The Economy the Rich Won

The two-part BBC documentary, The Decade the Rich Won, which concluded last week, made for interesting viewing. It told “the little understood story of our times” – how through the policy of Quantitative Easing (QE), the fabulously wealthy became even more fabulously wealthy and the rest of us had to make do with austerity and falling wages. But it did beg certain questions:

Why didn’t anyone say so at the time? “Full disclosure” said hedge fund manager Paul Marshall. Since the 2008 crash the world’s largest central banks (US Federal Reserve, Bank of England, European Central Bank and Bank of Japan) have created around $20 trillion which has basically gone into the already cavernous pockets of banks and wealthy individuals (like Paul Marshall’s).

In the words of Andrew Huszar, who was QE Program Manager at the Federal Reserve (and thus in charge of the entire process): “over the last 12 years, we’re talking about unprecedented amounts of money being printed and funnelled into the markets, banks being showered with trillions upon trillions upon trillions of dollars, ultimately benefiting the most privileged in our societies.” Only a fraction of the ‘stimulus’ he admits, “was actually getting out and making a difference in the lives of everyday people”.

But these mea culpas are strictly retroactive. When QE was first happening, not only politicians and central bankers – who you might expect to parrot the official line – but also media organisations like the BBC uncritically rehearsed the story that QE was providing  a lifeline to the ‘real economy’.  In 2009, the BBC likened QE to putting “imaginary petrol” in your car. 

And this isn’t of purely historical interest. The Covid shut down saw governments quickly turn to the “unconventional” (now used so much it must be thoroughly conventional) technique of QE. In Britain, the Bank of England increased QE from £495 billion to £895 billion. And the BBC was on hand to explain how this pumping of money into the economy would “help it to recover”.

So much like a war, when the controversy in question has to be implemented unscathed, critical voices are sidelined. But in the aftermath, when it doesn’t much matter anymore, they are allowed airtime and what actually went on can be safely revealed. That’s how much freedom we’re allowed.

If the economy wasn’t saved, what was? All the old familiar faces protested that they had no choice but to implement QE. It was a no brainer. “We kept the economy going,” said Alastair Darling (Chancellor in 2008). “People who’d otherwise have lost their jobs didn’t”. Former Bank of England Governor Mervyn King attested that the first tranche of QE prevented a re-run of the Great Depression. Transient Tory PM Theresa May called QE “emergency medicine”.

But if only a small amount of the QE trillions actually escaped into the ‘real economy’ – in the US mortgage lending actually went down after QE was introduced – it can’t have been the actual economy, the economy of people exchanging goods and services, that was saved. The “emergency medicine” has to have been for the conduit through which QE was implemented, the financial system. And only by QE preventing the implosion of the financial system, was the real economy rescued from oblivion.

The real question is therefore how did QE save the financial system? This is something the documentary didn’t try to explain but is actually the crux of the whole story. One means was simply by pumping huge amounts of money into the system. Thus hugely indebted banks and other companies escaped their natural free market fate.

But QE did more than supplying, in Huszar’s words, “the greatest Wall Street bailout of all time”. It also works by ensuring an ultra-low interest rate and by increasing the price and reducing the yield on government bonds, incentivising investors to shift into other assets, such as shares.

In this way, zombie companies – firms that do nothing more than survive by meeting the interest payments on their debt and paying wages – are permitted to live on. And the stock market as a whole receives a purely artificial boost. Under ‘normal’ market conditions, shares prices reflect investors’ expectations that profits will be high or low in the future. But not under QE. Thus a company such as car rental firm Hertz can file for bankruptcy and see its share price soar at the same time.

This is nothing like a free market system. More accurately it should be called a state capitalist system.

You can’t artificially hold down energy prices but you can, apparently, artificially raise share prices. Ex-banker and hedge fund manager Rishi Sunak lectured us last week on the futility of the state trying to hold down the natural, market prices of gas and electricity. But strangely this King Canute style impotence does not apply to share prices – or house prices – which through QE can be synthetically raised for years.

But what happens, you might wonder, when this outside ‘stimulus’ is taken away? When “the shot of adrenalin”– in Alastair Darling’s phrase – has done its work and we can get back to normal.  Will there be a massive market correction towards ‘natural’ share prices, precipitating widespread company bankruptcies? In 2018, US Federal Reserve started selling the bonds it had acquired under QE – a practice called Quantitative Tightening – but it had to abandon the policy after a few months owing to a negative reaction from markets.

