by

Professor Richard A. Werner, D.Phil. (Oxon)

20 June 2016

The British people should be clear about just what they will be voting on at the EU referendum this Thursday. What does it actually mean to stay in the EU? What does it mean to exit?

Concerning the second question, the dominant issue in the debate has been the question whether there will be a significant negative economic impact on the UK from exiting the EU. Prime Minister David Cameron, together with the heads of the IMF, the OECD and various EU agencies have given dire warnings that economic growth will drop, the fiscal position will deteriorate, the currency will weaken and UK exports will decline precipitously. George Osborne, the chancellor of the exchequer has threatened to cut pensions if pensioners dare to vote for exit. But what are the facts?

I have been trained in international and monetary economics at the London School of Economics and have a doctorate from the University of Oxford in economics. I have studied such issues for several decades. I have also recently tested, using advanced quantitative techniques, the question of the size of impact on GDP from entry to or exit from the EU or the eurozone. The conclusion is that this makes no difference to economic growth, and everyone who claims the opposite is not guided by the facts. The reason is that economic growth and national income are almost entirely determined by a factor that is decided at home, namely the amount of bank credit created for productive purposes. This has sadly been very small in the UK in recent decades, thus much greater economic growth is possible as soon as steps are taken to boost bank credit for productive purposes – irrespective of whether the UK stays in the EU or not (although Brexit will make it much easier to take such policy steps). We should also remember that a much smaller economy like Norway – thought more dependent on international trade – fared extremely well after its people rejected EU membership in a referendum in 1995 (which happened against the dire warnings and threats from its cross-party elites, most of its media and the united chorus of the heads of international organisations). Besides, Japan, Korea, Taiwan and China never needed EU membership to move from developing economy status to top industrialised nations within about half a century. The argument of dire economic consequences of Brexit is bogus.

As for the first question, namely what it means to stay inside the EU, we should consult the EU itself. Happily, the EU released a major official report about its key policies and what it plans to achieve in the near future in October 2015. This report was issued in the names of the „Five Presidents“ of the EU. In case you had not been aware that there was even a single, let alone five presidents of the EU, these are: The unelected president of the European Central Bank, Goldman Sachs alumnus Mario Draghi, the unelected president of the European Commission, Jean-Claude Juncker, the unelected Brussels Commissar and „president of the Eurogroup“, Jeroen Dijsselbloem, the „president of the Euro Summit“, Donald Tusk, and the president of the European Parliament, Martin Schulz. What is the message of this not negligible number of EU presidents concerning the question of where the EU is going? The title of their joint report is a give-away: „The Five President’s (sic) Report: Completing Europe’s Economic and Monetary Union“. https://ec.europa.eu/priorities/publications/five-presidents-report-completing-europes-economic-and-monetary-union_en

The report starts with the frank admission that „with 18 million unemployed in the euro area, a lot more needs to be done to improve economic policies“ in the EU. Well said. But what exactly needs to be done?

„Europe’s Economic and Monetary Union (EMU) today is like a house that was built over
decades but only partially finished. When the storm hit, its walls and roof had to be stabilised quickly. It is now high time to reinforce its foundations and turn it into what EMU was meant to be…“
“ we will need to take further steps to complete EMU.“

The central planners in Brussels and at the ECB in Frankfurt are not unaware that under their command, a historically unprecedented economic dislocation has taken place in the EU during the past ten years, including massive asset and property bubbles, banking crises and large-scale unemployment in all the periphery countries – with over 50% youth unemployment in Greece, Spain and Portugal, as well as the lack of any serious controls of the EU external borders to prevent an influx of unparalleled numbers of illegal immigrants and economic migrants.

However, the EU central planners are in denial about the fact that these problems have been caused entirely by their own misguided and disastrous policies. As a result, they argue that the solution to such problems can only be further concentration of powers into their hands: „We need more Europe“, as Mrs Merkel put it (source: please read these Merkel claims about the EU http://www.euractiv.com/section/eu-priorities-2020/news/merkel-calls-for-political-union-to-save-the-euro/) This is what they propose to implement in the coming years, by turning all EU members into one single country.

