Ann Pettifor was born in Sudafrica, but this analyst of the global financial system is based in the UK. She is the director of Policy Research in Macroeconomics (PRIME), a member of the Green New Deal Group and a fellow of the New Economics Foundation. Besides, she has advised governments on sovereign debt restructuring and sustainable development; and since 2015 she is a member of the British Labour Party’s Economic Advisory Committee, reporting to Jeremy Corbyn.
Pettifor predicted the Global Financial Crisis in several publications including her 2006 book, «The Coming First World Debt Crisis». In her last publication, «The Production of Money: How to Break the Power of the Bankers», she explains what is quoted as «history’s most misunderstood invention: the money system». Furthermore, this leading political economist argues that we can, and must, reclaim the power that we have over the financial sector.
In this extended interview with El BOLETÍN, that will be published in three parts, Pettifor, who was at El Escorial to participate in the Summer Course of the Universidad Complutense de Madrid (UCM) which was sponsored by Podemos, «Transform the Economy, Transform Society», analyses these and other subjects, such as their implications for the Spanish economy in the European context, Brexit, or the last elections in the United Kingdom.
There is a video on the Internet where you explain that this comparison between a household budget and the government budget that George Osborne used to make proved to things: that he was a very good politician but a very bad economist. Could you explain this to us?
The whole idea that the government budget is like a household budget is what we call in economics «the household fallacy» and is a very simplistic childlike way of looking at how the government operates, on the one hand. On the other hand, is also ideology. George Osborne´s intention was never to balance the budget cause he hasn´t done that. In fact the public debt has gone worst with austerity: the debt rose rather than falling. So he didn´t succeed in his goal of bringing down Britain´s public debt, but what he did succeed was to shrink the state and that was his ideological ambition, of course. And in particular he was very content to shrink the state for the poor. David Cameron was quoted saying that he was going to kill the regulations. Now we see the consequences in Grenfell Tower.
In your last book, «The Production of Money: How to Break the Power of the Bankers», you explain that all this is related with a lack of comprehension on what money is and how the money system works…
Yes, this Osborne´s comparison is a common misunderstanding of how the government works but is also a common misunderstanding of money and what money is. If you don´t understand the nature of money or the nature of credit, them is easy to think that the government has a pot of savings on the one hand and on the other hand spends, and that savings consists of tax revenues and can only spend as much as it has. That is to ignore that behind the government there is a central bank that has the ability to help the government finance expenditure by keeping the cost of borrowing incredibly low. And we have seen that happening through the crisis with Quantitative Easing (QE) and so on.
So it´s a really big problem through the world of politicians and economists not understanding the nature of credit and money and thinking about the government like a household and that led to austerity. And the ironic thing, and this applies in particular to Spain, is that the crisis was caused not by government deficits. The government debt in Spain was very low, public debt as a share of GDP was extraordinary low, I think that it was something like 36%. So it had nothing to do with the government, it was caused by the financial system and the banks. And the irony is that austerity which has shifted blame for the crisis to the governments and away from the banks is the very thing that is causing the banks to fail. So Banco Popular failed because for what are known as Non Performing Loans (N-PLs) which are loans that the borrower is not repaying because the income of the borrowers has fallen, because income across Spain has fallen. Therefore, austerity, which is designed to shrink the state and hurt the poor, is the thing that is hurting the financial system and the banks and we see that in Banco Popular but also in the cases of the Venetian banks’ in Italy. And it is the thing that will cause the next crisis, of course.
However, this kind of metaphors and narratives are very effective, so in which way could be countered?