In Britain, authorities have reached for the “unconventional” policy of QE on three separate occasions in the last decade. Currently central banks around the world are reducing the amount of QE but not stopping it altogether or reversing it which should happen under a free market system.

The documentary only nibbled at this question. “In a way markets are addicted”, said hedge funder Marshall, “and central banks have become very nervous indeed about removing the drug.”

But if QE has become a near permanent part of the economic landscape what are the consequences? Does its very existence – and the huge amount of money involved – mean that it is always accompanied by the shadow of austerity?

Or can QE be redirected to pay for essential public services like the NHS? If you can save the financial system by injecting huge amounts of money why can’t you do the same for public services millions of people depend on? This is essentially the argument of Modern Monetary Theory – that public services can be fully funded through nothing more elaborate than hitting keys on a computer. The need to amass taxpayer funds to pay for everything is a myth. Austerity is a political choice, not an economic necessity. The only constraint – MMTers argue – is inflation.

However, lack of inflation is the one sure sign that QE didn’t diffuse through the real economy, rather staying within the financial system. The classic explanation of inflation is that it is caused by too much money chasing too few goods. And the simple fact that inflation didn’t rise exponentially is a pretty strong indication that the QE trillions didn’t filter through the financial system. Inflation is rising now unquestionably, probably caused by supply chain disruptions and Covid relief spending. The Bank of England predicts it will hit 7.25% in the spring. But this is not the level of inflation that QE, if the theory is right, should generate.

However, if QE is redirected to pay for public services, all the ingredients for spiralling inflation are there. This is because the money in its entirety will enter the real economy – through spending by consumers and suppliers. And the mere existence of more money, if accompanied by rising prices, does not translate into greater value or purchasing power.

It’s also the case that QE, notwithstanding the public pronouncements, is intended to have financial effects. Through buying bonds from banks and other companies, these institutions are suddenly awash with cash which they will inevitably use to buy assets, such as shares, thus inflating their price. It is also meant to reduce interest rates on debt for vastly overleveraged companies. QE “for the people” cannot, I would suggest, use the same conduits without having similar effects which pointedly don’t benefit the people.

But the establishment’s faith in QE is unshaken. The BBC doc did reveal a certain buyer’s remorse on the part of some. Ex-Bank of England governor Mervyn King admitted, “if you’ve had the biggest monetary policy stimulus the world has ever seen and you still haven’t had adequate economic growth, maybe the answer is not yet more monetary policy stimulus.”

But there no indication that those at the helm would, in retrospect, have done anything different or, indeed, would do anything different today. Even in conditions resembling 1970s’ “stagflation” – negligible economic growth and rising inflation – alternative means of stimulus are not seriously entertained. “Helicopter Money”, for example, the crediting of ordinary people’s bank accounts with cash in the expectation they will spend it, contravenes a core principle of our political settlement, that only the financial system deserves bailing out and everyone else – especially the bottom 30% — must be kept on a firm leash.

The QE/Austerity duopoly thus reigns supreme and is, if anything, more entrenched than ever given that it is longer a leap in the dark but tried and tested policy. The Chancellor of the Exchequer, for example, hails from the finance system and has faithfully imbued its self-interested mores. The personally very wealthy Rishi Sunak used to work for Goldman Sachs and a hedge fund – the precise ‘sector’ of the economy that Paul Marshall says has “made out like bandits” because of QE.

And if that isn’t guarantee enough, Sunak’s opposite number – Shadow Chancellor Rachel Reeves – used to work for the Bank of England and is an expert – mercifully! – on QE.

So despite the enormous pile of evidence that QE just makes the rich richer and has no impact on economic growth, the establishment faith in the practice remains undimmed. The bandits have taken over the asylum.

QE’s impact on inequality is astonishing. A statistic flashed on the screen at the end of the documentary revealed just how well the bandits have done. UK billionaires (individuals who own assets of more than a thousand million pounds) are worth 310% more than in 2010. But the effect is not limited to this blessed island. According to rich peoples’ magazine Forbes, in 2021 there were 2,755 billionaires in the world, an increase of 660 from just a year earlier. “Altogether these billionaires are worth $13.1 trillion, up from $8 trillion in 2020,” says Forbes. In 2006 – just two years before the QE era began in Euro-America – there were less than 1,000 billionaires globally with a collective net worth of under $3 trillion. What explains the huge increase in a period of insipid economic growth?