So the Five Presidents‘ Report makes clear that the EU is not simply a free trade area. That project had been left behind with the 1992 Maastricht Treaty and a very different kind of Europe has become enshrined with the 2007 European Constitution (called ‚Lisbon Treaty‘, since the people of Europe in several referenda rejected it. Source: please read what the author of the rejected European Constitution says: http://www.independent.co.uk/voices/commentators/valeacutery-giscard-destaing-the-eu-treaty-is-the-same-as-the-constitution-398286.html ). Instead, the EU is the project to abandon all national sovereignty and borders within and melt away all European nations that don’t succeed in exiting in time, into a merged, joint new single country, with one central European government, centralised European monetary policy, centralised European fiscal policy, centralised European foreign policy, and centralised European regulation, including of financial markets and banking. This United States of Europe, an undemocratic leviathan that the European peoples never wanted, is the culmination of the much repeated mantra of „ever closer union“.

This project has been implemented steadily and stealthily over several decades, despite major and consistent policy blunders and scandals involving the central planners (e.g. in 1999 the entire European Commission – the unelected government and cabinet of the European superstate – resigned in disgrace, as it was found to have taken bribes and engaged in fraud, while the EU’s own Court of Auditors has repeatedly refused to sign off the EU’s official books).

The economics is clear: there is no need to be a member of the EU to thrive economically, and exiting does not have to impact UK economic growth at all. The UK can remain in the European Economic Area, as Norway has done, or simply agree on a trade deal, as Switzerland did, and enjoy free trade – the main intention of European agreements in the eyes of the public. The politics is also clear: the European superstate that has already been formed is not democratic. The so-called ‚European Parliament‘, unique among parliaments, cannot propose any legislation at all – laws are all formulated and proposed by the unelected European Commission! As a Russian observer has commented, the European Parliament is a rubber-stamping sham, just like the Soviet parliament during the days of the Soviet Union, while the unelected government is the European Commission – the Politibureau replete with its Commissars.

Big business and big banks, as well as central bankers and the IMF, constitute the financial elite that is behind this purposeful concentration of power – giving ever more power into the hands of ever fewer people. The undemocratic nature of EU institutions has reached such an extent that I have heard a recently retired member of the ECB governing council in private confessing that his biggest worry is the undemocratic nature and extent of the ECB’s powers, which have increasingly been abused for political ends. These facts have been drowned out by the constant drip of propaganda emanating from the powerful elites behind the creation of the United States of Europe.

During these years and decades of steady transfers of powers and sovereignty from nation states and their democratically elected assemblies to the unelected Brussels bureaucracy, I had always been puzzled by the apparent strong US support for all this. Whenever the ‚process‘ of ‚ever closer union‘ seemed to have hit an obstacle, a US president – no matter the post holder’s name or party affiliation – would intervene and in no uncertain terms tell the troublesome Europeans to get their act together and speed up unification of Europe into one state. In the naivety of my youth this had struck me as surprising. Likewise, the British public has recently been told by US president Obama that dropping out of the EU was not a good idea and they had better vote to stay in.

While it is not surprising that the global elite that has benefitted from the trend towards concentration of power is getting increasingly hysterical in their attempts to cajole the British public into voting to stay inside the EU, it is less clear why the US president and his government should be so keen on the EU project. We had been told in the past by the European media that the concentration of economic and political decision-making in Europe was being engineered in order to create a counter-weight against the US dominance. This seemed to motivate some pro-EU voices. Surely the US president must have heard about that?

There is another mystery. Only yesterday, an impressive-looking leaflet was dropped into the letterbox of my Winchester home, entitled „EU Basics – Your Guide to the Referendum“. It was issued by an organisation called the „European Movement“. The 16-page colour and high gloss booklet argues for Britain to stay in the EU. Who is this „European Movement“, and who is funding it? This little-known organisation seems financially powerful enough to drop a high-quality print booklet into every household in the entire UK.

The declassification of formerly secret records has solved both mysteries. For as it turns out, they are connected. In the words of Nottingham University academic Richard Aldrich:

„The use of covert operations for the specific promotion of European unity has attracted little scholarly attention and remains poorly understood. … the discreet injection of over three million dollars between 1949 and 1960, mostly from US government sources, was central to efforts to drum up mass support for the Schuman Plan, the European Defence Community and a European Assembly with sovereign powers. This covert contribution never formed less than half the European Movement’s budget and, after 1952, probably two-thirds. Simultaneously they sought to undermine the staunch resistance of the British Labour government to federalist ideas…. It is also particularly striking that the same small band of senior officials, many of them from the Western [note: this means US] intelligence community, were central in supporting the three most important transnational elite groups emerging in the 1950s: the European Movement, the Bilderberg Group and Jean Monnet’s Action Committee for a United States of Europe [ACUE]. Finally, at a time when some British antifederalists saw a continued ’special relationship‘ with the United States as an alternative to (perhaps even a refuge from) European federalism, it is ironic that some European federalist initiatives should have been sustained with American support.“

