Archive for May, 2011

The protests in Spain are turning into something of a revolution. Modeling themselves after the protesters of the ‘Arab Spring’, Spanish youth are taking to the streets in a rage against the austerity measures that are destroying the country’s economy.

One major problem, however, is that the movement is leaderless and doesn’t seem to offer a clear alternative. Some have lauded this as a step forward. In quasi-anarchist fashion they claim that such a new leaderless movement will bring some sort of ‘new democracy’ to Spain.

To be frank, we’ve heard all this before. This is exactly the rhetoric that the students in 1968 put forward in their protest movements. They claimed that revolutions didn’t need leaders — indeed, some went as far as to say that leadership would corrupt the movement itself.

Unsurprisingly, the revolutions of 1968 burnt out — leaving little real political change in their wake.

So, how do we prevent something similar happening to the protest movements in Spain? I propose that we use them as a springboard to try to get alternative ideas across to the population. The protest movement gives dissenters a chance to get an alternative message across to the people of Spain. The mainstream press will be searching for protesters with a coherent vision or alternative program beyond vague rhetoric.

So, how do you make sure that this message gets across? Well, first you need a message. So, here’s one that appears to me to fit rather well with the protesters otherwise vague rhetoric.

Okay, so the protesters have serious gripes with international financiers dictating government spending projects. So how should they counteract this? Simple, they should put forward a viable alternative.

The US economist Warren Mosler put forward such an alternative in an interview he gave recently. He said that the EU should give member-states a certain amount of money — he suggested 20% of their GDP per year — in order to fund government expenditure. This would allow the governments to spend money on providing employment and services without having to go to the bond markets.

This is an excellent suggestion. So how should the Spanish — or any of the other so-called PIIGS — push forward with this? Simple. They should push their politicians to force the EU to comply with this demand. If the EU refuses to comply the Spanish government should threaten to exit the single-currency. By doing this they could fund the spending programs themselves.

That’s the message. Keep it Simple:

(1) The Spanish government has to put pressure on the EU to give them and other periphery countries money to fund public expenditure (i.e. government spending on employment and services), so that these countries don’t have to be squeezed by the international financiers in the bond markets.

(2) If the EU refuse, the Spanish government should threaten to pull out of the Eurozone, reissue its own currency and fund these public projects themselves.

Protesters should then be clear that the only alternative to this program is perpetual unemployment, low wages and extremely low-growth. They should also be as clear and concise as possible when advocating this program. They don’t need to go into details of how it should work — hell, they don’t even have to know these details (if you do want details, email me at pilkingtonphil.at.gmail.com) — this should be seen as a purely political program.

Okay, so that’s the message sorted; now how do you get it out there? Well, you could just turn off your computer this minute and run into the street shouting loudly — but I don’t suggest it. Instead, seek out the key voices in the movement. The media is saying that there is no leadership — while this may be true in one sense, I’ll bet my socks that in another sense it isn’t.

There are always key voices in a movement — there was in May ’68 and I guarantee there are in May ’11. Look for the people that are publicly speaking and drawing crowds. Look for the popular websites, blogs and Facebook pages that the protesters are frequenting. Immerse yourself in the protest movement for a few hours, talk to some people, see from where and from whom they are drawing their inspiration.

When you figure this out, contact these people. Either approach them in person or email them. Explain that the gripes they have are extremely important, but in order to really change the political discourse they must have a coherent alternative. Tell them that the key is to push the government in the direction laid out above. Tell them that they should not give up their rhetoric — their rhetoric is one of their most important assets — but they must put an alternative solution front and center.

If they are clear about their alternative — especially if they are clear when asked about it by the mainstream press — you will soon see this alternative discourse turning up all over the place. The press will run it and then, if you’re lucky, they will confront mainstream politicians with it. Even if these politicians dismiss it — which they probably will if they are confronted with it — it still makes its way into the debate (“All press is good press” and all that).

Such a change in discourse may even spread further and begin to influence the political election. You really never know how far these things can go… at least, not until you try.