Objecting to this is not just a case of the “politics of envy” as it used to be derided. Beside the fact that these individuals do not deserve their loot under any objective free market criteria, such mammoth inequality fundamentally distorts society. As I have argued in a previous post, these billions are not all spent on buying luxury yachts or even blasting into space. They are also used as capital – money invested to make more money. In areas such as housing, privatisation, fossil fuel extraction, the media and democracy the invested funds of the ultra-rich are perverting society in ways that are directly at odds with the interests and desires of the vast majority. And through QE we have, through government action, turbocharged this process.

But then that is not all that surprising as the ultra-rich basically own the government as well.

Neoliberalism is broken but no-one, not even leftists, want to pull the plug

One should always be suspicious of unanimity. While debate rages about the right fiscal policy (tax and spending) governments should adopt in the post-crisis world (the austerians versus the Keynesians, George Osborne versus Jeremy Corbyn and most economists), when it comes to monetary policy (interest rates, the price of borrowing money, whether the money supply should be increased through quantitative easing), eerie silence reigns. No-one, the odd Conservative ex-Prime Minister aside, is calling for interest rates to be raised significantly. The US Federal Reserve, which recently pondered raising interest rates ever so slightly, couldn’t bring itself to actually do it.

The trouble is ‘markets’, those capricious, unelected arbiters of our future who cling to ultra-low interest rates for dear life, have finally determined that they don’t actually work. Investors have decided that the “world’s problems can’t be solved by low interest rates alone” said an article in the New Statesman after August’s Chinese stock market turmoil. The Bank of International Settlements, which is owned by the world’s central banks, warned earlier this month that it was dangerous to expect that monetary policy could cure all the global economy’s ills.

Broken beyond repair

There is a growing realisation that neoliberalism is fatally wounded. After the flashing warning lights of the 2008 crisis, the heart attack victim has gone back to smoking 40 a day and consuming fry-ups. Global debt has risen by 40% since the crisis to $199 trillion (three times what it was in 1990) and privatisation, trade liberalisation (see TTIP) and wage repression have intensified, buoyed by $12 trillion worldwide in invented money (quantitative easing). All hail free markets.

“At some point you have to take your bitter medicine”, says the Bank of International Settlements, a recognition that markets are overdue a “correction”, or in layman’s terms, another financial crisis. The problem is that no-one, leftists included, want to administer the dose.

The official reluctance is in plain sight. See the Federal Reserve’s prevarication over interest rates. In the UK, Bank of England monetary policy committee member, Andy Haldane, claims that, far from rising, interest rates may have to fall further and may, following the example of Japan in the 1990s, turn negative.

But this instinct to preserve, even if what you are preserving is broken and hurts millions of people, is not limited to official policymakers. Earlier this year, the leftist Keynesians of Syriza in Greece, faced with the chance of rejecting austerity and exiting the Eurozone, caved in and opted for heightened austerity and a massive programme of privatisation carried out by a foreign country. They looked down the barrel of precipitating another financial crisis in Europe and bringing down the wrath of the world’s entire financial establishment on their own country, and capitulated.

A Titanic minus the lifeboats

Even if you don’t agree with them, you can understand the reluctance. Another financial crisis would very likely be devastating. The chief economist of HSBC warned in May that world economy was like an ocean liner without lifeboats. If another recession hits, it could be a “truly titanic struggle for policymakers”, he wrote in a note to clients. This is because, in response to all downturns since the 1970s, governments and central banks, have cut interest rates. Their capacity to do that again is extremely limited because they are so low already. More bailouts would doubtless be attempted, and austerity can be understood as creating a ‘fiscal space’ to enable this, but the ability of states to save insolvent institutions is likely to be dwarfed by the size of the task.

Stephen King, the HSBC economist, apparently didn’t speculate what a renewed financial crisis would look like “in the absence of adequate policy tools”. But let’s speculate (every else is). Pension funds are identified by King as “high risk”. There are $50 trillion in pension and insurance funds invested in stock markets in OECD countries, much more than their combined GDP. Then there are mortgages, a debt owned primarily by banks, but as 2008 showed, by many other investors as well. Mortgage payments in the UK, says the Economist magazine, are the lowest they have ever been in peacetime. But were ultra- low rates to rise quickly, as they would in a financial crisis, “things could start looking very troubling”, says the magazine.