There is much more to read in this explosive piece of scholarly research (Richard J. Aldrich (1997), OSS, CIA and European unity: The American committee on United Europe, 1948-60, Diplomacy & Statecraft,8(1), pp. 184-227, online at http://www.tandfonline.com/doi/abs/10.1080/09592299708406035#.V2exrU36voo )

UK journalist and former Brussels correspondent Ambrose Evans-Pritchard was the only journalist to report on such academic research findings, in two articles in 2000 and 2007:

„DECLASSIFIED American government documents show that the US intelligence community ran a campaign in the Fifties and Sixties to build momentum for a united Europe. … US intelligence secretly funded the European Movement, paying over half its budget. Some of Europe’s founding fathers were on the US payroll….

„The documents confirm suspicions voiced at the time that America was working aggressively behind the scenes to push Britain into a European state. Lest we forget, the French had to be dragged kicking and screaming to the federalist signing table in the early 1950s. Eisenhower threatened to cut off Marshall aid unless Paris agreed to kiss and make up with Berlin. France’s Jean Monnet, the EU’s mastermind, was viewed as an American agent – as indeed, he was. Monnet served as Roosevelt’s fixer in Europe during the war and orchestrated the failed US effort to stop de Gaulle taking power.

„One memorandum, dated July 26, 1950, gives instructions for a campaign to promote a fully fledged European parliament. It is signed by Gen William J Donovan, head of the American wartime Office of Strategic Services, precursor of the CIA. … Washington’s main tool for shaping the European agenda was the American Committee for a United Europe, created in 1948. The chairman was Donovan, ostensibly a private lawyer by then. The vice-chairman was Allen Dulles, the CIA director in the Fifties. The board included Walter Bedell Smith, the CIA’s first director, and a roster of ex-OSS figures and officials who moved in and out of the CIA. The documents show that ACUE financed the European Movement, the most important federalist organisation in the post-war years. In 1958, for example, it provided 53.5 per cent of the movement’s funds. The European Youth Campaign, an arm of the European Movement, was wholly funded and controlled by Washington.

„The leaders of the European Movement – Retinger, the visionary Robert Schuman and the former Belgian prime minister Paul-Henri Spaak – were all treated as hired hands by their American sponsors. The US role was handled as a covert operation. ACUE’s funding came from the Ford and Rockefeller foundations as well as business groups with close ties to the US government.

„The head of the Ford Foundation, ex-OSS officer Paul Hoffman, doubled as head of ACUE in the late Fifties. The State Department also played a role. A memo from the European section, dated June 11, 1965, advises the vice-president of the European Economic Community, Robert Marjolin, to pursue monetary union by stealth.

„It recommends suppressing debate until the point at which „adoption of such proposals would become virtually inescapable“.

„Fifty years after the Treaty of Rome, the architects of post-war US policy would be quite pleased, I think, if they were alive today. …

(excerpted from: Ambrose Evans-Pritchard (2000), Euro-federalists financed by US spy chiefs, The Daily Telegraph, 19 September 2000; http://www.telegraph.co.uk/news/worldnews/europe/1356047/Euro-federalists-financed-by-US-spy-chiefs.html and Ambrose Evans-Pritchard (2007), The scare of a superstate has passed, but do we want to lose the EU altogether? The Daily Telegraph, 7 April 2007)

No wonder Mr Evans-Pritchard has now concluded that he will vote for Brexit: http://www.telegraph.co.uk/business/2016/06/12/brexit-vote-is-about-the-supremacy-of-parliament-and-nothing-els/

The revelation that the EU is the result of a major US secret service operation – effectively just yet another secret creature of deception launched by the CIA (taking seat of honour in the hall of infamy that includes false flag operations, invasions, coup-detats, and the establishment of organisations such as Al Qaida and ISIS) solves the third mystery, namely how on earth the allegedly democratic European nations could design such an undemocratic, virtually dictatorial structure. With the EU/United States of Europe the US not only achieves its geo-strategic goals in Europe, but it has also eliminated the role of pesky national parliaments that could on occasion get in the way of US or CIA foreign policy. And another puzzle is solved, namely why the EU had so readily agreed to a US request a few years back that US spy agencies get access to all European emails and telephone calls….

