Category: Economics

Let’s start by asking about the causes of our present economic crisis and look at three long-term changes that might have something to do with it.

1. Finance and the real economy
First, is it basically a financial crisis or an economic one? Has the relationship between the financial services and the wider economy got out of balance? If so, why? It is the job of the banks to allocate capital to the rest of the economy. They have to get money to the place in which it can be most productively used. How successful is the banking industry at allocating capital to industries other than itself? The financial sector has been growing as a proportion of the economy, and has grown spectacularly over the last ten years. What is behind that? Surely it has not grown at the expense of other industries? Surely other industries have not receded as a result of the expansion of banking? What is cause and what effect in this relationship between the financial sector and the economy?
Then there is another thing. Debt with compound interest is a threat to individuals, corporations and to the long-term stability of the economy as a whole since demands for interest payments grow faster than the economy can. The curious thing is that this appeared to have been forgotten, and restrictions that every society must place on debt abandoned until very recently.

2. Older and more worried
A large population of 50-70 year olds is looking for places to put its savings, and can’t find enough places. Then individual members of this age-group realise that their savings won’t be enough to keep in them the style they were hoping for right to the end. They start to look for increasingly speculative ways of getting ahead of the crowd, so speculation becomes the norm. The children of the baby-boomers have been loaded with obligations because their own parents have been unwilling to adjust their expectations downwards.
The future is that a large dependent population is cared for by a smaller population, but the more that prospect emerges, the smaller the future population becomes as people find other things to do than have children. Can you even have a growing economy if you have a declining population?

3. Not as fiercely independent as we used to be
We have exporting our industries, and with them has gone some of the culture of work and sense of community that those old industries sustained. Work gives you confidence, perhaps enough of it to do that most public-spirited thing, settle down and start a family with someone, and then stick with them through thick and thin. If you give the children your undivided attention they have a good chance of becoming the dynamic creative economic agents of the future. As it creates more legislation the state inadvertently takes away individual responsibility and takes away the incentive to exercise it. There been a corresponding loss of willingness to start families and for partners to sustain their marriages in order to bring their children up and create that next generation of motivated economic agents. If you delegate too many of those responsibilities to the state, they and you have a good chance of slipping into a dependency culture without an easy way out. Oops.
Now we have been transferring liabilities to the state so fast that some nervous people wonder whether our government can continue to meet them. Can states go bankrupt too?
So there you are – three candidates for underlying cause of the crisis. These do not show that a financial storm blew up out of nowhere because some bankers got careless. They show that the emergence of the distended financial sector is the manifestation of an underlying crisis in inter-generational relationships and the culture that is supposed to encourage one generation to bring the next into existence. This inter-generational economics is the new wave. You heard it here first.

Christian responses
So much for causes of the crisis. The much more interesting part of this discussion is about the responses that Christians can make to it. Here are some hints:
1. Christians look forward to an alternative economy which they call the kingdom of God, though they could equally well call it the economy of God.
2. Modern economics makes it unnecessary for us to judge for ourselves, for we can delegate our responsibility. Ethics is over, for the market can make our decisions and if it can’t the state will take care of them for us.
3. But Christians operate a different account of human being in which no one can be stripped of responsibility. This can make life rather awkward, though also more rewarding.
4. Christians suggest that you can’t get to forgiveness without going through judgment. It looks as though we all have to be a little judgmental after all.
5. Christians pray Forgive us our trespasses. They are talking about their own trespasses, but maybe they are talking about other people’s trespasses as well. They are interceding for others. Maybe they are even bearing the punishment for others too. The secret of Christian economics is the Christian view of human being, and the secret of the Christian view of human being is Jesus Christ. The priestly and sacrificial work of Christ who, by removing our trespasses, paying our debts and taking down all obstacles to it, restores the functioning of the human economy. It is not primarily the free market that is on our side, nor even the modern welfare state. It is God who is on our side, and who, if asked, can give us the forgiveness, the resources and the new start we need.

If you are interested and in London, come along to this Saint Augustine Institute event on Friday 19th November –

There is an easy solution to the financial crisis, but it involves exposing a problem that governments and economists have ignored for decades.
Much of the poverty in the world is due to the design on the banking system used in most countries, which allows 97% of money to be created by profit-making banks, and only 3% of money to be created by the government. Money created by the banks benefits the banks; money created by the government benefits everyone. This might sound difficult to believe at first, but it is accurate.
If we change this system so that money can only be created by the government (acting on behalf of the people), we could:

phase out national debt and significantly reduce corporate and consumer debts (in both the US and the UK)
reduce taxes by around 30%, permanently, or increase government services with no increase in taxation
find the money needed to solve the energy crisis
enjoy higher disposable income, or take more time off from work
avert the oncoming pensions crisis
wipe out the debt of poverty-stricken nations
Save 60% on the cost of public infrastructure projects (such as schools, hospitals and public transport), by removing the need to borrow this money and pay interest over 30 years