So Spaniards — and members of other countries where protest movements develop — stop being lazy. Stop commenting on internet articles and the like. Find a real outlet for your opinions — one that plugs into the population as a whole. Don’t let the debate be dominated by those that advocate cuts and those that advocate less cuts. Don’t let the protest movement burn out without leaving a trace. You have a chance to really make yourself heard, but you have to be clever about it — I strongly suggest that you take this opportunity.

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Here’s an excellent video by Tschäff Reisberg on how governments debts and deficits work — as well as how these might be used to secure full employment and stable wages. Note, however, that this is not quite applicable to Ireland. Ireland, being a member of the Eurozone, does not issue its own currency — thus it relies on the ECB for this. The ECB, in turn, forces Ireland to service its debts on the international bond markets — this is the main problem the country faces at the moment.

Some people — myself included on some occasions — argue that this means we should leave the Eurozone. And perhaps we should. For an alternative solution, see this interview with the economist Warren Mosler. There he argues that the ECB could give governments a certain credit allowance every year so that they don’t have to go to the international markets to borrow — this allowance could then be used to ensure that the governments don’t simply spend themselves into an inflationary spiral.

It’s a wonderful idea that has my full support. My only criticism is that the EU is a crappy political institutions that’s overly geared toward national interests and petty infighting. It also has remarkably weak leaders with little or no vision (these days, at least). The idea that the drones currently running the Eurozone would even consider such a proposal seems quite fantastic to me.

The EU leaders like to think that the system that is in place is the only one that could possibly function (even though it clearly doesn’t function). This gives them an excuse to avoid formulating real political programs and simply vibe with the conventional wisdom. This is a topic in Adam Curtis’ new documentary which starts tonight at 9pm (GMT) on BBC2. The show is called ‘All Watched Over By Machines of Loving Grace’ and if it’s anything like Curtis’ previous documentaries, it will prove to be some of the best television aired this year.

In an interview with The Guardian Curtis explains the premise for the series. Here he discusses the problems that hiding behind a certain political or economic model causes:

On Greenspan’s watch, computers allowed investment banks to produce complex mathematical models that could predict the risk of making any loan or investment. If a risk could be predicted, it could be balanced by hedging against it. Hence, stability. There would be no more boom and bust. It was the “new economy”.

That stability was, of course, an illusion; it was followed by the greatest economic crash since 1929. But, as Curtis says, the price of the bailouts was paid by ordinary people, via the state, rather than by the wealthy financiers who lost all the money in the first place. That’s because, despite the illusion of ordered non-hierarchy, some people have vastly more power than others, and in many cases have had it for centuries.

He draws a parallel with those 1970s communes. “The experiments with them all failed, and quickly. What tore them apart was the very thing that was supposed to have been banished: power. Some people were more free than others – strong personalities dominated the weak, but the rules didn’t allow any organised opposition to the suppression because that would be politics.” As in the commune, so in the world: “These are the limitations of the self-organising system: it cannot deal with politics and power. And now we’re all disillusioned with politics, and this machine-organising principle has risen up to be the ideology of our age.”

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Whoops! Careful you don't drop the economy there, mate!

Here’s an ethical question: is it ever right to attack one’s allies? I mean, if they’re doing or saying something desperately stupid, should you point this out? Beyond this, how should one go about it? Should you attack them with all the vitriol such an ignorant position truly deserves? Probably not — but I think I’ll do it anyway.

Whenever anyone has asked me about my opinion of Morgan Kelly, I’ve always responded that I think he’s an excellent economist. I say this not because I actually know how good an economist Morgan Kelly is — instead I say it because he seems to be willing to cut through the layers of bullshit that are daily laid upon us by the Irish media. He’s also a fine writer — but we’ll leave that aside.

His latest Irish Times article, however, shows him to be a shit economist. I’m afraid I have to be as blunt as possible on this because, Morgan Kelly being seen as a trustworthy source on economic issues by many, this makes it all the more important to point out where he seems to have no idea what he’s talking about — and this especially so if his prescriptions are so dangerous as to be poisonous.