A vote to stay in the EU thus is a vote to abolish the United Kingdom as a sovereign state and merge it into the undemocratic United States of Europe which the European elites are building under US tutelage. That the European public – and, it seems, even European politicians – have little or no input in key European decisions can be seen from the increasingly aggressive NATO stance against Russia (Brussels-based NATO being the military arm of the EU, which is overtly under direct US control), and the one-sided sanctions against Russia that the US could simply order the Europeans to implement (causing significant losses in incomes and jobs in Europe, while boosting US business interests). Immigration policies are another case in point. If the US had in the past considered the largely homogeneous European populations a source of potential European resistance against its plans for Europe, then the policy to replace them with balkanised failed ‚melting pots‘ also makes sense.

Norway voted in 1995 on EU membership. Leading parties were all in favour. Big business and central banks, major media outlets and the talking heads on TV were frantically bullying and cajoling the Norwegian public to vote ‚in‘. The people remained steadfast and voted ‚out‘. Norway did splendidly. And so much more will the UK.

 

Professor Werner is Director of the Centre for Banking, Finance and Sustainable Development at the University of Southampton. He is known for proposing the concept of ‚Quantitative Easing‘ in Japan. His 2003 book Princes of the Yen warned of the dangers of excessive central bank independence and predicted that the ECB was likely to create credit bubbles, banking crises and recessions in the eurozone.

I have recently been asked a few questions about the role of German current account surpluses in the problems encountered in Europe and in particular the eurozone. Below are the questions and the answers.

Is the German current account surplus sustainable?

Yes and no. The German current account surplus is not sustainable in the long-run. It has been too large for too long – reflecting the substantial and one-sided net delivery of real goods and services, produced through the work of German businesses and individuals, to the rest of the world, without the Germans in aggregate receiving equal compensation in real goods and services from the world. It is indeed surprising that Germany has collectively been willing to deliver abroad against credit for decades, accepting promises to pay from increasingly and unsustainably indebted borrowers in return for the delivery of the valuable fruits of their labour. Perhaps yet another of the many ingenious ways through which Germans insist on making up for their sins? The gold that they had earned – prudently – from their exports in the early post-war era is held abroad without the prospect of ever getting repatriated fully. But the majority of payments has been in the form of promises to pay in any case. Concerning such credit granted by Germany, there is little to show for: Germany is for instance not even allowed to receive delivery of US Treasuries that it may have purchased as a result of the dollars earned through its current account surplus: these Treasuries have to be held in custody by the Federal Reserve Bank of New York, a privately owned bank: A promise on a promise. At the same time, German influence over the pyramid structure of such promises has been declining rapidly since the abolition of the German currency and introduction of the euro, controlled by an unaccountable supranational international agency that cannot be influenced by any democratic assembly in the eurozone. As a result, this structure of one-sided outflows of real goods and services from Germany is likely to persist in the short and medium-term.

This structurally entrenched surplus is ultimately assured by the political situation: International debtors to creditor Germany can remain confident of their unlimited credit card account in Germany by the practical inability of Germans to change their predicament. Germany has since 1945 not been master of its political and economic destiny. There has not been a peace treaty over 70 years after the end of the second world war. Germany remains an enemy nation in the UN Charter, and the occupation statutes remain in place despite the 4+2 Treaty with the Allied Powers of 1990. With a suspended constitution (and only a temporary ‘Basic Law’ in its place), the US has in practice continued to call the shots in Germany. Unlike in other European nations, a referendum has never been allowed in Germany on any important question, such as any connected to the drive towards ‚ever closer European union‘, including the abolition of the then de-facto European currency (the D-Mark) and its replacement by the euro. While the German population has increasingly been waking up to the legal facts of their status – or rather lack thereof – a massive and costly diversion (in the form of a transfer into Germany of a large foreign population – in direct contravention to the Haag and Geneva conventions) has left public debate muted on such fundamental issues. It may yet contribute to reducing the current account surplus by weakening Germany’s export prowess. The ECB’s handling of the aftermath of the credit bubbles that its policies had created in Ireland, Portugal, Spain and Greece during 2004-8 further demonstrates that ECB policies have not been in the interests of Germany – and neither have they been in the interests of Ireland, Portugal, Spain and Greece. They have, however, played into the hands of those working towards the centralisation of power in the hands of unelected bureaucrats in the name of ‘ever closer union’.

