Brexit is a £1 trillion con job

Just over a decade ago the British state conjured up staggering amounts of money in order to save the City of London financial sector from insolvency.

This unprecedented tsunami of cash included £200 billion in liquidity support, £76 billion to bail out RBS and Lloyds, £40 billion to bail out Bradford and Bingley and the Financial Services Compensation Scheme, £280 billion in insurance cover for financial sector assets, and £435 billion in quantitative easing.

In 2010 the general public decided to punish Labour for having been in power during the financial sector insolvency crisis by replacing them with a Tory/Lib-Dem coalition (despite the fact that the Tories had been squealing for even more financial sector deregulation even right up until the financial sector meltdown was kicking off!).

The Tories and their despicable Lib-Dem enablers immediately began loading the cost of the bailouts onto ordinary British people via a ruinous programme of austerity fanaticism, unprecedented wage repression, devastating public service cuts, deliberate under-investment in infrastructure, and vandalism of the social safety net.

Meanwhile they continually lavished vast tax cuts and extravagant handouts on corporations and the mega-rich, as they raided the infrastructure budgets of Scotland, Wales, Northern Ireland, and northern England to further boost spending in already wealthier areas like London and the south east.

The consequences of these policies were absolutely dire. The slowest economic recovery in two Centuries, the longest period of real terms wage depreciation since records began, soaring child poverty and in-work poverty, unprecedented cuts to the education system, unprecedented cuts to local government budgets, catastrophically failing public services like the NHS, police & fire service, tens of thousands driven into early graves, the most unaffordable housing in history ...

And then David Cameron decided to gamble the entire nation's future in order to nick a few thousand UKIP votes at the 2015 General Election.

An environment of collapsing wages, insecure jobs, soaring poverty, failing public services, unaffordable housing, and an annihilated social security system was exactly what the Brexiteers needed in order to push Leave marginally over the winning line in the 2016 referendum.

All they needed to do was blame the consequences of these devastating domestic policies on immigrants and the EU, then watch the votes flood in as the Tories and Lib-Dems outright refused to admit the truth, that it was actually them to blame for the living standards collapse, not immigration or the EU.

The austerity fanatics and their vile austerity-enabling sidekicks couldn't counteract the lie without implicating themselves, so they just sat back allowed the lie to stand, and allowed Leave to win.

Britain has been in a state of constitutional chaos ever since, especially so after Theresa May decided to give the British public the chance to get rid of the Tories who created this Brexit chaos in the first place, and instead of seizing the opportunity we decided to intensify the chaos by keeping them in power but without a majority so that the government was beholden to the Northern Irish DUP sectarians and the ERG Brextemists in the Tory ranks.

Hence huge numbers of financial institutions simply giving up on all the chaos and uncertainty in the UK to seek economic refuge in the safety of the Single Market, taking £1 trillion in assets with them as they flee.

Dublin, Frankfurt, Paris, and Luxemburg being the main beneficiaries so far.

So that's £1 trillion in financial sector bailouts. The British people being forced to cover the cost of these bailouts through Tory/Lib-Dem austerity fanaticism. Then a furious backlash against collapsing living standards resulting in the financial sector pissing off out of Britain taking £1 trillion in assets with them!

The saddest thing of all is that millions of Brits remain absolutely incapable of seeing this con go on right in front of their eyes, and it's not just an inability to synthesise information without allowing the mainstream media propagandists to do their thinking for them that's causing people to completely miss the bigger picture, it's an extraordinary level of political forgetfulness.

Remainers flocking to support the Lib-Dems seem to have completely forgotten* all of the Lib-Dem lies, and their red-handed culpability in laying the groundwork for Brexit by helping the Tories wantonly trash our living standards for five devastating years.

It's just four years since the Coalition ended, yet huge numbers of people have apparently already forgotten how appallingly the Lib-Dems behaved, and we're somehow back to trusting them again, despite all their betrayals, despite their austerity-collusion, despite the fact that their entirely unrepentant leader Vince Cable wilfully served as George Osborne's austerity hatchet man at the treasury for five years, and despite the fact he defrauded the UK taxpayer of hundreds of millions by selling off the Royal Mail property portfolio at a fraction of its true value.

If people can't even remember four years ago, what hope is there of them remembering how the very same financial sector that's scarpering with £1 trillion in assets today were the beneficiaries of £1 trillion in bailouts 11 years ago?

So what are the lessons here? 

• Brexit is a chaotic and ongoing economic disaster.

• There's nothing patriotic about supporting the diminishment of your own nation.

• Capitalism has no national loyalties, even to the extent of scarpering just a decade after being lavishly bailed out at the public expense.

• People are apparently so forgetful the bankers' bailouts are ancient history to them, and they're even back to trusting the Lib-Dems again!

 Another Angry Voice  is a "Pay As You Feel" website. You can have access to all of my work for free, or you can choose to make a small donation to help me keep writing. The choice is entirely yours.

OR

* = Well, either they've forgotten, or they were actually perfectly fine with ruinous austerity fanaticism all along because they were socially and economically insulated from it. So they've either somehow forgotten it all in the space of four years, or they're a bunch of horrible "I'm alright Jack" wankers who simply didn't mind austerity malice at all because the dreadful consequences always fell on other people, meaning they're exactly the kind of insufferably aloof and uncaring metropolitan elitists their opponents always claimed that they were.

