However, none of the economic gurus of the time – from the US Federal Reserve’s Alan Greenspan, to European central bankers, to orthodox economists – while ferociously opposed to the inflation of prices and wages, ever complained about the inflation of assets.


Why? It is my belief that this is because it is the rich, on the whole, that own assets. The rest of us live by our wages. The rich live on rent from their assets – be it property or stocks and shares. And orthodox economists allowed bankers and the rich to inflate the value of their assets with easy credit. This enabled the rich to enrich themselves over the period of financial liberalisation, to an extent probably unknown in our history.


Destructive forces


But that asset-price inflation bubble had to burst. Because if more credit is created than there is economic activity or assets – then the result is inflation. And if inflation grows into a vast asset price bubble as it did in the nineties and early noughties, then it will invariably burst – leaving the detritus of excessive debt to spread the destructive forces of deflation over both assets and other economic activity. One has only to look at Japan’s debt-deflationary spiral of the last two decades. Twenty years after Japan’s asset bubble burst, property prices are still falling! Can you imagine what that would mean to us, in 20 years time, if the property that we thought would finance our old age just keeps falling in value? Today we are trying to clear up a mess – a mess made by the greedy and excessive explosion of unregulated credit-creation, which, while the party was on, excessively enriched a few. This mess was created by the ideology of ‘easy’ but expensive credit (i.e. credit lent at high rates of interest). The mess that we are living through is a debt-induced deflationary spiral. As borrowers de-leverage their debt and save more, as they are bankrupted by high, real rates of interest, so they reduce their economic activity. As they reduce economic activity, so more companies go bust (especially if they have heavy debts), so more people have to be made unemployed. As more people lose their jobs and cut their economic activity – so prices fall more, and more jobs are lost. It is a wicked and vicious spiral.


The real worry is this: in a deflationary


environment the cost of debt (including interest rates) rises. While the price of, for example, tomatoes can fall below the cost of growing tomatoes, the ‘price’ of money – interest rates – can never fall below zero. So while prices and wages might turn negative (i.e. people lose their incomes) the price of money cannot turn negative. It’s a wicked old world. That is why we should make a strong effort to understand finance and economics – monetary policy as


28 ADULTS LEARNING APRIL 2010


well as fiscal (taxation) policy – and not let the boys in pinstripe suits run the economy. They have amply demonstrated their incompetence.


Contrary to economic ‘groupthink’, cut- ting government borrowing is best achieved by investing in jobs, generating tax revenues, and cutting spending on unemployment benefits. In other words, by spending away the debt.


Of course, that does not make sense to


many, and is anathema to many orthodox economists. But it should make sense to anyone on a first-year economics course. I want to evidence my point with Treasury data which show how Britain’s public debt as a share of GDP has changed since 1858. Britain’s debt today – as a proportion of the national cake or GDP – is a little over 60 per cent, and rising. In 1858 it was about 100 per cent of GDP.


Government debt is expected to hit 70 per cent soon. That’s largely because of the City of London bail-out which cost the Government at least £150 billion between 2007 and 2009. In 1946 Britain’s debt was almost five times what it is today – a staggering 250 per cent of GDP. At that point an extraordinary thing happened. The heavily indebted Labour government began to spend – as soon as legislation was agreed by Parliament. Labour invested in a bold and visionary project: a publicly funded health service free at the point of use. There was a slum clearance and housing programme. They revived the ancient universities, provided pensions and welfare to the poor. They trained ex-soldiers to become teachers. To revive the economy, to protect the vulnerable, and to prepare the country for


the threat posed by climate change, the next government, whichever party forms it, must do the same again: invest in a ‘green new deal’, a strategy for economic and environmental transformation.


What happened to the public debt in the 1940s and 1950s, you might ask, as a result of Clement Attlee and Hugh Dalton’s apparent extravagance and flouting of the economic orthodoxy? Did the deficit balloon, the bond markets blackmail the government, and did capitalism, as we know it, go into free fall? No. On the contrary, what John Maynard


Keynes advised would happen, did happen. Government investment kick-started private economic activity. Tax revenues rose, expend- iture on unemployment benefits fell, and government cut its borrowing, which fell dramatically as a share of GDP. And the economy thrived. Indeed, 1945-1971 is known in economics as ‘the Golden Age’. The spending paid down the debt. There was not much leakage, because


‘offshore capitalism’ – the kind of capitalism that dodges regulation and taxation – was not well established then. People in Britain were getting jobs and paying taxes in Britain – and so were their employers, and the businesses in which they spent their earnings. That is why the economy was able to recover, and launch the period known to economists as ‘the golden age’.


If we want our economy to recover again,


we are going to have to learn from that experience.


Ann Pettifor is an author and analyst of the global financial system. She is a fellow of the New Economics Foundation and a director of Advocacy International. Go to: www.debtonation.org


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