Australia, South Africa and others. This is an important change.
Brazil, China and India not having a voice in economic policy
coordination was becoming increasingly ridiculous.
This change, however, is yet to result in any fundamental
changes to the system, in part because the G20 is merely a
gathering of national leaders; it is not a formally constituted
international organisation and lacks the capacity to enforce its
decisions.
So why is a system that, for so many of its participants, is deeply
dysfunctional so resilient? The answer lies in whom the current
system serves and the general paucity of knowledge, outside those
it serves, about how it works and its effects.
The strong negative resilience of the global financial governance
system
Resilience science teaches us that strongly resilient systems have
strong feedback loops. This concept of feedback loops, developed in
analysing systems, explains much of the resilience of our global
financial system. The feedback loops in global financial governance
show that the system tends to reward the international commercial
banks and the elites in developing countries at the expense of the
common people in the debtor countries. A few examples will suffice.
After the debt crisis struck in 1982 a way was needed to allow
many hundreds of creditors to negotiate with many hundreds of
debtors in each debtor nation. The commercial banks appointed
steering committees comprising representatives from six to eight
banks to represent all creditors and persuaded the sovereign debtor
to also represent all other debtors within its jurisdiction (including
state
governments,
state-owned
industries
and
private
corporations). This was sensible. The banks, however, went further
and persuaded the debtor nations to bring all debt incurred by all
entities within their jurisdiction under their sovereign guarantee.
This was completely unnecessary and, from the perspective of the
common people in the debtor nations, appalling. The inevitable,
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massive shortfall between what the sovereign now owed the bank
creditors and what it could recover from the original debtors became
a charge on government revenues. The people paid in reduced
services so that the foreign banks could receive a free credit
upgrade on most of their assets.
Likewise in Indonesia after the Asian economic crisis, the
International Monetary Fund (IMF) and the foreign commercial
banks insisted that the Republic of Indonesia assume the obligations
of the local banks to foreign lenders and then seek to recover the
funds from the local banks; by selling their assets if necessary. This
again proved a difficult task and only about 28% of the total
liabilities assumed have been recovered (Asian Development Bank
2009). Almost three-quarters of the costs of repaying those foreign
loans has thus been borne by the Indonesian people. Yet there was
no reason for Indonesia to assume responsibility for these loans.
The market mechanism, if left to work, would have seen many of
these Indonesian banks placed into bankruptcy by their Western
creditors who would have received a proportion, presumably in the
order of 28%, of their claims in the bankruptcy proceedings.
Instead, insolvent local banks were put into bankruptcy by
Indonesia, the creditors were repaid in full and the Indonesian
people bore most of the cost of that repayment. The funds to repay
the creditors came from the long-term loans organised by the IMF
and invariably were described as bail outs of the debtor nations. Yet
these loans were required to be used to repay outstanding
indebtedness; so the bail outs were of the foreign banks. In
Indonesia, the IMF coordinated a restructuring that socialised
massive amounts of private sector debt (Buckley 2002).
Similarly, the centrepiece of the G20 response to the GFC in April
2009 was a US$500 billion additional credit facility for debtor
nations. The conditions required to be eligible for these loans,
however, exclude virtually all African and most Latin American
nations. While it is not apparent on the face of the conditions, they
are carefully crafted so that most of these loans will go to their
intended destination; the East European countries. The German
banks are heavily over-exposed to these countries. So this
additional credit facility, in large measure, is designed to bail out the
German banks. The funds lent come from the G20 nations, which
know they will be repaid; official credit always is. The loss will fall on
the people of these Eastern European nations, who will labour under
massive debt burdens for decades to come. Once again normal
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market processes, which in Eastern Europe would have led to
German banks incurring large losses on their ill-judged, excessive
lending to the region, are abrogated to prefer foreign banks at the
direct expense of the people of the poorer nations.
The benefits of our system of global financial governance to the
commercial banks are thus manifestly clear. The market is given full
rein when yielding large profits to the banks, but is interfered with
when it would yield large losses.
The benefits to the elites in developing countries are far less
obvious, but are often very substantial and are the reason that
voices well-placed to argue against the current system are rarely
raised against it. An example is in the restructuring of Indonesia’s
indebtedness after the Asian crisis. When the assets of the insolvent
local banks were sold, who was best placed to bid for those assets?
Who knew everything about the assets and precisely what they were
worth? The families that had owned them and were the principal
shareholders of the banks.
So, in effect, these families were able to regain control of the
assets they had owned before the crisis with their foreign debts
discharged by their government, all for an average cost of 28%.
Who would speak out against such extraordinary largesse? Would
you if, somehow, you could repay your home mortgage for onefourth of the debt owing? Our system of financial governance neatly
transferred the real cost of the crisis, which should have been borne
by borrowers and lenders that had engaged in imprudent borrowing
and lending, onto the people of the debtor nations who had done
nothing.
As Professor Luis Carlos Bresser Pereria, former Finance Minister
of Brazil, testified before a US House Committee in the aftermath of
the debt crisis, the elites in the debtor nations often profited from
that crisis (Pereira 1990). Periods of great volatility and forced asset
sales offer huge opportunities to those with access to better
information, power and financial resources.
Overall, the system of global financial governance has displayed a
quite remarkable degree of resilience. When one analyses whom it
serves, this is unsurprising. Any system that rewards the powerful at
the expense of the powerless is likely to prosper.
Yet the system was not designed to do this. Its architects were
Keynes and White at Bretton Woods in 1944. Their primary goal was
the promotion of global trade. Fixed exchange rates were to
facilitate that trade. The IMF was established to provide short-term
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loans and technical advice to nations to facilitate their management
of these fixed rates. This fixed exchange-rate system ended in the
1970s as the US went off the gold standard and floated its currency
and other developed nations followed suit. During the 1970s, the
IMF’s core mission ended.
Global institutions are, however, notoriously hard to kill. Witness
the Bank for International Settlements, which Keynes and White had
intended be closed but which lived on to become the most significant
global banking regulatory institution.
So the IMF continued on until the debt crisis of 1982 gave it a
new role. The commercial banks needed to keep lending to the
sovereign debtors so they could service their debts, but they didn’t
want to advance more funds without changes to the policies that
had led these nations to the brink of insolvency. Yet it was politically
impossible for a Bank of America or J.P. Morgan to be dictating
economic policy to a Brazil or Argentina.
The IMF stepped in. As a supposedly independent international
financial institution it was well-positioned to play the role of crisis
manager of nations in trouble. It was well-positioned for the role but
not staffed or equipped to discharge it. So the IMF performed
poorly, with disastrous consequences for the human rights of poor
people in poor nations. Yet it has continued to fulfil this function,
with substantially unchanged policies, for over a quarter of a century
– talk about negative resilience! Over time, as its litany of policy
failures began to mount, the Fund attracted sustained, unrelenting
criticism from both sides of politics in the US and from developing
countries and it was allowed to shrink in size from a total staff
approaching 3000 to about 1700 (Vines and Gilbert 2004, Meltzer
2000).
Yet in 2009, another crisis rescued the Fund. The GFC meant the
G20 needed an organisation through which it could channel most of
its US$1.1 trillion funding package, a bill the IMF fitted. And so,
today, the credibility of the IMF has been somewhat restored by
having a new role and its staffing levels are again climbing.
The IMF continues to exert control over the economic policies of
developing countries in crisis some 35 years after the role for which
it was established ended. It has proven to be a remarkably resilient
institution, to the detriment of a substantial proportion of the people
on the planet. ■ [To be concluded in next issue.]
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