Kelly’s article is, for the most part, excellent — that is, until it comes to the economics. Toward the end of the article — and to my unending horror — Kelly advises the Irish government to cut back it’s budget deficit:

So the second strand of national survival is to bring the Government budget immediately into balance.

Now, upon reading this I find myself asking whether Kelly actually understands some of the most simple tenets of macroeconomics. You see, in times of recession and high unemployment government budgets automatically go into deficit. Why? Because tax takes go down and unemployment claims go up. Macroeconomists call these mechanismsautomatic stabalisers’ and they are generally recognised as being the force in modern economies that prevent these economies from sliding into major depressions.

A quick aside. The Great Depression was largely caused by aggregate demand falling apart — what that means is that people, being out of work and having no income, couldn’t buy anything. This caused the prices of goods to fall sharply. In response to this fall in both the demand for and prices of goods, many companies simply stopped hiring. This led to unemployment climbing even higher, which led to prices falling even more sharply — and so on. A self-perpetuating spiral resulted. Hence, the depression.

We see something similar — although not nearly as bad — in Ireland at the moment. Shops and services — which make up around 64% of employment in Ireland — are seeing less punters turning up to buy things… and so they’re laying off more staff and, in some cases, closing their doors altogether.

What prevents these unfortunate economic circumstances — this quote-unquote ‘recession’ — from sliding into a full-on depression are the aforementioned ‘automatic stabilisers’. These were not in place in the US during the 1930s and so, the depression. Nowadays, however government spending — through dole checks and the like — opens up to fill the gap left off by private and household spending. This is macroeconomics 101.

Now, can you imagine what would happen if we were to follow Kelly’s advice and try to balance our budget? I’ll tell you what would happen: the fall-off in government spending would cause a depression. It’s as simple as that. Kelly is clear that the prospects of an Irish default would be nasty — well, I can tell you right now, they wouldn’t be nearly as nasty as a 1930s-style depression. (Besides, this would probably cause government debt to grow further — but that’s another day’s macroeconomic lesson…).

Related to this, Kelly doesn’t seem to understand why certain countries are able to maintain large deficits and others are not. Kelly talks about Japan:

Economists have a rule of thumb that once its national debt exceeds its national income, a small economy is in danger of default (large economies, like Japan, can go considerably higher). Ireland is so far into the red zone that marginal changes in the bailout terms can make no difference: we are going to be in the Hudson.

Every reader should be able to see how vague Kelly is being here. Japan can borrow more because it’s a ‘larger economy’. Really? That’s just tripe. It’s clear that Kelly has no idea what he’s talking about.

Japan — whose debt-to-GDP is some 200%; far higher than Ireland’s — can borrow and remain solvent because they issue their own currency. I won’t bore you with the details of this, but if a country is able to maintain its debts in its own currency and it issues this same currency it can pretty much borrow forever. Ireland is not in this situation — we don’t issue our own currency and our debt is denominated in Euros; this is why our debt is unsustainable (ditto for Russia in 1998 and Argentina in 2003 — whose debts were denominated in foreign currency [$]).

Understanding any of this indicates to any reasonable person that an Irish default is probably inevitable. This is not an ideal situation by any means — but we should get our facts straight, at least. So should Morgan Kelly.

UPDATE: Regarding the point about why certain countries default and others do not — Martin Wolf made this point succinctly in a Financial Times column today. He points out that:

Overindebted countries with their own currencies inflate. But countries that borrow in foreign currencies default. By joining the eurozone, members have moved from the former state to the latter.

Of course, I don’t agree with Wolf’s overarching analysis — conspicuous in it is what remains absent: namely, a discussion of the austerity measures themselves. However, he’s right about currencies that borrow in their own currencies versus those that borrow in foreign currencies. A point I made in the above article.
It should also be noted however, that while while overindebted countries with their own currencies may feel inflationary pressures, this need not mean that they actually inflate. Japan, for example, has high levels of debt but low levels of inflation. The level of inflation is not wholly determined by the debt — it is reliant on a number of other factors; the most important of which being consumers’ willingness and ability to spend (i.e. aggregate demand).

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