 

How does the German current account surplus affect the balance between investments and savings?

A current account surplus can by definition be called an excess of savings over investment. In this case, this is just restating the problem identified above, namely that the rest of the world is not delivering valued goods and services to Germany equal to German exports of such. This renders the Germans creditors to the rest of the world, which can be defined and verbally reformulated as being ‘excess savers’. Even the domestic investment-savings balance is an ex-post accounting identity that says little about the causal factors behind economic growth or current account balances. Business investment is a function of bank credit creation for such investments. Like all markets, the market for credit is rationed, and in this case the dominant short side is the supply of credit (Werner, 2005). That is decided by banks, the creators and allocators of about 97% of the money supply (through their extension of credit, see Werner, 1997, 2015). Banks always ration credit, as it does not make sense to raise interest rates to the high levels that would equilibrate the almost unlimited demand for ready purchasing power with the supply created by banks. The virtually unlimited demand for money and credit is not least ensured by the fact that banks create the principal of their loans, but not the interest. This means that borrowers have to out-compete each other in the search for money and credit to service their loans, ensuring a certain amount of bankruptcies. This is especially noticeable during times of nominal stagnation (which happens when bank credit for GDP transactions has stalled, as in the eurozone for the past six years or so). Since 2008 eurozone banks have been rationing credit more than usual: in the periphery countries, because the ECB-driven credit bubbles had burst, causing the predictable bad debt problems in the banking systems that have in turn rendered these banks highly risk averse, resulting in a protracted credit crunch. The problem could have been solved at one stroke and without any costs to the tax payer by the ECB and its national branches (the national central banks, see Werner, 2014), but the ECB chose to let these problems grow over time, resulting in fiscal cut-backs and large-scale unemployment.

Meanwhile, in Germany the vast majority of banks (the 1,500 small community banks accounting for about 70% of deposits and over 90% of SME lending) have not been affected by the 2008 financial crisis. As the big banks reduced lending sharply, they increased loan extension, ensuring that there was no recession in Germany. But bank credit for real economy investments has also been stagnating recently. This has been due firstly to the massive and disproportionate increase in bank regulation by the EU Commission and the ECB, which is crushing community banks due to sharply risen costs to manage the regulatory burdens; secondly, it has been due to the negative interest rate and flat yield curve policy of the ECB, which is good for the large, asset speculation-driven banks, but has drastically shrunk income of the majority of banks, which are small, local and normally lend for productive purposes, hence requiring a positive yield curve. They are getting hammered by the flat yield curve and the new ECB tax on banks called ‘negative interest rates’. These banks will get annihilated in the near term, if they do not follow the only avenue left to them by the ECB: a massive expansion in bank credit for non-GDP, namely property, transactions. Such bank credit is unsustainable and causes asset bubbles (see Werner, 2013). The property bubble which the ECB policy has indeed been creating in Germany will in turn result in a banking crisis that may well become the last nail in the coffin of the community banks, likely to cause them to disappear after all in the coming decade, if current ECB and EU polices are not reversed. Since the community banks are a main reason for the strength of the German Mittelstand SMEs – in turn the backbone of the 200 years of strong and stable German economic growth – this will in due course dissolve German current account surpluses. As the reader will have noticed, none of these momentous events unfolding before of our eyes has anything directly to do with the savings-investment balance, but all with the ECB’s quantity of bank credit policies.

 

Are German savers saving too much?

In a market economy, private sector decision-makers should be left to make their own decisions. These are usually the result of the policy environment created by central banks. It is thus inappropriate to speculate about whether the fault lies with savers. This is especially true when savings are not the cause of any problems in the eurozone. That role is played by the ECB’s quantity of bank credit policies. The tight credit policy has suppressed productive investment. Fortunately, there is an easy way out of the ECB’s straight-jacket of tight bank credit for the real economy: finance ministries, official debt management offices and Treasuries in the Eurozone can quickly and efficiently boost bank credit for GDP transactions by stopping the issuance of government bonds, and instead raising the funds for the public sector borrowing requirement from the banks in their respective countries (if they still have any) through entering into standard bank loan contracts (which are neither tradeable nor do they have to be marked to market; moreover they incur the attractively low prime rate in the bank credit market that has consistently remained below bond yields during the months of the sovereign debt crises; see Werner, 2014).