We are currently standing at a fork in the road. One road leads to poverty for almost everyone, while the other leads to greater wealth for everyone. Politicians and economists are taking us down the road to poverty, because they don’t know that any other option exists. If we want them to change track, and do everything that is listed above, then we – the public – need to show them that the other road does exist.
Start by reading A Quick Introduction to the Real Cause of the Crisis for a beginner-friendly explanation of the problem, the consequences, and the solution to the recent financial crisis and our current financial problems
The (proposed) Bank of England Act 2010
And see Ben Dyson and James Robertson

The problem is made worse still because of the way the tax burden will be distributed. For some older people – such as those in retirement – there isn’t much problem at all. They benefit from the government’s commitments, but are unlikely to have to pay much towards their cost. For young people, it is the other way round: they are expected to pay large amounts into the system and get little back in return; and the younger the person, the worse the deal. So we have an average, per person, tax burden of £73,000 if we are feeling optimistic and nearly £117,000 if we are feeling pessimistic – but in either case possibly much higher, and certainly rising – that is distributed very unevenly across the population: younger people paying much more, and older people less, if anything at all. One recent estimate suggested that a UK citizen born in 2011 will inherit, on birth, a debt of perhaps £200,000, and it could easily be much more. It is simply inconceivable that debts on this scale will be paid off in full.

Nor should they. These were not debts that youngsters freely took on, but obligations incurred on their behalf in many cases before they were even born. The uncomfortable moral question then naturally arises: at what point does the debt become so large that our future children will be born into a new form of slavery, entering the world shackled by the debts of their forbears?

This highlights the underlying moral as well as fiscal bankruptcy of the system. For years, politicians yielded to the temptation to increase spending commitments and put off the costs of those decisions into the future, when it would be someone else’s problem…. In so doing, our political system created a huge intergenerational Ponzi scheme, passing the buck from one generation to the next, until the whole rotten system inevitably collapses under its accumulated weight. The long-term, even medium-term, outlook is therefore deeply unpleasant. Taxes will rise, sharply, but these rises will not be enough, and will leave younger people with little incentive to work or to save. Benefits across the board will be cut, massively: the government will renege big-time on many of its commitments, breaking its health, pensions and other promises on a huge scale. The social and economic consequences don’t bear thinking about. And of course there is the very real danger that even these draconian measures will not be enough: that the government will lose all control of its finances and end up printing money to pay off its debts, so leading to hyperinflation and economic collapse.

Kevin Dowd The UK is Broke Cobden Centre

They are still more worried over at the Automatic Earth – 40 Ways to Lose your Future

Here for your delectation are three cracking new Christian analyses of economics:

John Médaille Toward a Truly Free Market: A Distributist Perspective on the Role of Government, Taxes, Health Care, Deficits, and More . You’ll find some of John Médaille’s papers at his website, and at the Distributist Review and Front Porch Republic.

At long last it seems that John D Mueller’s Redeeming Economics: Rediscovering the Missing Element is about to appear. Mueller gives a very significant re-telling of economics’ history with Augustine and Aquinas set in their foundational place, from which I have borrowed. You’ll find some of Mueller’s stuff at the EPPC

And there are some classic Wendell Berry essays in his new What Matters?: Economics for a Renewed Commonwealth.

If you are looking for long-term causes of our ongoing financial crisis, these three are a fine place to start

Let me tell you exactly what is going on “out there.” The so-called developed world is watching two giant forces race each other to put an end to business-as-usual for industrial civilization. These two forces are the catastrophe of debt and predicament of oil supplies. They had been running neck-and-neck for a few years, but now the catastrophe of debt is pulling slightly ahead. But even this is an illusion because these two forces are actually hitched in tandem, with the rickety cart of civilization bouncing perilously behind them, and whatever one of these forces does will affect the other. Bad debt will eventually cripple the global oil industry’s ability to perform, and the failures of the oil industry will only amplify the killing force of debt. It’s that simple.
And the simple moral of the story is that the only sane thing America can do is simplify itself, de-complexify its dangerously hyper-complex organs of daily life. I’ve stated them before but, briefly, this means simplifying the way we do farming, commerce, transportation, inhabiting the landscape, schooling, medicine, and banking. Everything we do to add additional layers of complexity to these already tottering systems will guarantee an eventual orgy of blood and material destruction to this land. Everything we do to prop up the unsustainable instead of reconstructing the armatures of everyday life will make American life a nightmare in a very few years ahead.
Jim Kunstler In the headlights