Is very hard because the narrative originates in politics, of course; but it also does in economics profession and is shocking that, nowadays, the profession does not teach money, banks and debts in its university courses. If you pick any Economics textbook on macroeconomics, for example, you´ll find that there is no discussion of money, banks and debts. So to change the narratives we have to educate people, essentially. On the first group of people, we have to begin with all the economists: we have to teach them about money, banks and debts. And the tragedy is that societies had known and understood the monetary system from way back, the Florentine bankers understood money, the Dutch bankers understood it. It is why we got a bank union in 1694. There was also a brilliant British economist who understood money, his name was John Law. Unfortunately, he was also a womanizer and he was found to kill a man in a duel and he was a gambler ‘cause he had such a brilliant brain that he could compute what was gonna happen on the gambling table. So this did not help his reputation. Plus, he went to France to help to set up their monetary system and it all went upside down. But the fact is that John Lord back in 1705 understood that money was not a commodity like gold or silver, is not even a coin. Money is nothing except the promise to pay and that promise is represented by a token that might be a note, or it might be a dedit card or a credit card.
Today, for example, is so interesting to me that people use credit card every day without understanding money. When you go into the shop and you hand your credit card to the shop keeper, what this credit card is saying «I trust this person to pay». Is a promise to pay. A contract with the bank that any debt that you incur you will pay and that promise is backed by the Justice system. But when you made the purchase and the shopkeeper gives the card back to you and you put in your pocket, nothing has been exchanged. You haven´t given money or anything, all you´ve given is a promise to pay. But that is giving you purchasing power and is giving the shopkeeper the ability to sell a product. That is the miracle of the monetary system. And I know, cause I´ve worked in Africa, that if you don´t have a monetary system you don´t get purchasing power and the shopkeepers can´t make money. Whether there is not a monetary system, there is no money. It´s as simple as that.
So this has important implications if we think about the financial system…
Given that´s how money is created we understand that banks can do it effortlessly, is not like growing tomatoes or an iPhone. That requires complexity and engineering and so on. So once we understand that, we understand that what banks do is easy compared to farmers or engineers do, for example. And, therefore, that´s why they must be managed and regulated.
In your last book you also talked about the role that women and environmental activist should play in this reform of the financial system…
Yes. The thing that annoys me intensively is that women are told that there is no money for childcare, or for the elderly with Alzheimer´s disease or dementia, or for education for your kids; or that there is no money for your children to go to university or to enable them to live in affordable housing. And the environmentalists are told: «sorry, there is no money for protecting us from climate change. We can´t build wind farms and we can´t prevent energy leaking from our houses and we can´t manage the forrest fires or the floods to prevent them, cause we don´t have any money». That is a lie in a developed monetary, such as exist in Spain, where there is never a shortage of money. And if you don´t believe me ask the bankers cause they got trillions of dollars after the crisis, and those dollars didn´t come from taxation. The government didn´t go around with a tin saying please put some tax money into this tin so I can bail-out the bankers. When the government has to spend money in a crisis, such as a war or terrorism or a terrible accident like Grenfell Tower It doesn´t go around asking the taxpayers to put some money in a tin. Instead, it uses the ability of the government to borrow supported by the central bank to raise finances. And that is what can be invested in a wind farm, or in a nursing home for the elderly or in energy efficiency
And the miracle of it is it this: When the government spends, the expenditure pays for itself. If you think about that it works like this: the government for example employs a nurse in a nursing home to look after the elderly, which is a contribution to society. That´s valuable. But them at the end of the month, she pays taxes. Those taxes goes to the government and they help to pay for the debt. Even better, she goes shopping and pays VAT and other taxes. That money goes back to the government. The shopkeeper makes a profit and he pays corporation tax and that money goes back to the government. So she is helping to pay or to repay her salary. This is quite different, if you employ a nurse because you never got your money back. You pay your nurse a monthly salary and it goes out of your purse and what you get in return is care for the elderly, but the government gets more. Besides, the government can raise finance at any time if it has a well developed taxation system. If the bondholders, if the people that are in the markets, know that the government’s got taxpayers that can pay taxes and can help to pay back the debt, they think this is the best bet in the world. If I lend money to Joe Blocks and I´m not sure if he´s got a job or is going to have one, them in take a risk. When I lend money to the British or the Spanish or the American government, I have no fear or risk, because, for example in Spain, there is around 30 million people paying taxes.
