Wednesday, 5 October 2011

The PIGS are not the problem – it’s China!

Democracy needs a scapegoat.

During the Cold War it was the Russians; now it’s the PIGS.

They, we are regularly assured, are the cause of the problem, and we come down on them harder and harder.

Fairness, reason, play no part in it.

It’s THEM!

The news again this morning is full of ‘them’.

Italy has had its credit rating downgraded. Greece is failing to meet its deflationary targets. Even Belgium (always good for a bit of scorn) is having problems with one of its banks.

Boo, boo (ya boo)?

It’s all bullshit. We’re shouting at the wrong horse.

Debt is not a problem in a capitalist economy.

To start, let’s get the first hurdle cleared: debt is NOT a problem in a capitalist economy.

Nobody ever maintains a sense of proportion in this kind of situation – they always merely retweet the propaganda. Today, we’re supposed to be aghast because Greece has a debt 170% of its GDP.


There are many people in this country who have a mortgage five, six, seven times their annual income, but they’re all waking up this morning and smiling at the sunshine!

As long as you’re earning enough to make the repayments, debt is no problem at all.

Debt only becomes a problem when you lose your job; and even then, it’s usually possible to go to your bank, restructure your debt … survive until you get another job.

Another solution, of course, is to get a rich parent to pay off the mortgage – or, at least, take over the payments until you can afford them again.

Even assuming that Greece and Italy have done the international equivalent of losing their job, the current ‘solutions’ they are being forced to take are NOT the answer:

IF the problem is too much debt, WHY are we forcing these PIGS nations to take more huge loans from us (at quite a high rate of interest)?
IF the problem is making their payments, why are we down-grading their credit rating so that they have to pay MORE for their debt?

‘The only way out of a debt crisis is for governments to pay off their debts’ is the message I am told that David Cameron is going to give today at the Tory Conference.

But IF we want the PIGS nations to pay off their debt, why are we forcing them to impose viciously deflationary measures which will put their economy, and their taxpayers, out of work?

That really IS the international equivalent of ‘losing your job’.

How the world economy works

NONE of it makes sense.

I have a strange vision of myself as a David Icke character, ‘the only person in the world who knows the truth’.


But it seems so simple that I cannot believe that no one else out there is saying it.

There is no mystery to the economy. The economy may be difficult to control, but it is easy enough to understand.

The key to wealth is trade.

Trade makes the economy go round. Trade makes wealth.

I have explained in a previous blog a simulation which demonstrates this.

Another analogy would be blood.

Trade, like blood, pumps round the world economy.

When it’s going fast – like an athlete’s heart-beat – the economy is active, achieving, breaking world records.

The USA buys Greek olives. The Greeks use the money to buy French wine. The French buy a fighter jet from Lockheed.

Round and round the money goes, and the greater the velocity of transactions, the more we all accumulate wealth and possessions, the outcome of our trading.

But when the circulation slows, the economy becomes a metaphorical couch potato, sluggish, ‘ticking over’, atrophying.

That is why the western world has spent the last century inventing different clever ways to buy without spending – Hire Purchase, credit cards, buy-now-pay-later etc.

Because – in order to trade – I do not need you to pay for the goods or services I have provided you with! All I need is for funds to be credited to my account from somewhere so I can go out and buy something from someone else!

I suppose the archetypal example was the Marshall Plan. After the Second World War, with the world economy languishing, the USA pumped billions of dollars into Europe, more-or-less on a ‘pay-it-back-when/if-you-can’ basis.

Shelling out that money did not ruin the Americans … far from it – those European countries promptly gave it straight back to American businessmen for weapons, food and machinery! And the Americans bought things from Europe, and the Europeans bought things from each other, and the world ‘got going’ again.

China and the demise of the western economy

So what has gone wrong?

If the problem is not the Greek debt, what IS the problem?

I think there’s a strong argument that – on an international scale – it’s China.

We allowed China onto the international trading scene, but the Chinese aren’t playing the game by the capitalist rules.

(Remember what those rules are – I buy something from you, you use the money to buy something from me, and the faster we do it the wealthier we are.)

The Chinese are selling, but they’re not buying.

They’re just selling, and ponding up their profits in HUGE foreign currency reserves.

The most recent figure I have is $2.85 trillion.

And that unreciprocated $2.85 trillion is the reason Greece cannot pay back its loans – China not spending that money buying Greek olives is the international equivalent of Greece ‘losing its job’.

Using my analogy of trade as human blood, it is as though the world’s body has developed a HUGE haematoma, which is just growing uncontrollably, stealing blood from the rest of the vascular system.

So Cameron is wrong. The WORST way out of a debt crisis is for governments to pay off their debts. In a capitalist economy, the only way out of a debt crisis is to trade your way out of it.

And to do that, China needs to play its part.

Persuading them to donate the Chinese equivalent of a Marshall Plan, or to buy $2.85 trillion-worth of European goods, is another matter, of course, even if they aren’t doing all this knowingly on purpose to try to destroy the West.

But at least let’s put blame where blame is due.

And the thing is the Chinese don’t need to begrudge pumping that money back into the system, because the FIRST thing we’ll do with it is to buy more goods from China.

And we’ll all get wealthier.

Because that is how the world economy works.

Osborne at the home situation

And just to finish with a brief comparison with the home system.

Because what Cameron and Osborne are doing with the world economy, they’re doing to the home economy.

This country has its own debt crisis – unsecured debt of £1.4 trillion

Cameron today will tell the country to pay off its credit cards!

But just like China is ponding up international funds, the gap between rich and poor has been growing in this country for the last 15 years. Wealth in this country is ponding up in the bank accounts of the rich.

Osborne’s solution is to make the poor poorer, and to make the rich (the ‘wealth creators’) richer.

But (again) that is the WORST solution.

The way to pay off Britain’s debt is to get the economy going, buying from and selling to each other and the rest of the world.

Borrowing more money to pump-prime the economy, of course, is NOT the answer – that just makes the problem worse.

Incidentally, getting people to pay off their credit cards (essentially, saving) is ALSO just about the most disastrous thing you could tell people to do. In fact, domestic debt is already falling quickly, and this is adding to deflationary pressure. Because when people are paying off their debts, they are not spending it buying things from (giving money-for-trade to) others, and they are deflating the economy.

No. What we need is the domestic equivalent of the Marshall Plan.

By gift or by taxes or by simply spending what they have, we need the rich to pour their accumulated money into the economy, employing people, buying stuff from them.

And the thing is the rich businessmen don’t need to begrudge pumping that money back into the system, because the FIRST thing the poor people will do with it is to buy more goods from the rich businessmen.

And we’ll all get wealthier.

Because that’s how the domestic economy works.

1 comment:

  1. Since I wrote this, of course, things have moved on. We have been told that private firms in Britain are responsible for hoarding £_billions which they have not invested. And there has been the 1% movement (exemplified in the 'Occupy' protests) who have drawn attention to the vast amounts of money which the richest people are accumulating.
    But my basic analysis remains true. It's not the debt-accumulators who have broken the economy (they are the ones who have, beyond their means, been keeping it going all this time), but the wealth-ponders. And now the wealth-ponders are insisting on austerity measures, things will get worse. Trade is down; the economy is atrophying.
    The only answer to reinvigorate the economy is that we find a way to get that ponded money back into circulation - into spending - and the best way to do that is to tax the rich and give it to the poor (who will sopend it fairly quickly).
    See here: