Though investments in renewable energy and green infrastructure are necessary for building a sustainable world, they are not sufficient. Barring an overhaul of the global financial and monetary system, humanity will keep stumbling from one massive, destabilizing crisis to the next.
LONDON – Today’s global economy suffers from multiple imbalances. The fundamental economic objective of endless “growth” fuels increases in heat-trapping atmospheric gases above and beyond what the planet can sustain. Urbanization, pollution, soil erosion, deforestation, the destruction of wildlife, and the degradation of marine ecosystems: these and other consequences of economic activity threaten humanity’s life-support system.
Worse, these ecological imbalances are further compounded by economic imbalances. The overproduction of oil, steel, diamonds, and cocoa (to list just a few examples) is at odds with declining global purchasing power, which is driving a trend toward “underconsumption” (as first defined by the economist John A. Hobson in his 1902 book, Imperialism).
Moreover, persistent imbalances between countries with large current-account surpluses and deficits create international tension, leading to protectionism and trade wars. Even before COVID-19, capital-account imbalances had rendered many countries vulnerable to capital flight or sudden stops. Global financial imbalances are of the greatest concern. The generation of boundless private and public credit has eclipsed the global income needed to pay down debt. Reckless lending to “special purpose acquisition companies” that borrow to finance spurious “undertakings which shall in due time be revealed” has resulted in a proliferation of financial bubbles.
Finally, there are today’s historically unprecedented imbalances in wealth – a feature of the system, not a bug. Capital today wields vastly greater power than labor. As the economist Guy Standing has shown, global plutocrats now lord it over a global precariat. To complicate matters further, economic-power imbalances between OECD members and poorer countries have led to an alarming rise in geopolitical strains.
The system is so unstable that it took a microbe just a few months to derail the entire global economy.
To be toppled by a pandemic that many actually predicted can be called careless, but to be unprepared for foreseeable future shocks is downright reckless. Scientists have warned about the threat of climate breakdown and the potential for future pandemics, yet most societies remain indifferent to looming ecological threats.
At a time when democracy is under threat, there is an urgent need for incisive, informed analysis of the issues and questions driving the news – just what PS has always provided. Subscribe now and save $50 on a new subscription.
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The world’s multiple imbalances can be traced back to the architecture of the international financial system, created not so much by conscious design as by the “invisible hand” of capital markets. Its implied (if not overt) purpose is to protect the interests of international creditors, investors, and speculators. Its structure thus bears a close resemblance to the “barbaric relic” that was the nineteenth-century gold standard, designed to protect the interests of the world’s biggest creditor, the City of London.
The system’s fundamental design flaws were exposed yet again this year, when creditors, investors, and speculators buckled under the strain of the pandemic and were promptly bailed out by taxpayer-backed central banks. For the US Federal Reserve and other major central banks, the top priority is not to stabilize the financial system, but rather to keep it spinning.
Hence, earlier this year, when the real economy was tanking, the Fed, “merely by virtue of its promises, was responsible for putting $7.1 trillion of wealth in the hands of equity investors,” notes the historian Robert Brenner. And the same was also true in the years following the 2008 financial crisis, when, as economist Trevor Jackson explains, the Fed flooded “financial markets with cash as quickly as possible, so banks could keep lending, buyers of stocks could keep buying, and institutions could keep making their debt payments.”
As the issuer of the world’s main reserve currency, the Fed stands at the apex of the world’s monetary and financial system, and was the sole source of global liquidity during the pandemic, providing dollars (via currency “swap lines”) to every bank and creditor in the world, but also to select central banks. Those excluded from this imperious largesse include most low-income countries, but also China.
In thinking about the prospects for a “green recovery,” the question is how to transform a structurally unstable system to prepare for future shocks. The first priority must be to put finance back in its proper place as servant, not master, of the global economy. As Barron’s commentator Michael C. Klein and Michael Pettis of Peking University argue in Trade Wars Are Class Wars, today’s central social, political, and economic conflict is “mainly between bankers and owners of financial assets on one side and ordinary households on the other – between the very rich and everyone else.”