So if we need to finance the care of the elderly, or of our children, or to protect ourselves from climate change the government can do it without any fear of shortage of money. But there is a problem, that if a government practices austerity and it fires the nurses or the construction workers, it won´t get tax revenues and them it won´t be able to repay the debt. Them the deficit will rise, and the debt will rise. We need to increase employment and, above all, to increase well paid skilled employment because an employee that is payed well pays more taxes, and that can pay down your debt. So the best way to increase taxes is by increasing wages and by increasing employment. Is tragic that we are wasting the talent and the genius of youth for this mythology that there is no money.
But the conservative reply to all this would be: «ok, it´s true that any government can create money, but that would lead to massive inflation».
Yes, there is that argument. But the first thing is that the government does not create money. It borrows from the markets. Most of the money that is created in the economy is created by the private banks; not by the central banks. Central banks create something like at the most 5% of the money supply. All the money in the economy is created every time a bank makes a loan. So if you worry about inflation as many conservatives do, and I worry about inflation, them control the rate at which the banks are creating credit and what are they creating it for. In Britain we got inflation under Mrs. Thatcher because she liberalized the banking system, that meant that the banks could just create pure credit and because it´s so easy and because the deregulation gave them the power to fix the prize of credit, which is the rate of interest, they went crazy. They lent money anybody that wanted money. If you wanted money for gambling, they gave you more money, because they could charge you a higher rate of interest. But if you wanted money to grow a wind farm or something productive they weren’t interested because it would take a long time to get the profit from that. So it´s too much money chasing too few goods and services what creates inflation. That´s what we must say to the conservatives. Therefore, in order not to have too much money chasing goods and services we must manage the creation of credit, because that´s where the money come from: the private banks.
And the other problem is that we have huge inflation at the moment and the conservatives say nothing about. Where do we have inflation? We have inflation in property prizes and in stocks and shares and in bonds. In other words in assets. And who owns assets? The rich owns assets. Who complains about that? Not the conservatives. They don’t say a word about that. But if wages go up or prizes go up, them they come and they viciously attack people who are trying to cope with an inflationary environment. So the double standards from the conservatives are just ugly.
We are also seeing that huge inflation in sports, in football in particular…
Assets prizes are rising to a very high level in property, works of art, race horses, veteran cars, anything that´s an asset. Everything in sports. Football players, they are assets because they generate income. And do the conservatives complain about that inflation? They say nothing. The problem with that inflation is that you and me or ordinary people with low incomes that are falling can´t afford to buy a house or a work of art, etc. So I find this argument about inflation to be very hypocritical and we must say this to the conservatives. If they want to manage inflation, them they must manage the banks. For example around 2/3 of the lending of the private system in Britain is for property. Why? Because they are speculating. They believe that property prizes are gonna rise forever, so they can throw the money at any London property and force the prize up.
So should we link the real and the financial economy again…
Yes, because what´s happening is that the banks are now lending for speculative purposes. If for example a brilliant engineer comes up with a brilliant idea and wants to explore that brilliant idea, he can´t because the interests rate will be too high. The point is that the Banks are not lending to the productive sector of the economy, to the entrepreneurs, because it takes longer for those profits to come in. Rather they would lend for speculation in property. That´s a big problem for the real economy. And them another thing that is happening is that shareholders are getting all the benefits that are being made by companies and other stakeholders are not getting any.
The tragedy is that we, the taxpayers, bail-out the banks without the support of central banks, the guaranties from governments to guarantee the depositors, the low interest rates and Quantitative Easing; in my view, Santander today will be insolvent. And the same to all the big banks. Ferrovial or Telefónica for example, doesn’t have their losses guaranteed by the government, the taxpayers will not bail-out these companies if they got bust. But they will bail-out Santander o Banco Popular or any other bank that threatens the economy. We, the taxpayers, have in fact nationalized the banks since the crisis but we haven’t demanded that the banks lend into the real economy. We haven’t said to them: «you can have the guarantees, you can have the cheap money, but you must invest in jobs, and in employers that will create decent jobs and will pay decent wages; and if you don´t do that, we are taking away the guarantees». We need to understand that we as taxpayers have the power but we don´t use that power. We don´t even know that we are giving all the banks all this guarantees. Many people don´t understand this and they think that is something very complicated that is going up there. It´s not: these banks won’t exist without taxpayers supports, so the taxpayers should have what in finances we call leverage, influences; they, we, should make demands of the banks and say that we are happy to give them access to the central bank low interests rates and to the QE but the condition must be that they invest in the real economy that creates employment.