UK to surpass Germany - they're having a laugh

As we say goodbye to 2013 I think it's a good idea to see in the new year with a bit of a laugh. The right-wing economic think tank CEBR were obviously thinking along similar lines when they published an absurd piece of "research" which (via the process of churnalism) provided numerous corporate press headlines claiming that the UK economy would overtake Germany to become the largest in Europe within the next 20 years.

Before I get to picking apart their absurd claims, it's first important to give a bit of information on who the CEBR are. On their website they claim to be an organisation providing "independent economic forecasting and analysis". They also claim that they have a "strong track record of forecasting accuracy".

Both of these claims are extremely dubious. The client list on their website reveals that they have a number of government contracts, meaning that their independence to freely criticise the UK government and their policies is severely curtailed. They also boast about providing services to many of the biggest banks and insurance companies in the UK as well as the nation's "largest property portfolio". Given their reliance upon the financial sector and the property market for income, it seems unlikely that this organisation has the "independence" to criticise structural flaws in the financial sector or even bonkers property price inflation subsidies like George Osborne's idiotic "Help to Buy" scheme.

When it comes to their "strong track record of forecasting accuracy" perhaps it would be useful to consider what they were predicting at the back end of 2012 and judge how accurate they were?

In September 2012 the CEBR predicted that wages would exceed the rate of inflation in 2013. Not only did they predict that the campaign of wage repression would be reversed in 2013, they also predicted that the poorest would benefit the most, with the poor experiencing a 1.5% above inflation income gain, the middle classes bagging a 1% rise and the richest minority getting just 0.7%.

This prediction has been proven completely wrong because wages have continued to fall in real terms every single month throughout 2013, as they have ever since the Tory led coalition came to power. Not only was their prediction of rising wages completely wrong it also betrayed a shocking lack of political nous. Would anyone with the slightest understanding of what the Tory party is and how it is funded ever conclude that the Tory party would run the economy in a way that would benefit the poorest the most and the richest the least?

When we look at the facts, we find that the poor and ordinary suffered more real terms cuts in their incomes during 2013 (as well as bearing the brunt of harsh austerity measures like cuts in in-work benefits and the hated "Bedroom Tax" too) whilst the wealthiest minority bagged massive above income wage rises yet again (as well as benefiting from George Osborne's cut in the top rate of income tax which was worth an average £100,000 per year to the 13,000 income millionaires in the UK).

Here's my prediction: If this Tory campaign of wage repression is to end, it will happen around six to eight months before the 2015 General Election, in the hope that taking the boot of economic repression off the necks of the masses and allowing them to breathe properly for the first time in over four years will create an election winning feel good factor, even though people will still be significantly worse off than they were before the Tories came to power.

Returning to the CEBR and the "strong  track record" of predictions they like to brag about, one of my key tests is whether the individual or organisation managed to predict the 2007-08 financial sector meltdown. Economists like Steve Keen and Nouriel Roubini that successfully predicted the global economic crisis get the AAV seal of approval and the vast majority of economists that not only failed to see it coming, but also tried in vain to talk down the seriousness of the crisis once it had actually begun, get all their future predictions and forecasts buried in salt.

The fact is that the CEBR didn't see the 2007-08 financial crisis on the horizon, and on the eve of the meltdown they were still predicting huge rises in property values between 2007 and 2010 and claiming that "The underlying fundamentals of the housing market continue to support prices". Well we all know what happened next. If they didn't see something as big as the global financial sector meltdown coming, just months before it happened, they certainly shouldn't be trusted on their predictions that span decades into the future.

So now they would have us believe that the UK economy is in such healthy shape that it will grow at an average 3.3% per year between 2014 and 2028 to surpass Germany as the biggest economy in Europe sometime around 2030.

The first and most obvious criticism is that they are using a number of critical assumptions to generate this prediction, most notably their refusal to consider the possibility that Scotland will depart the Union after the 2014 referendum on independence. Should this happen, and the UK declines in population by over five million and loses the massive North Sea oil revenues, there isn't a snowball's chance in Hell that the UK will rocket past Germany to become the most powerful economy in Europe.

Even if the massive uncertainty over the Scottish independence referendum and a potential 2017 referendum on membership of the EU are discounted - the "research" still doesn't seem to have taken any account of hugely important issues such as:

The balance of trade: Soaring trade deficits in the UK and huge trade surpluses in Germany provide strong indicators that Germany is a far healthier economy from a long-term perspective.

Short-term analysis: From a short-term perspective the prediction of a 15 year period of sustained economic growth more rapid than anything seen since the "golden age of capitalism" in the 50s and 60s looks like some kind of absurd fantasy. The idea that such a robust and prolonged period of growth is going to propel the UK above France and Germany is ludicrous given that the UK still hasn't even managed to rebuild to the size it was before the 2007-08 economic meltdown (the one that the CEBR failed to predict) but both Germany and France have recovered and exceeded pre-crisis levels. The idea that the most sluggish economic recovery in UK history is suddenly going to transform into the most rapid and sustained period of growth in over 50 years is more than wishful thinking, it's absolutely crackers.
  