Yet, it could be argued that Germans have been contributing to the European mess, because they have failed to assert their rights as the sovereign of their nation, proclaiming a democratic constitution allowing for referenda and throwing off the yoke of foreign domination. It turns out, the EU was designed to prevent Germany from become a sovereign nation ever again. But a peaceful and prosperous Europe is more likely to be ensured if free and sovereign decisions are made in democratic fashion – such as via referenda – by informed people not manipulated from the outside. That idea is not popular in Brussels.

 

References

Richard A. Werner (1997). ‘Towards a New Monetary Paradigm: A Quantity Theorem of Disaggregated Credit, with Evidence from Japan’, Kredit und Kapital, vol. 30, no. 2, July 1997, pp. 276-309.

Richard A. Werner (2005). New Paradigm in Macroeconomics, Basingstoke: Palgrave Macmillan, 2005

Richard A. Werner (2013). Quantitative Easing and the Quantity Theory of Credit. Royal Economic Society Newsletter, July, pp. 20-22 http://www.res.org.uk/view/art5jul13features.html

Richard A. Werner (2014). Enhanced debt management: Solving the eurozone crisis by linking debt management with fiscal and monetary policy, Journal of International Money and Finance, 49, 443-469, http://www.sciencedirect.com/science/article/pii/S0261560614001132

Richard A. Werner (2015), A lost century in Economics: Three theories of banking and the conclusive evidence, International Review of Financial Analysis, in press, online: http://www.sciencedirect.com/science/article/pii/S1057521915001477

 

 

 

The talking heads featured on the corporate mainstream media have started to disseminate the idea that cash is a barbarous relic and needs to be abolished. Central bankers have been particularly articulate, such as former IMF staffers Kenneth Rogoff and Peter Bofinger, or current Bank of England spokesman Andrew Haldane.

Among the reasons why cash suddenly needs to be abolished are the usual arguments, such as that criminals may be using cash, or that electronic money is more ‘efficient’. Some media even claim that people are annoyed in queues when someone pays with the more cumbersome cash, instead of the faster plastic money. The truth is of course the opposite, although the recent introduction of contactless debit cards in the UK, which only need to be waived at the card terminal for payment, have speeded up the payment of petty transactions compared to the usually much longer processing time for debit cards compared to cash.

Another reason given in favour of abolishing cash is the argument that this will facilitate bank bail-ins, as agreed at the Seoul G20 summit in 2010: if people can move money out of the banks into cash, it is not possible to steal their money to bail out the banks. While cynics will be open to this argument, the reality is that it does not make sense: in Cyprus, where the Seoul G20 programme was first implemented, banks were shut before deposits were confiscated. In Greece, banks were shut for a month and people had to survive on cash, which they were after a while allowed to withdraw in small amounts only. What would have happened if cash had already been abolished is that the ECB shutting down Greek banks would have been more effective in blackmailing the Greek people to give in to Troika demands.

The main reason advanced by the Bank of England for wanting to abolish cash is that it wishes to stimulate the UK economy, and to do so it wants to use interest rates. Since rates are already zero, it is now only reasonable to lower them into negative territory. However, to make such a policy effective, the possibility to move from electronic money into cash needs to be taken away. If cash is abolished, we can then enjoy the benefits of negative interest rates – or so the official narrative goes.

This story is so full of holes that it is hard to know where to start. Let’s begin by reminding ourselves that it has been the Bank of England that has since 2009 argued that interest rate policy is not a good tool to stimulate the economy, and instead it wanted to use what it (misleadingly) called ‘Quantitative Easing’. So if that is true, why now suddenly switch back from the quantity to the price of money? What is it that should make ‘price easing’ now more effective than an emphasis on quantities? Wouldn’t it be better to instead introduce true quantitative easing, which expands purchasing power in the productive economy, such as in the hands of SMEs?

Secondly, let us consider the proposal of introducing negative interest rates in an effort to stimulate the economy. As we know, the proclaimed transmission mechanism of lower rates is via cheaper borrowing costs. In countries where a negative interest rate policy has been introduced, such as Denmark or Switzerland, the empirical finding is that it is not effective in stimulating the economy. Quite the opposite.

This is because negative rates are imposed by the central bank on the banks – not the borrowing public (so please forget the idea that you will be given a mortgage, and paid an extra fee on top to do so). To be precise, they are imposed on the reserves held by banks at the central bank.

This might seem reasonable at first sight: Have not these mean banks been hoarding all the QE cash from the central bank, instead of lending it out?