If you are up to it, a gentle review of the issues is always available from the Automatic Earth

Introduction to ‘Gospel and Economy’

Unregulated finance, the ideology of unfettered free markets, and state capture by corporate interests are what ended up undermining democracy both in North America and in Europe. All industrialized countries are at risk, but it’s the eurozone – with its vulnerable structures – that points most clearly to our potentially unpleasant collective futures.
As a result of the continuing euro crisis, European Central Bank (ECB) now finds itself buying up the debt of all the weaker eurozone governments, making it the – perhaps unwittingly – feudal boss of Europe. In the coming years, it will be the ECB and the European Union who dictate policy. The policy elite who run these structures – along with their allies in the private sector – are the new overlords.
We can argue about who exactly are the peasants, the vassals, and the lords under this model – and what services exactly will end up being exchanged. But there is no question we are seeing a sea change in the post-war system of property, power, and prosperity across Western Europe, just as Hayek feared. An overwhelming debt burden will bring down even the proudest people.
Simon Johnson The European Road to Economic Serfdom
Our own red-tory Philip Blond’s Respublica publishes The Venture Society – A small state, big (civil) society, please. It’s a mess of pottage but you have got to wish them luck. Curious how the Front Porch Republicans, of whom the excellent Patrick Deneen is the latest, have taken him to heart. Meanwhile my own account of these matters is nearly presentable enough to be shown to good friends.

Spread out before the early settlers of this continent was incredible untapped wealth in the form of vast unsettled lands filled with natural resources—all for the taking. Now that the Frontier is mostly tapped out, we are seeing the long, slow, decline from prosperity to scarcity…and with it the loss of individual freedom. How long will it be before we see masses of government-dependent Americans protesting in the streets of our urban centers because the messiah state can no longer provide them with the handouts they have grown to depend on; that they feel they have earned and have a right to? The taking and the giving and the borrowing by government is unsustainable. We all know this. And we know the day of reckoning is coming. The best that messiah government can do is obscure the reality and delay the inevitable.

How then shall people who are cognizant of this eventuality live? Disengage as much as possible from these dependencies. Simplify your wants and needs. Steer clear of the bondage of debt. Provide for your needs of food, heat, and shelter as much as you can with your own hands and backbone. And, most fundamentally, turn your eyes from the false messiah state to the true Messiah. This response is as much spiritual as it is physical. What I am talking about is a return to the American pioneer spirit, characterized by a firm reliance on the God of the Bible, hard physical work, thrift, self-reliance, subsistence, and the family economy. While it is true that the Great Frontier, with all its uninhabited land and untapped natural resources is now, for all practical purposes, gone, the land remains. And if properly husbanded, the land can still sustain pioneer families in this new century, fraught as it is with impending shortages and instabilities.

Living on a section of land and working to make it productive will not bring wealth sufficient to satisfy the average modern American who is conditioned by our culture to spend, borrow, consume, and spend, borrow, waste. But in the days ahead, those people who have returned to the land, have equipped themselves with the tools and knowledge to make the land productive, and who are secure and content with little, these people will provide a valuable example for the helpless, discontent, and confused all around them. Pioneering is totally contrarian to the spirit of this age, but it is a positive, refreshing, satisfying course of action. It is the only appropriate personal response in the midst of the crisis we find ourselves in.
Herrick Kimball The Deliberate Agrarian

Here is a draft of the first chapter of the Economics book for your inspection.

1 Man and Economy

I have been both a central banker and a market regulator. I now find myself questioning whether my early career, largely devoted to liberalising and deregulating banking and financial markets, was misguided. In short, I wonder whether I contributed – along with a countless others in regulation, banking, academia and politics – to a great misallocation of capital, distortion of markets and the impairment of the real economy. We permitted the banks to betray capital into â??hopelessly unproductive worksâ??, promoting their efforts with monetary laxity, regulatory forbearance and government tax incentives that marginalised investment in â??productive worksâ??. We permitted markets to become so fragmented by off-exchange trading and derivatives that they no longer perform the economically critical functions of capital/resource allocation and price discovery efficiently or transparently. The results have been serial bubbles – debt-financed speculative frenzy in real estate, investments and commoditiesâ?¦. While the problem is usually expressed as one of confidence, a more honest conclusion is that credit extended in the past has been employed unproductively and so will not be repaid according to the original terms. In other words, capital has been betrayed into unproductive works. The credit crunch today is not destroying capital but recognising that capital was destroyed by misallocation in the years of irrational exuberance. If that is so, then we are entering a spiral of debt deflation that will play out slowly for years to come.
London Banker