Capital flight: The German economy is benefiting as capital flows from struggling Eurozone economies (Spain, Greece, Portugal, Italy and Ireland) into Germany. It is true that the UK (mainly London) is also benefiting from capital flight as foreign money flows into the City of London and the London property market, however this still isn't enough to counterbalance the enormous trade deficits the UK is running. The main point is that it is unwise to omit the effect of capital flight from the periphery Eurozone economies into Germany in order to make sweeping statements that Germany is going to be surpassed by the UK and would be better off out of the Euro - as the CEBR report clearly did.
 
The effects of Quantitative Easing mania across the major economies: Currency devaluation was hardly a success when Japan tried it in isolation through the 1990s (the Japanese "lost decade") - now that all the major economies are simultaneously trying the same fiat currency devaluation trick it's hardly likely to work any better for the UK. If magicking up hundreds of billions and holding interest rates at the all-time record low of 0.5% for five long years hasn't produced 3.3% growth yet, when and how is this remarkable period of growth going to begin?

Uncertainty: Economies are extremely complicated things which are almost impossible to predict with any degree of accuracy. Just a tiny miscalculation (of say 0.01%) in one of your parameters is more than enough to completely wreck your predictions over the course of 15 years. Then there's the uncertainty of events. Given that they couldn't predict the 2007-08 crisis, who is to say that there isn't another enormous economic catastrophe just around the corner that the CEBR are totally (or willfuly) blind to?

The idea that the UK is going to ride a wave of almost unprecedented prosperity for the next 15 years to soar past Germany and become the biggest economy in Europe is as assumption laden as it is laughable. This brings us to the question of why they have produced such a ludicrously over-optimistic report.

The answer is quite simple: The CEBR see it as in their best interests to produce reports that their clients approve of, and they clearly consider the Tory party to be valuable clients.

The over-optimistic endorsements of Tory policy from the CEBR have been through many stages, all of them closely matching the economic narratives being pushed by the Tory party at the time.

After initially endorsing George Osborne's catastrophic ideological austerity experiment, the CEBR changed tune to claim that a further decade of austerity would be necessary (a move expanded upon by David Cameron in his "austerity to infinity" speech at the Lord Mayor's Banquet in November 2013). Now the CEBR are determined to help bolster the Conservative's utterly misleading "economic recovery" narratives with absurdly optimistic projections seemingly designed to provide the right-wing press with feel-good "UK to be better than Germany" headlines.

If that's not enough to convince you that the CEBR busy themselves producing reports that are little more than propaganda for the Tory party, then perhaps their ludicrous 2011 report clearly designed to help George Osborne justify cutting the top rate of income tax might be enough?

With this wildly optimistic report and their claims that Britian will soon surpass Germany as the most important economy in Europe, the CEBR are clearly attempting to reinforce the Tory narrative that the UK economy has recovered and that we are on the brink of economic utopia. The most obvious problems with this are that only 2% of the UK public believe that the economy is recovering and that they are feeling the benefit; and that their growth predictions for the next 15 years are so ludicrously over-optimistic that nobody in their right mind would take them seriously.

The problem for the rest of us is that there are an awful lot of delusional Tory tribalists that believe the economy is in great shape after three years of ideological Osbornomics and that we are on the verge of utopia, meaning they will continue voting Tory.

 Another Angry Voice  is a not-for-profit page which generates absolutely no revenue from advertising and accepts no money from corporate or political interests. The only source of revenue for  Another Angry Voice  is the  PayPal  donations box (which can be found in the right hand column, fairly near the top of the page). If you could afford to make a donation to help keep this site going, it would be massively appreciated.
             

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 ANOTHER ANGRY VOICE 

                
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Workfare, tabloid mindsets and neoclassical economics
            

Marginal Propensity to Consume explained

The Marginal Propensity to Consume (MPC) sounds horrifically complicated, but like many economic terms it is actually quite an easy concept to grasp, in fact many people grasp it intuitively without actually knowing that there is even a specific economic term for it.

I've often heard people talking about how it would have been loads better if the government had've done a "people's bailout" rather than a "bankers bailout", because had people been given tax rebates, food stamps, debt write-off grants, single lump payments (sometimes described as "helicopter drops" - which is a phrase coined by the neoliberal guru Milton Friedman of all people)  they would have spent it within their local or national economy, created extra demand and stimulated more economic activity. This kind of view shows an intuitive understanding of the MPC.

Consumption vs Saving
The Marginal Propensity to Consume is formally defined as the amount of a person's  additional income that gets spent, rather than saved. 

To give a simple example: If the government gave every worker in the country a £500 credit with their next paycheck and you spend all of yours on food, clothes for the kids, and repairs on your car, you would have a marginal propensity to consume of 1.00 (or 100%). If another person only spent £100 on an evening out and put the other £400 into their savings plan or pension scheme, they would have a MPC of just 0.2 (or 20%).

This consumption vs savings definition is the traditional one, however it neglects a couple of important elements of spending which are debt reduction and capital flight. Using additional income to reduce your debt burden (pay off a credit card or outstanding loans from a Payday lender, pay mortgage arrears, reduce overdrafts...) can be seen as a form of saving, only that the returns on these "debt repayment savings" come in the form of reduced future interest payments, fines and fees. The relationship between MPC and capital flight is a more complex issue which I'll pick up later.

Wealth 
The MPC is higher in the case of poor and ordinary people than it is for the extremely wealthy. The greater a person’s wealth, the more of their basic human needs will have already been met, and the greater their tendency to save a proportion of their income in order to provide for future will be.

The marginal propensity to save of the richer classes is greater than that of the poorer classes. Thus it follows that if the government want to increase economic demand, then purchasing power must be transferred from the richer classes (with their lower propensity to consume) to the poorer classes (with their higher propensity to consume).

Disposable income
In essence, the Marginal Propensity to Consume is concerned with how individuals use their disposable income, which is the amount of money the individual has left over after paying their costs of living (usually defined as rent, tax, childcare and utility bills). The most common use of disposable income is consumption. When an individual spends a proportion of their disposable income on consumption (buying a new smartphone, going out for a meal, buying a book or getting some fancy new clothes) the retail sector of the economy benefits.

Aside from basic consumption, disposable income is also an important economic driver in another way. Without disposable income it is significantly more difficult for an individual to set up a small business or to improve their circumstances through education or training. If disposable income is lowered for millions of people (through ideological austerity) economic potential is retarded because significantly fewer people have the financial means to establish new businesses or to improve their productive capacities through education or training.

In a capitalist economy, disposable income is of paramount importance because it is one of the most important drivers of economic demand. When people have money in their pockets, they spend it, creating demand in the economy, or they save it, creating the capital reserves that the financial system is supposed to be based upon (hence the name "capitalism"). When people don't have money in their pockets, they cut back their spending, which reduces economic demand.

If people don't cut back on spending, their only other option is to get into debt in order to try to maintain their standards of living. The ever increasing level of private (corporate and personal) debt was the principal cause of the 2007-08 financial sector meltdown (over-leveraged banks, reckless lending, unsustainable property price inflation and sub-prime mortgages).

Fiscal Multiplication
[main article]

Considering relative MPC values for different socio-economic groups provides insight into what kinds of economic activity is stimulated by particular spending priorities. The way that these changes in economic activity are measured is called fiscal multiplication, which is another horrendously complex sounding term to describe a fairly simple concept, which is similar in meaning to "returns on investment".

If a spending project stimulates £1.50 worth of economic activity for every £1 in investment, the fiscal multiplication value is a strong 1.5. If the project breaks even, the fiscal multiplication value is 1.0 and if only 50p of economic activity is generated for every £1 of investment, the fiscal multiplication value is a poor 0.5.

There is solid economic evidence from America that spending on poverty relief programmes such as food stamps generates far more economic activity that giving tax-breaks to the super-wealthy. When the Bush tax cuts for the super wealthy 1% were made permanent, the economic returns on each $1 of lost government revenue was a pathetic $0.29. Meanwhile an increased provision of food stamps resulted in an impressive $1.73 return on every $1 in additional spending.
It is absolutely clear from these results that providing a small amount of additional spending power to the less well off creates vastly superior economic returns on investment than giving large tax cuts to the extremely wealthy minority.
Another extremely strong fiscal multiplier is the provision of social housing, which gradually pays back the investment cost through rent, and also creates a large increase in the MPC of social tenants, because their rent is much lower than the private sector, meaning that they have significantly more disposable income than had they been paying higher private sector rent.

MPC and capital flight 
[main article]

The Marginal Propensity to Consume is often contrasted with the Marginal Propensity to Save, as if spending and saving are the only two options to the individual. Things are obviously not that simple. The main problem being that national economies do not exist in a vacuum.

Other than spending or saving within the national economy, there is a third option that becomes more available the more wealthy the individual gets, and that is removing wealth from the national economy entirely. This can be done through the spending on foreign goods such as Italian sports cars or luxury yachts from South Korea for example, however this is more of a balance of trade issue than a capital flight issue. If the United Kingdom was more of a productive economy without enormous trade deficits, then more of that departing wealth would flow back into the national economy through the export of British manufactured goods.

The most problematic form of capital flight is tax-dodging, and the wealthier an individual or organisation becomes, the easier it is for them to shift their wealth out of the national economy into tax-havens.

The reason that it is so much more likely that the wealthy will extract wealth from the economy in this way is obvious. If an individual has a monthly disposable income of just a few hundred pounds, it would be an obvious false economy to pay a tax lawyer over £100 pounds an hour to build a convoluted tax avoidance scheme in order to extract this wealth, however convoluted tax avoidance schemes will create large returns for extremely wealthy individuals (such as the comedian Jimmy Carr or the Tory party donor George Robinson).

The same goes for businesses. A small operation like a barber shop or self-employed builder won't be capable of producing the necessary profit in order to justify the establishment of a chain of offshore shell companies for the purposes of avoiding tax, however due to economies of scale, "offshoring" is common practice amongst major corporations (in fact 98 out of the FTSE100 companies have tax haven based subsidiaries).

Once offshore wealth extraction schemes are factored into the equation, it becomes obvious that there is more to the Marginal Propensity to Consume than the traditional way of formulating it in simple spending versus saving terms.

For more information about how tax-dodging is detrimental to the economy, see my article on the subject.

Current policy 
There are two strands of policy to consider in terms of the MPC: Fiscal policy and monetary policy. The government is largely responsible for the fiscal policy agenda, and the Bank of England is responsible for monetary policy. In this section I'm going to demonstrate how both institutions are engaged in policies that result in the transference of wealth to the rich, resulting in a reduction in consumption at the national level.

Since 2010 the Tory led government have engaged in a duel strategy of ideological austerity and wage repression (destroyers of economic demand because they affect poorer people with high MPC the most) whilst simultaneously enacting policies such as cuts in the top rate of income tax and huge reductions in corporation tax, which benefit the wealthy minority who have a a lower MPC.

Under Tory rule the average wage has fallen 9% in real terms (because average monthly wage rises have risen slower than the rate of inflation every single month for three years) whilst the corporate executive class have enjoyed a staggering 152% increase in their annual remuneration between 2010 and 2012. Not only that, but the government cut the income tax burden of the highest earners by 5% in April 2013, meaning an average £100,000 annual tax reduction for Britain's 13,000 income millionaires.

In the very same month that they handed this huge tax break to the wealthy (low MPC) class, the Conservative led government hammered poor and ordinary people with schemes like the Benefits Up-rating Bill, the public sector wage freeze and Bedroom Tax.

It is absolutely clear from these actions that the government has contempt for the Marginal Propensity to Consume, they are simply engaged in enabling a massive transference of wealth from the poor and ordinary to the wealthy, no matter what the cost to the economy.

The Bank of England are no better with monetary policy. Their policy of Quantitative Easing (magicking up money to pump into the financial sector, whilst holding interest rates at an all time record low for 4 consecutive years) has resulted in a massive transference of wealth to the super-rich minority. Their own figures show that 40% of the benefit of Quantitative Easing went to the wealthiest 5% of households. Instead of pumping this new cash in at the bottom of the economy and letting it work its way upwards, stimulating economic activity on its way, the Bank of England pumped it directly in at the top of the economy.

With the government and the Bank of England pursuing policies that result in transference of wealth to those with the lowest marginal Propensity to Consume, it is hardly surprising that the UK economy is suffering the slowest economic recovery in a Century, that the UK is recovering more slowly than any other major western economy bar Italy, and that the economy has still not recovered to pre-crisis levels almost six years after the financial sector collapse began. Given that both the government and the Bank of England have enacted policies which reduce the national MPC, it is almost as if there is an agenda to deliberately prolong the economic crisis.

Conclusion
Given that the Chancellor of the Exchequer George Osborne has absolutely no economics qualifications, it is possible to imagine that the guy is completely ignorant of the Marginal Propensity to Consume, however it is impossible to imagine that absolutely nobody in government, and nobody at the Bank of England has heard of it either. That both institutions have been enacting policies that reduce the national consumption by transferring wealth from the high MPC majority to the low MPC minority, suggests the possibility that the prolongation of the economic crisis is actually a deliberate macroeconomic strategy.

It is easy to understand why a Tory led government would ignore the MPC and damage the economy by reducing the income of the majority, in order to fill the pockets (or should I say offshore bank accounts) of the wealthy minority: Serving the interests of the wealthy establishment, at the expense of the majority has always been their game.

It is more difficult to see what the Bank of England have to gain by transferring wealth to the already wealthy, and robbing the pension schemes and savings accounts of the ordinary to do it. Perhaps it is simply that they so many of them have been indoctrinated with neoliberal pseudo-economic mumbo-jumbo when they studied PPE at Oxford, Cambridge or LSE (as most of them did).

Whatever the case, the fact that the UK is enduring the slowest post-crisis economic recovery in recorded history, and that the political and financial establishment are simultaneously working to ensure an unprecedented transference of wealth from the high MPC majority to the low MPC minority hardly seems like a coincidence.

 Another Angry Voice  is a "Pay As You Feel" website. You can have access to all of my work for free, or you can choose to make a small donation to help me keep writing. The choice is entirely yours.

Read more articles in the "What is...." series

How Quantitative Easing is bad for the economy

The Quantitative Easing wealth transfer: How Quantitative Easing is bad for the economy.

I do tend to write quite long and complicated articles on the assumption that those with short attention spans would be unlikely to engage with complex political and economic ideas no matter whether the article is short and punchy or long winded and precise. As soon as the "complicated word stuff" appears, many people automatically disengage, no matter what the length of the article.

However in this case I'll try to spell it out as simply and concisely as I can because I believe this particular financial matter is of such importance.

The issue is Quantitative Easing (if you don't know what it means here's my attempt to explain it in relatively simple terms & and here's the Wikipedia article).

After creating £375 billion to inject into the UK economy, the Bank of England released some incredible research that estimated that 40% of the economic benefit of their money creation exercises went to the richest 5% of the population. They also conservatively estimated that their policies had devalued British savings by £70 billion.

The National Association of Pension Funds estimate that the BoE's first £325 billion worth of Quantitative Easing policies had damaged pension funds to the tune of £270 billion.

It is quite clear from this evidence that Quantitative Easing polices have tended to transfer wealth from many millions of ordinary people with savings accounts and pension funds to the wealthy economic elite.