To resolve such conflicts and address broader threats to human survival, we must establish more democratic oversight of the international financial system. Management by states with democratically legitimized public authority must reverse today’s de facto governance by private authority in Wall Street and the City of London. We know this can be done, because a similar transformation was achieved, almost overnight, in 1933 by US President Franklin D. Roosevelt. As Roosevelt’s Secretary of the Treasury Henry Morgenthau explained at the time: “We moved the financial capital from London and Wall Street right to my desk at the Treasury.”
Next, we need a global alternative to the dollar. To that end, Mark Carney, before stepping down as governor of the Bank of England, outlined a plan for a new “synthetic hegemonic currency,” which would be provided by the public sector, perhaps through a network of central-bank digital currencies. An SHC “could support better global outcomes” across the international monetary and financial system, not least by mitigating the risks of a disruptive “transition to a new hegemonic reserve currency like the renminbi.” By dampening the “domineering influence of the US dollar on global trade,” said Carney, an SHC could reduce the international spillover effects of US-based shocks, and allow trade to become “less synchronized across countries.”
In any case, the goal should be to manage the financial system in such a way as to create and maintain a steady-state economy that will provide for humanity’s wellbeing within ecological limits. From this perspective, the most damaging aspect of globalized, under-regulated credit creation is the financial sector’s demand for high real rates of return on a relatively effortless process: the creation of new money. If interest rates exceed the capacity of the Earth or the economy to renew itself, they become brutally extractive. That must change.
To undertake such a transformation will require governments to mobilize as if for war. That will mean bringing offshore capital back onshore, both to manage capital flows and to domesticate finance for the sake of systemic stability. As an added bonus, this will also help prevent multinational corporations from evading taxes on profits generated in that state’s jurisdiction. Those revenues are needed if investments in transforming transport, energy, land use, and care are to be affordable.
Democratic governments must be empowered both to manage their domestic economies and to collaborate internationally in the interest of economic stability. That requires a great transformation of the international monetary and financial system. There simply is no other way to address the deep-seated imbalances underlying unsustainable forms of economic activity that threaten humanity and the planet.
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LONDON – Today’s global economy suffers from multiple imbalances. The fundamental economic objective of endless “growth” fuels increases in heat-trapping atmospheric gases above and beyond what the planet can sustain. Urbanization, pollution, soil erosion, deforestation, the destruction of wildlife, and the degradation of marine ecosystems: these and other consequences of economic activity threaten humanity’s life-support system.
Worse, these ecological imbalances are further compounded by economic imbalances. The overproduction of oil, steel, diamonds, and cocoa (to list just a few examples) is at odds with declining global purchasing power, which is driving a trend toward “underconsumption” (as first defined by the economist John A. Hobson in his 1902 book, Imperialism).
Moreover, persistent imbalances between countries with large current-account surpluses and deficits create international tension, leading to protectionism and trade wars. Even before COVID-19, capital-account imbalances had rendered many countries vulnerable to capital flight or sudden stops. Global financial imbalances are of the greatest concern. The generation of boundless private and public credit has eclipsed the global income needed to pay down debt. Reckless lending to “special purpose acquisition companies” that borrow to finance spurious “undertakings which shall in due time be revealed” has resulted in a proliferation of financial bubbles.
Finally, there are today’s historically unprecedented imbalances in wealth – a feature of the system, not a bug. Capital today wields vastly greater power than labor. As the economist Guy Standing has shown, global plutocrats now lord it over a global precariat. To complicate matters further, economic-power imbalances between OECD members and poorer countries have led to an alarming rise in geopolitical strains.
The system is so unstable that it took a microbe just a few months to derail the entire global economy.
To be toppled by a pandemic that many actually predicted can be called careless, but to be unprepared for foreseeable future shocks is downright reckless. Scientists have warned about the threat of climate breakdown and the potential for future pandemics, yet most societies remain indifferent to looming ecological threats.
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At a time when democracy is under threat, there is an urgent need for incisive, informed analysis of the issues and questions driving the news – just what PS has always provided. Subscribe now and save $50 on a new subscription.