Then, there is the fact that consumers are, as Paul Mason says in his book, Postcapitalism, “direct participants in the financial markets” through credit cards, student loans, car loans, mobile phone contracts, gym memberships and household energy. An unchecked financial crisis could turn all these investments and the services they deliver, into dust. And this is besides the geo-political effects in an already hugely unstable world. The refugee crisis Europe is experiencing now would be merely a foretaste.

It’s my, maybe irrational, hunch that the world’s governments and monetary authorities would somehow find a way to arrest a future financial crisis, through a combination of negative interest rates, nationalisation, bailouts and expanded quantitative easing. But the mere fact that a crisis occurred would lead to the realisation that it will inevitably recur. The process cannot be arrested forever.

It is for these reasons that leftists are as conservative as anyone else when it comes to the financial system. They, understandably, combine an awareness of the system’s vast anti-social consequences with an aversion to systemic meltdown. “Europe’s crisis,” wrote former Syriza finance minister, Yanis Varoufakis, in February, “is far less likely to give birth to a better alternative to capitalism than it is to unleash dangerously regressive forces that have the capacity to cause a humanitarian bloodbath”. The implosion of a “repugnant capitalism”, “despite its many ills”, he said, “should be avoided at all costs.” To repeat, at all costs.

No appetite for destruction

Leftists now have no appetite for destruction. In fact, Mikhail Bakunin notwithstanding, the willingness to destroy was always more of a right-wing characteristic. The desire during the Great Depression “to purge the rottenness out of the system” by liquidating stocks, labour and farmers, emanated from a finance minister in a Republican US administration. Despite American Marxist Andrew Kliman’s assertion that since the Great Depression, policymakers have always responded to downturns with fiscal and monetary measures to avoid mass bankruptcy, conservatives since the 1930s have sometimes been happy to destroy business for political and economic reasons. The huge spikes in interest rates in Britain and America at the beginning of the 1980s, unthinkable now, were instituted by the conservative regimes of Thatcher and Reagan with the aim of humbling organised labour. In Britain, a quarter of manufacturing industry was destroyed as a result.

But if leftist governments now see their overriding aim as saving capitalism from collapse, that vastly limits their room for manoeuvre and puts them in a contradictory situation. Paul Mason in Postcapitalism, argues that neoliberalism is broken but imagines an “escape route” for capitalism. Governments agree to suppress financial mania by raising interest rates in response to all future bubbles (like this one) and removing the guarantee of bank bailouts. The opposite, in other words, to what they are doing now. But, simultaneously, he advocates ‘financial repression’ to pay off huge public and private debts, by holding interest rates below the rate of inflation for 10 to 15 years. I would suggest that doing both is impossible.

Any leftist government will naturally face sabotage from corporations and banks eager to turn it into an economic calamity, as a warning to others if nothing else. But a leftist government in current circumstances is especially constricted because it must always keep one eye on stopping the stock market from imploding. Will a Jeremy Corbyn government be able take rail franchises into public ownership when they expire? Probably. Will it be able to nationalise energy companies without sending the stock market in a tailspin? That’s more debatable. And such a government must play along with the pretence that companies’ share values represent their future profitability. Banning companies from buying back their shares thus inflating their value, as many currently do, will precipitate a mass stock market ‘correction’. So it won’t be done.

A day of reckoning

Of course, the fact that leftists won’t pull the plug on neoliberalism, doesn’t mean that the system won’t pull the plug on itself. Many believe a ‘great reckoning’ is approaching whatever governments and central banks do. In that eventuality, a Corbyn-led Labour party would be much better placed in opposition than in government. If it was elected to power following a huge, impossible to bailout crash, it would have far more freedom. Stock market pension schemes, for instance, would have to be replaced with taxpayer-funded, pay as you go schemes, currently portrayed as unaffordable. The house price bubble would be fatally pricked, and there would be no alternative to huge expansion of public or non-profit housing. Public ownership of natural monopolies would be impossible to resist. A basic income would come to the fore.

But as things currently stand, politics and economics resemble a giant game of Buckaroo in which no-one wants to be responsible for triggering the mayhem. And leftists, however unwillingly, have been drawn into the game.