There are three main reasons that this kind of poor to rich wealth transfer is so bad for the economy:

1. Capital Flight: The first reason is quite obvious. The super-wealthy beneficiaries of QE are significantly more likely to hire pricey tax lawyers to siphon their wealth out of the UK economy into tax haven economies via complex tax-loopholes. They are also much more likely to invest their fortunes in the untaxed and unregulated global shadow banking derivatives casino. If the newly created wealth floods out of the UK economy into tax havens or the global derivatives market, the wider UK economy will not feel the economic benefit. Many people associate capital flight with poor and struggling economies, however richer economies suffer too, especially if they have lax tax collection regimes or have no capital controls to influence the flow of wealth in and out of the country.

2. Reduced demand: As millions of ordinary people witness the value of their savings and pensions stagnate and shrink in real terms (grow less than the rate of inflation), the rational response is for them to "tighten their belts" and cut their weekly expenditure in order offset their losses. If millions of people are incentivised to simultaneously cut spending, the amount of demand in the economy is reduced causing productive enterprises to suffer.

3. Poor fiscal efficiency: Fiscal efficiency sounds like a complex term but it isn't really. Fiscally efficient spending results in greater economic activity than the scheme cost to implement in the first place (strong fiscal multipliers include spending on affordable housing projects, Infrastructure improvement and Research and Development). Research by Owen M. Zidar has found that in America "a one percent of GDP tax cut for the bottom 90% results in 2.7 percentage points of GDP growth over a two-year period. The corresponding estimate for the top 10% is 0.13 percentage points and is insignificant statistically." Put simply, if poor people are given money they spend it and stimulate the economy. Given that Quantitative Easing transfers wealth from the poor to the rich, it should be seen as extremely harmful to the UK economy, since wealth is being transferred from people that use their wealth to generate economic growth at the national level to those that don't.

Zidar's results are specific to America, but the vast difference in fiscal multiplication between the richest 10% (who generate only 13 cents worth of economic growth for every extra Dollar) and the majority (who generate $2.70 worth of economic growth for every extra Dollar) is so resounding, that it is hard to imagine that a similar ratios do not exist for the UK economy.

The Bank of England's Quantitative Easing policies transfer wealth from millions of ordinary people that create demand and generate economic growth with their wealth, to the "idle rich" that use their wealth for their own benefit and create little economic demand with it. If British fiscal efficiency results are similar to results in the US, the long-term damage being done to the UK economy as consequence of the Quantitative Easing wealth transfer could already be extremely severe.

The wealthy economic elite (financial sector workers, capitalists, government officials, landed gentry etc)  are unlikely to worry about growing levels of poverty, falling economic demand and economic contraction caused by QE or to agitate for change, since they are the principal beneficiaries of the QE wealth transfer. If anything is to be done to oppose this economically damaging wealth transfer process it must be done from the grass roots and in order for that to happen, a hell of a lot more ordinary people need to be made to understand that the Quantitative Easing wealth transfer is extremely bad for them and extremely bad for their communities.


 Another Angry Voice  is a not-for-profit page which generates absolutely no revenue from advertising and accepts no money from corporate or political interests. The only sources of income for  Another Angry Voice  are small donations from people who see some value in my work. If you appreciate my efforts and you could afford to make a donation, it would be massively appreciated.

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Margaret Thatcher's toxic neoliberal legacies
  

The Spanish Euro sunset

The sun sets behind one of Ibiza's many abandoned property developments.

Take a trip to Ibiza this summer and you would hardly know that Spain is in the grip of the worst socio-economic crisis since democracy returned to the country in 1975. The beaches are crowded, the Superclubs are open and still charging €40 or €50 just to get in and €10 just for a 275ml bottle of partially refrigerated beer once you're inside. The signs are there, but the casual holiday maker is unlikely to notice that dozens of partially constructed property developments around the island haven't progressed in the last year, or even since the Spanish property bubble burst in 2008.

People travel to Ibiza to relax and have a good time, they don't go to the most famously hedonistic island in Europe to assess the state of the economy or consider what the implications for the European single currency might be, should the entire Spanish banking sector submerge into the ocean of debt they created for themselves during the boom years.

The recently elected right-wing Spanish government are playing an unprecedented game of Euro brinkmanship in the desperate hope that the unelected technocrats at the European Central Bank and European Commission decide to treat Spain as a different case to other struggling Eurozone economies such as Ireland, Greece and Portugal, who were forced to accept harsh austerity measures in return for bailouts to help them avoid defaulting on their external debts.

Mariano Rajoy's Popular Party have already inflicted €27 billion in self inflicted austerity measures and drastically undermined Spanish labour laws in the hope that by inflicting voluntary austerity measures they might avoid the national humiliation of accepting bailouts and externally imposed austerity drawn up by the ECB and the IMF and might receive preferential treatment in the form of direct intervention to prevent the imminent collapse of the entire Spanish banking sector.

Adopting a different approach for Spain is likely to infuriate the populations of the three smaller Eurozone countries that have had to eat the EU "shit pie" of a vast bill to cover the cost of bailouts that flow straight back out of the country to their French, German and British financial sector creditors and the socio-economic chaos of brutal externally imposed and self defeating austerity measures. Watching Spain get preferential treatment when they themselves have already been made to suffer enormously, would almost certainly cause a dramatic rise in anti-EU sentiments in the three "periphery" states.

