CFA Conference: Ann Pettifor

CFACentral Banking, State Capitalism, and the Future of the Monetary System

Moderated by James Benoit, CFA, AfrAsia Bank Ltd.

Ann Pettifor is the director of Policy Research in Macroeconomics (PRIME) and an honorary research fellow at the Political Economy Research Centre of City University, London. She is also a fellow of the New Economics Foundation. Ms. Pettifor was one of the leaders in Jubilee 2000, a campaign that succeeded in writing off $100 billion of debt owed by 42 of the poorest countries. She is the author of Real World Economic Outlook, The Coming First World Debt Crisis, and Just Money: How Society Can Break the Despotic Power of Finance.

  • The fallacy of easy money: Are central bankers trying to solve long-term problems with short-term solutions, and what might be the ramifications of their strategy?
  • The limits of credit expansion: Is ever-increasing sovereign debt a recipe for disaster or essential for global prosperity and stability?
  • Structural imbalances in global economics: How long can they persist, and can they be reduced without triggering a monetary crisis?

 

My session notes follow. As always, these are contemporaneous notes. I make no guaranty as to their accuracy or completeness.

  • Concerned about global debt, especially among the poorer countries
  • Modern finance is incomprehensible to ordinary people and even to most professionals (quoting Das)
  • Money creation is opaque – banks aren’t merely intermediaries within a barter system
  • We overrate the power of central banks
  • How is money created? Via commercial loans – loans create deposits, not the other way around (quoting Sheard)
  • Money created out of nothing more than the promise of repayment
  • Bank money creates economic opportunity and activity
  • How to create equilibrium given the above?
  • If the circle is virtuous, lots of good stuff created; otherwise – dis-equilibrium and bad stuff (too little credit aimed at productive activity
  • Role of central banks – “Janus faced”; defends the interests of private banks (liquidity); protects the currency; manages public finances; mints currency
  • Banks can fix the rate of loans and then collect the resultant interest, unfettered by the Fed; only banks get the base rate from the Fed; banks don’t offer a similar concession to businesses (banks clean-up their balance sheets at the expense of the rest of the economy)
  • $85B used to bail-out AIG was created by the Fed out of thin air (even though necessary)
  • Banks increasingly don’t lend into the “real” economy – only into the financial economy; in fact, the real economy is lending to banks (deposits exceed loans)
  • Meanwhile, infrastructure is in disastrous shape
  • Outlook – we’re left with far too much credit-fueled speculation
  • Debt in highly leveraged loans is back to levels approaching those of 2006-2008
  • Rising interest rates will be a major problem for those in debt – note rising margin debt balances
  • No signs of inflation, but large fears about inflation
  • Flawed obsession with inflation – ignores the threat of deflation (especially within the EU)
  • Investment priorities distorted and crises hard to predict
  • Financial crisis was the first world’s debt crisis
  • Long-term unemployment still high
  • Still no way to tackle global economic imbalances and to avoid crises – that’s a huge and ongoing problem
  • Q&A…
  • “I don’t know what Basel is really trying to do…crazy money with very little behind it.”
  • Capital requirements aren’t the reason banks aren’t lending; the problem is that their balance sheets are still a mess
  • Any central banks getting it right? The Fed has been the most sound, but central banks can’t provide what’s needed; only private banks can do that
  • Demand is what needs to be created, perhaps by state infrastructure investment until the economy improves
  • Central banks required? They perform a necessary function (not a bitcoin enthusiast)
  • Rejects the commodity theory of money (not a “gold bug”); current system a great advance – there will be no shortage of money for productive activity; without sound monetary system, poverty reigns; the monetary system needs to be managed; money shouldn’t be scarce
  • Any limits to credit creation? It isn’t equivalent to income; credit enables transactions; but ultimate amounts can’t be quantified; but too much credit (inflation) can be a problem – money/credit put to speculation rather than productive activity; again, the system needs to be managed
  • We need to recognize that deflation is a real threat and at very high levels of debt is terrifying
  • Dealing with debt: pay it off, write it off, or inflate it away; the best thing is to generate income and employment so debt can be paid off; that’s what central banks should be about
  • Not opposed to government bail-outs of banks, but they shouldn’t be without terms and conditions – force lending, for example; that’s reckless
  • Still no management of the system; potential of another crisis constant; e.g., Greece can’t afford more debt, but there is no disincentive to loan to Greece (bail-out inferred); no insolvency framework for sovereigns and no real risk to lenders
  • Debtors prison counterproductive – inmates can’t work off their debts; note the sovereign parallel
  • Housing bubble in the UK now, financed by the taxpayer
  • Today, loans are available with very little effort or analysis of ability and willingness to repay
  • QE designed to save the banking system, but only “the 1%” have truly benefitted; banks back to speculating; the system was saved but there were no terms and conditions to the banks for doing so; that’s dangerous to political and social stability
  • Concerned about China’s debt build-up; may face problems similar to post-1990 Japan
  • Question traditional economic thinking
  • Money creation is a great ting, but unlike growing tomatoes or gathering gold – it needs to be managed; banking should be servant rather than master

One thought on “CFA Conference: Ann Pettifor

  1. Pingback: CFA Conference: Post Compendium | Above the Market

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