The banking system is like a sanitation system. It´s a public utility. If the sanitation system breaks down, we´ll have public diseases such as cholera. So the same is true of the banking system. If we allow the banking system to be corrupted and to become dangerous, we all suffer. So that´s why the banks should actually be nationalized; and if they are not nationalized, cause I don’t think we need to put civil servants into the banks, we have to manage the banks. I don’t like to use the word control and I don´t like to use regulation. I like to use management, we don´t want chaos. We want management of the financial system because without a banking system we would really, really, suffer.
And how could we do this? In which kind of measures or system are you thinking?
We have done this before. It´s not new. We know how to do it, because we´ve done this before. I always give the example of «The Sorcerer’s Apprentice story». There is a lovely Disney movie about it. The story is that the sorcerer, the magician, had a studio and one day he went for lunch and he said to his apprentice: «You have to clean the studio. Here is a pale, a bucket, and some brushes: clean the studio». And the apprentice was fed up, he didn´t wan to do it, so he said: «I´ll get some magic to clean the studio». Suddenly, there was a pale and a brush, but them there was another pale and another brush, and another pale and another brush. And the next thing, the studio was flooded with water. It was out of control. That´s our financial system. So the sorcerer leaves the studio and there´s chaos because he´s using the magic of credit creation to create chaos. So we need to say no: the apprentices, the bankers, have to be managed. They can´t be allowed to use the magic of the credit creation system to create chaos.
We had a period like this, of liberalization of finance, up until 1933. We had globalization at the end of the XIX century, it was stopped by the IWW, and them resumed after IIWW. At the same time, we had deregulation until 1929, when the whole thing blowed up. John Maynard Keynes, whom I think is one of the greatest monetary theorists of all time, argued that the reason was liberalization and that the gold standard was at the heart of it. Finally, in 1933, the politicians understood. Four years after the crisis, Britain was the first to come out of the gold standard and they said: «now we have to manage the financial system. In particular, we have to manage flows of capital across borders, and we have to manage the creation of credit so money its lend for productive not speculative activities, and we have to manage interest rates». Keynes also thought that it was really important to manage employment, because employment generates income which can be used to pay debt. So his general theory is called the «General Theory of Employment, Interests and Money». He thought that employment was the most important thing and interests the second most important because if you keep your rate of interest low, you will keep a sustainable economy. But you have too keep them low not just for the Banks, but for the whole economy. If the banks get low interest rates and money, but we don´t do; it doesn’t work. His theory was not called the «General Theory of Taxation and Spending». He was not interested in that, but in Money, Employment and Interest.
So between 1933 and 1971, we managed the financial system. In the middle, we had a terrible devastating war, but from 1944, when Bretton Woods was stablished, to 1971; in all economic textbooks. including the neoliberal economic textbooks, they call this period the Golden Age. We had financial stability, we had high levels of employment, we had economic activity across the board. Even in poorer countries there was prosperity. Them the banks started to chip away at the system and the bankers lobbied all the politicians to liberalize it all again. And, eventually, in 1971, Nixon pulls down the whole financial architecture of the world with one swipe. One night, on a Sunday night, he announced that the United States were going to bail out the Bretton Woods system. It´s like defaulting. It was the biggest sovereing default in History. He said: «We are not gonna pay back in gold anymore and we are breaking down the system». And after that the bankers were in heaven and since 1971 we have been governed by bankers, not effectively by politicians.
The good news is that we know how to do it. We have to have capital controls, we have to manage the flow of capital across borders; we have to manage the creation of credit; and we have to manage the price of credit, which is interests rates. If we do that, we will have once again have prosperity, full prosperity, higher wages and a more stable economy. But there will be a big fight before we do that and what we need are politicians with a bit of guts basically.