No. It is a little known fact that the total quantity of reserves held by banks at the central bank is entirely determined by the central bank. Individual banks can try to reduce their reserves, but only at the expense of other banks holding more reserves. This is of course why the type of „QE“ implemented by many central banks – buying financial assets and increasing banks‘ reserves at the central bank – have only created another asset bubble, but hardly helped the real economy. Banks cannot lend out their reserves at the central bank. As we show in the book „Where does Money come from?“, banks‘ reserves at the central bank are simply credits created by the central bank for the benefit of the banks – central bank money that cannot circulate in the economy.

As a result, negative interest rates on banks‘ reserves at the central bank are simply a tax imposed on banks. So why would central banks impose new taxes on banks at this stage? The experience of Switzerland may provide answers: negative rates raise banks’ costs of doing business. The banks respond by passing on this cost to their customers. Due to the already zero deposit rates, this means banks will raise their lending rates. As they did in Switzerland. In other words, reducing interest rates into negative territory will raise borrowing costs!

If this is the result, why do central banks not simply raise interest rates? This would achieve the same result, one might think. However, there is a crucial difference: raised rates will allow banks to widen their interest margin and make their business more profitable. With negative rates, banks‘ margins will stay low and the financial situation of the banks will stay precarious and indeed become ever more precarious.

As readers know, we have been arguing that the ECB has been waging war on the ‘good’ banks in the eurozone, the several thousand small community banks, mainly in Germany, which are operated not for profit, but for co-operative members or the public good (such as the Sparkassen public savings banks or the Volksbank people’s banks). The ECB and the EU have significantly increased regulatory reporting burdens, thus personnel costs, so that many community banks are forced to merge, while having to close down many branches. This has been coupled with the ECB’s policy of flattening the yield curve (lowering short rates and also pushing down long rates via so-called ‘quantitative easing’). As a result banks that mainly engage in traditional banking, i.e. lending to firms for investment, have come under major pressure, while this type of ‘QE’ has produced profits for those large financial institutions engaged mainly in financial speculation and its funding.

The policy of negative interest rates is thus consistent with the agenda to drive small banks out of business and consolidate banking sectors in industrialised countries, increasing concentration and control in the banking sector.

It also serves to provide a (false) further justification for abolishing cash. And this fits into the Bank of England’s surprising recent discovery that the money supply is created by banks through their action of granting loans: by supporting monetary reformers, the Bank of England may further increase its own power and accelerate the drive to concentrate the banking system if bank credit creation was abolished and there was only one true bank left – the Bank of England. This would not only get us back to the old monopoly situation imposed in 1694 when the Bank of England was founded as a for-profit enterprise by private profiteers. It would also further the project to increase control over and monitoring of the population: with both cash and bank credit alternatives abolished, all transactions, money creation and allocation would be implemented by the Bank of England.

With all money being electronic money, one can already predict the questions ‚raised‘ by the PR departments of central banks and keenly picked up by the mainstream media: How could one increase the security and safety of this digital money. What if one loses one’s direct debit card? No doubt, some bright Bank of England spark, or else any of the talking heads in the media, will then suggest we should adopt the techniques long practiced with our pets, namely of implanting microchips under the skin as our money of the future. Whether this spells progress readers needs to decide for themselves.

 

First published in the October 2015 Liquidity Watch report by Prof. Richard A. Werner

10 July 2015

By Richard A. Werner

Will Greece default or exit from the euro, or both? First, I will describe the best course of action, then what I think will happen. The two are not the same: In Europe, policy actions have diverged from the optimal course of action for most of the last two decades.

Consider first the 1990s. Like many economists, at the time I pointed out that the plans by the eurocrats to introduce a single currency were thoroughly misguided: monetary policy is the most powerful policy arm, and there is no reason why any government should amputate it. As I argued then, historically the German D-Mark had been strengthening since its introduction in 1948 against the currencies of its neighbours, and this reflected – and compensated for – increased German competitiveness. Their weakening currencies allowed German trade partners to keep their export industries in business and their workers employed. By introducing a single currency, future revaluations of the German currency were disallowed. This amounted to a de facto future devaluation of German purchasing power, revaluation of the currencies of the other European countries, and hence would render non-German economies less and less able to compete against German exports over time.