Even nine months ago talk of a potential Greek exit was being scorned as inconceivable scaremongering, in recent weeks high profile politicians have made calls for Greece and the Eurozone to "make up or break up" and financial experts have gone as far as calculating the potential economic damage of a Greek exit at €1 trillion. Now there is talk of a Spanish exit too. If the European authorities are unprepared to modify their bailouts and austerity prescription in Spain's case and the Spanish government are too proud to accept the same brutal treatment as Ireland, Greece and Portugal an exit looks like the only remaining option.

In the Spanish case, the Euro-technocrats will struggle to stick with the same strategy of inflicting another self-defeating cycle of austerity and bailouts because the stakes are much higher with Spain than with the previous three, meaning that Spain has a much stronger bargaining position. The Eurozone could conceivably take the exit and default of Greece, which represents only 2.65% of the Eurozone economy. The scale of the economic damage has been estimated at almost three times the size of the Greek economy, but surviving an 8% of Eurozone GDP (€1 trillion) hit seems conceivable. Irealnd and Portugal are even smaller, accounting for less than 4% of Eurozone GDP between them. Spain on the other hand is the fourth largest economy in the Eurozone accounting for over 8.4% of Eurozone GDP and using the Greek exit damage estimate as a rule of thumb (3x national GDP in economic chaos), a Spanish exit could end up creating up to 25.3% of European GDP (€3,151 trillion) in economic fallout.

The Eurozone would undoubtedly suffer enormously from a Spanish exit, however after a year or two of intensified economic chaos it is possible that Spain could actually emerge in a much healthier state following an exit and default. A return to the Peseta would allow Spain to devalue their currency providing some blessed relief for the struggling Spanish manufacturing sector, create employment, dramatically slow down the flow of capital out of the country and also create a much stronger incentive for holiday makers to choose Spanish destinations like Ibiza for their holidays.

It seems certain that mainland Spain would soon begin to experience a manufacturing boom as the Spanish exports become much cheaper in comparison to produce from countries still locked into the Euro and tourist destinations like Ibiza would benefit from a large tourism boom as visitors find their money goes much further than in Eurozone destinations. Both of these factors would create extra employment and increase aggregate demand, putting Spain on the road to recovery.

The problem for the Spanish government is that whatever happens someone is going to have to lose face. If Spain accepts the same kind of austerity and bailouts "shit pie" the previous three have been forced to eat, it will be a massive national humiliation, if the ECB back down and intervene directly to prevent the Spanish banking sector collapse, they will look like a bunch of malicious thugs that lost their vindictive streak when the stakes got too high and if neither side are prepared to lose face in the short term, they will both lose face as the Spanish are forced out of the Euro and the Euro technocrats are forced to watch the disintegration of their beloved Single European Currency project.

If Spain does bail out of the Euro, I don't suppose the hedonists holidaying in Ibiza would notice anything but the change in currency. The sun will still be blazing down, the beaches will still be packed and the superclubs will still be brazenly ripping off their customers with eye watering markups on their beer, just like the European financial sector will still be lending on their ultra-low interest ECB "giveaway loans" to create mind boggling profit margins at the expense of the "real economy".

 

See also

The Austerity Death Cycle
   

Spanish capital flight and ECB inertia

 

The Bankia bailout

 

Squandered trillions and the Greek exit

 

Argentine Recovery Economics

  

Capital Flight Explained

Capital flight is an economic term used to describe the outflow of wealth from a country when it is experiencing severe economic difficulties. The most common causes of capital flight are widespread expectations of a significant currency devaluation, and/or fear that the government would give precedence to their foreign debt obligations ahead of their domestic ones.

The fear that the value of their wealth is not secure drives people and institutions to shift it to other economic jurisdictions they consider to be safer. This kind of outflow of wealth can be either be done legitimately through strategies such as the sale of shares and bonds and the widespread withdrawal of savings funds or illegally through corruption and tax evasion strategies.

Capital flight works as a kind of self-fulfilling prophecy; as confidence in the economy drops and more people disinvest, the performance of the economy is further weakened by lack of capital reserves, creating a further drop in confidence and a downward spiral of capital flight and economic contraction until the effected nation is forced to massively devalue their currency and default on their external debts.

There are two distinct forms of capital flight, the most common form in the western world occurs in economies that lack monetary autonomy, meaning that their governments can't gradually change the value of their currency to suit their economic circumstances. When the value of the currency is directly tied to an external value, such as the Gold Standard, the US Dollar or the Euro, there is little a government can do in order to alleviate economic problems. A lack of ability to gradually reduce the value of the currency in order to prevent a strong currency from crippling their export markets for example.

When the national currency is easily convertible to the currency of other economies this increases the ease with which capital flight is achieved. An example of this can be seen in the Argentine 1:1 currency peg with the US Dollar. As the Argentine economy deteriorated in the late 1990s, people rapidly converted their Argentine Pesos into Dollars in the expectation that a breaking of the peg in order to allow devaluation of the Peso was becoming inevitable. Another example can be seen in the Eurozone crisis where Euros are flowing out of countries like Greece and Spain at astonishing rates.