Subscribe Now
The world’s multiple imbalances can be traced back to the architecture of the international financial system, created not so much by conscious design as by the “invisible hand” of capital markets. Its implied (if not overt) purpose is to protect the interests of international creditors, investors, and speculators. Its structure thus bears a close resemblance to the “barbaric relic” that was the nineteenth-century gold standard, designed to protect the interests of the world’s biggest creditor, the City of London.
The system’s fundamental design flaws were exposed yet again this year, when creditors, investors, and speculators buckled under the strain of the pandemic and were promptly bailed out by taxpayer-backed central banks. For the US Federal Reserve and other major central banks, the top priority is not to stabilize the financial system, but rather to keep it spinning.
Hence, earlier this year, when the real economy was tanking, the Fed, “merely by virtue of its promises, was responsible for putting $7.1 trillion of wealth in the hands of equity investors,” notes the historian Robert Brenner. And the same was also true in the years following the 2008 financial crisis, when, as economist Trevor Jackson explains, the Fed flooded “financial markets with cash as quickly as possible, so banks could keep lending, buyers of stocks could keep buying, and institutions could keep making their debt payments.”
As the issuer of the world’s main reserve currency, the Fed stands at the apex of the world’s monetary and financial system, and was the sole source of global liquidity during the pandemic, providing dollars (via currency “swap lines”) to every bank and creditor in the world, but also to select central banks. Those excluded from this imperious largesse include most low-income countries, but also China.
In thinking about the prospects for a “green recovery,” the question is how to transform a structurally unstable system to prepare for future shocks. The first priority must be to put finance back in its proper place as servant, not master, of the global economy. As Barron’s commentator Michael C. Klein and Michael Pettis of Peking University argue in Trade Wars Are Class Wars, today’s central social, political, and economic conflict is “mainly between bankers and owners of financial assets on one side and ordinary households on the other – between the very rich and everyone else.”
To resolve such conflicts and address broader threats to human survival, we must establish more democratic oversight of the international financial system. Management by states with democratically legitimized public authority must reverse today’s de facto governance by private authority in Wall Street and the City of London. We know this can be done, because a similar transformation was achieved, almost overnight, in 1933 by US President Franklin D. Roosevelt. As Roosevelt’s Secretary of the Treasury Henry Morgenthau explained at the time: “We moved the financial capital from London and Wall Street right to my desk at the Treasury.”
Next, we need a global alternative to the dollar. To that end, Mark Carney, before stepping down as governor of the Bank of England, outlined a plan for a new “synthetic hegemonic currency,” which would be provided by the public sector, perhaps through a network of central-bank digital currencies. An SHC “could support better global outcomes” across the international monetary and financial system, not least by mitigating the risks of a disruptive “transition to a new hegemonic reserve currency like the renminbi.” By dampening the “domineering influence of the US dollar on global trade,” said Carney, an SHC could reduce the international spillover effects of US-based shocks, and allow trade to become “less synchronized across countries.”
In any case, the goal should be to manage the financial system in such a way as to create and maintain a steady-state economy that will provide for humanity’s wellbeing within ecological limits. From this perspective, the most damaging aspect of globalized, under-regulated credit creation is the financial sector’s demand for high real rates of return on a relatively effortless process: the creation of new money. If interest rates exceed the capacity of the Earth or the economy to renew itself, they become brutally extractive. That must change.
To undertake such a transformation will require governments to mobilize as if for war. That will mean bringing offshore capital back onshore, both to manage capital flows and to domesticate finance for the sake of systemic stability. As an added bonus, this will also help prevent multinational corporations from evading taxes on profits generated in that state’s jurisdiction. Those revenues are needed if investments in transforming transport, energy, land use, and care are to be affordable.
Democratic governments must be empowered both to manage their domestic economies and to collaborate internationally in the interest of economic stability. That requires a great transformation of the international monetary and financial system. There simply is no other way to address the deep-seated imbalances underlying unsustainable forms of economic activity that threaten humanity and the planet.