To economists – even of the mainstream ilk – it was clear what would have to follow: Unable to depreciate their currencies, countries such as Spain, Italy, let alone Greece would need to conduct what is euphemistically called an ‚internal devaluation‘, i.e. wages would have to fall significantly and domestic purchasing power would have to be reduced. Countries refusing to implement such austerity policies or trying to circumvent them would face ballooning trade deficits with Germany and the need for ever greater borrowing from the German central bank (via what came to be known as TARGET2). Their debt would swell, until reaching an unsustainably high level, and then something drastic would have to happen – default, exit from the single currency, or both. It was an almost unique instance where most economists – famous for disagreeing – agreed.

When visiting Europe at the time (I was based in Tokyo in the 1990s), and meeting my peers, the chief economists at other banks, I would of course discuss what in my view was the highly worrying prospect of these plans to abolish the D-Mark. I was astonished by their reaction. About half of them insisted that those plans were so lunatic that, of course, they would not be implemented. This was a bad call, since the commitment to the single currency had been enshrined in the Maastricht Treaty in 1993 and the eurocrats were implementing a pre-ordained implementation plan resulting, by the end of the 1990s, in fixed exchange rates, and by 2001 a single currency. I had had the opportunity to hear Mr Alexandre Lamfallusy, the leading technocrat tasked with the introduction of the single currency, speak in Tokyo around 1996. He presented his road map. The astonishing aspect was the level of detail. He told us, years in advance, in which European cities the chiefs of central banks and the finance ministers would meet and what they would decide; when and where their deputies would meet and what they would decide; and where and when the heads of government would meet, and what they would decide: month after month of detailed scheduled meetings, with a complete script of pre-ordained outcomes, named after the cities in which the meetings were to take place. His confident presentation made it clear that he expected this script to be followed to the letter. I saw no reason to doubt his words. (Needless to mention, this is what happened).

The other half of the chief economists, like me, recognised that a single currency would be introduced, no matter how nonsensical the economics, since it was a political project. (The economics being bad, the politics was even worse: the end of democracy in Europe). They agreed with me that it was going to be a disaster. I asked the chief economist of what was then the fourth largest German bank: „If you think so, why don’t you speak up about this? You are forecasting gloom and doom, but I don’t see any reports by you or your bank about it.“ His answer was shocking: He said that there had been clear instructions from the boards of all the large German banks to their staff that no report on the abolition of the D-Mark and the introduction of a European single currency that was in any way negative was allowed to be published. The economists in the private sector had been muzzled by their bosses. The same I heard from journalists. So the German media only quoted the rigged reports from the banking economists.

As I warned in my 2003 book Princes of the Yen, in the event the European Central Bank was to exacerbate matters greatly by creating massive credit bubbles, banking crises and recessions in its first decade of operation. The ECB then ensured a prolonged crisis by not ending these banking busts, such as in Ireland, quickly and without costs to the tax payer (as central banks are uniquely able to do). Instead, the ECB forced governments to incur massive national debts to rescue their now defunct banking systems. This way, Ireland moved from fiscal poster boy to virtual default, needing an IMF ‚rescue‘.

And this, coupled with excessive consumption and spending during the boom years, is how Greece got into its current predicament.

So it is high time to recognise that the introduction of the euro was a mistake. It is time to cut our losses, instead of throwing good money after bad. Eurozone countries should therefore now show solidarity with Greece and all exit the eurozone together. This can be done by simply reversing the procedures of introducing the euro.

By abandoning the euro, each country would regain control over monetary policy and could thus solve their own particular predicament. Some, such as Greece, may default, but its central bank could limit the damage by purchasing the dud bonds from banks at face value and keeping them on its balance sheet without marking to market (central banks have this option, as the Fed showed again in October 2008). Banks would then have stronger balance sheets than ever, they could create credit again, and in exchange for this costless bailout central banks could insist that bank credit – which creates new money – is only allowed for transactions that contribute to GDP in a sustainable way. Growth without crises and large-scale unemployment could then be arranged.

As to the question of what will actually happen with Greece, we can be short: President Obama called Angela Merkel a fortnight ago and apparently told her that it was ‚critical‘ to keep Greece in the euro. Legally, Germany is not a sovereign state; in practice, it is beholden to the US. It is thus likely that a deal will be made, as the US project of ‚ever closer union‘, the transfer of all powers and sovereignty to an unelected Brussels elite reporting to Washington, must continue, no matter the costs for the European peoples.

Professor Richard Werner is Chair in International Banking at the University of Southampton, Director of its Centre for Banking, Finance and Sustainable Development, and Chairman of Local First Community Interest Company.

You can follow Professor Werner on Twitter @professorwerner.