A second type of capital flight is more akin to simple corruption than a socio-economic process brought about by lack of monetary autonomy and falling confidence. This second type is much more common in the developing world where international aid and the profits from the sale of valuable mineral resources are siphoned out of the economy by the establishment elite over the course of decades.

Examples

The Gold Standard: One of the most commonly cited examples of capital flight came during the British Gold Standard between 1926 and 1931. Under this economic system paper money was redeemable in the form of gold bullion. This convertibility allowed foreign speculators to redeem large amounts of gold, forcing the British government to borrow billions from French and American banks in order to restock their gold reserves. In 1931 the flow of gold across the Atlantic to America and the ever increasing cost of replenishing gold reserves forced the British to suspend the gold standard in order to allow the the Pound to devalue to a more sustainable level, which in turn allowed direct stimulation of the economy through the lowering of interest rates.

The Argentine Peso: In the 1990s the Argentine government pegged their currency directly to the US Dollar and began enacting neoliberal reforms at such a pace that they became the poster boys of the IMF. Unfortunately the attacks on financial sector regulations and capital controls, the reductions in tax rates and the fire sale of heaps of state infrastructure to foreign investors in combination with the easy convertibility with the US Dollar increased the flow of capital out of the country to an unsustainable level. The huge growth in foreign corporate ownership in Argentina meant that profits were siphoned out of the country for the benefit of foreign investors and declining tax returns meant that the Argentine government struggled to maintain the large foreign currency reserves necessary to maintain convertibility with the Dollar. As confidence diminished, even more people withdrew their wealth from Argentina in the expectation of a significant currency devaluation, eventually when the devaluation happened in 2002 it was accompanied by the biggest sovereign default in World history. Once the default happened, the Argentines rid themselves of the IMF's brand of neoliberal pseudo-economics and set themselves on the road to economic recovery by taxing capital flows out of the country and investing in fiscal multipliers such as infrastructure projects, house building, welfare provision and education.

UK tax dodging: In 2009 it was reported that hundreds of wealthy financiers had withdrawn their capital from the UK after tax rises for the super-rich. The destinations of choice for the uber-wealthy elite to stash their wealth were British dependency tax havens such as Jersey, Guernsey, the Isle of Man and the British Virgin Islands.

The Eurozone crisis has intensified the amount of capital
flowing out of Greece, Ireland, Spain, Portugal and Italy.

The Eurozone crisis: As confidence in the European Single Currency project has waned, several countries have experienced massive scales of capital flight. Following the undecided Greek election it was reported that as much as €4 billion a week was flowing out of Greek banks, meaning that their leverage ratios were becoming more and more unsustainable. In May 2012 the Spanish Central Bank released estimates that showed nearly €100 billion in capital flight (nearly 10% of Spanish annual GDP) for the first three months of the year. Despite these economic difficulties the European Central Bank flatly refused to devalue to Euro, meaning that struggling Eurozone economies were stuck with a massively over-valued currency which was easily siphoned out of the country into stronger Eurozone economies such as Germany, making the exit from the Eurozone and default on their debts seem ever more likely options for crippled European economies like Greece, Ireland and Spain.

Embezzlement flight: The second form of capital flight normally occurs in the developing world. It is less to do with lack of monetary autonomy and more to do with outright corruption. The International Monetary Fund estimated that wealthy citizens of developing countries amassed at least $250 billion worth of foreign assets between 1975 and 1985. As dictators in countries such as Argentina and their cabal of supporters were showered with money by the IMF and western economies in return for implementing fundamentalist neoliberal reforms, a large proportion of that wealth was simply siphoned straight back out of the economy and stashed in bank accounts in Switzerland, America and UK administered tax havens. One of the regions most badly effected by this kind of capital flight is sub-Saharan Africa where capital flight has been estimated at more than $700bn since 1970, which is more than triple the region's outstanding external debts of around $175bn. Common mechanisms in this "economic rape" form of capital flight include inflated procurement contracts for goods and services, kickbacks to government officials, and diversion of public funds to politically influential individuals. A smaller proportion of of Africa’s lost capital has come from other sources, such as earnings from oil and mineral exports, but foreign loans are much simpler to embezzle since there is no need to bother with the hard work and expense of extracting natural resources in order to convert them into cash.

Capital flight is an extremely destructive economic phenomenon, the long term damage of corruption funded capital flight has severely damaged many developing countries as their political leaders have pillaged their own economies in order to fill their personal bank accounts in Switzerland, The US or British administered tax havens. Even though the free flow of capital out of poor economies is severely damaging, the IMF have a history of actively lobbying against "third world" countries introducing capital controls to slow down the outward flow of capital from their own economies. 

When capital flight occurs in the West it is often a strong indicator that the effected economy is about to undergo a dramatic currency devaluation. This is what made the astonishing scale of capital flight out of Spain in the first quarter of 2012 such important news, with disastrous implications for the Eurozone project and holders of Spanish government bonds.

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See also

Spanish capital flight and ECB inertia

Argentine Recovery Economics

Mixed Economy vs Neoliberalism
 

3D economics: Disposable income, Demand and Debt