When the capitalist system fell off the cliff in 2008 the taxpayer was asked to fork out £500 billion to help it climb back up again. This was then followed by fifteen years of attacking public services in the name of austerity, to apparently balance the books. However, the debt in 2010, when Labour left office was approximately £800 billion. It is now at £2.5 trillion. The attack on the public services has not remedied the hole in the UK economy. It has trebled its size.
The only way to remedy it, is to make the UK more productive. Not to force people to work in jobs that make them frustrated and desperate. To create a productive economy in which people want to work and find real fulfillment. To create a society in which people are proud to contribute and are rewarded fairly across the board.
Both the Conservative Party and the Labour Party show no signs of wanting to create this type of economy. They merely stick to the tired old practices that lead the country deeper and deeper into the mire.
Here, ex government cabinet member, Chris Williamson explains briefly how Rachel Reeves is lying to us and that those who trusted the Labour Party in power to offer something different, have been sold a pup.
The Chancellor, @RachelReevesMP, is sacrificing infrastructure projects on the altar of an imaginary black hole in the public finances. @StephanieKelton's documentary, 'Finding The Money' shows that another way is possible. Download it here:https://t.co/any412Vpok pic.twitter.com/t3Nl7yS3PM
— Chris Williamson (@DerbyChrisW) October 4, 2024
The 2008 Financial Crisis Explained
The 2008 financial crash was one of the most significant economic downturns in modern history, deeply affecting countries worldwide, including the UK. The crisis, often referred to as the “Global Financial Crisis,” was triggered by the collapse of the US housing market and the failure of several major financial institutions. However, its roots were more complex, tied to excessive risk-taking in the financial sector, a lack of regulatory oversight, and global financial imbalances.
At the heart of the crisis were mortgage-backed securities (MBS) and collateralised debt obligations (CDOs), financial products that packaged home loans into tradeable assets. Banks and financial institutions in the US and Europe, including the UK, invested heavily in these products, which seemed lucrative and safe at the time due to rising house prices. However, many of these loans were subprime, meaning they were issued to borrowers with poor credit histories, and when US house prices began to fall in 2006, it triggered a chain reaction of defaults. This led to the collapse in the value of MBS and CDOs, causing huge losses for financial institutions worldwide.
The collapse of Lehman Brothers in September 2008, one of the largest investment banks in the world, sent shockwaves through the global financial system. The interconnectivity of financial markets meant that banks and institutions in the UK were exposed to these toxic assets. Several major UK banks, such as Royal Bank of Scotland (RBS) and HBOS, had significant exposure to the US housing market and were heavily reliant on short-term borrowing to finance their activities. When the value of their assets plummeted and liquidity dried up, these banks faced insolvency.
The UK government, led by Prime Minister Gordon Brown and Chancellor Alistair Darling, responded with swift and decisive action to prevent the complete collapse of the financial system. In October 2008, the government announced a £500 billion rescue package aimed at stabilising the banks and restoring confidence in the financial system. The plan included £50 billion in direct capital injections to banks, £200 billion in guarantees for bank debts, and a further £250 billion in liquidity support through the Bank of England.
This intervention was crucial to prevent the failure of some of the UK’s largest financial institutions. The government took part-ownership of RBS and Lloyds Banking Group, effectively nationalising them to keep them afloat. As Alistair Darling later explained, “There was a real risk that the banks could have closed their doors, with disastrous consequences for people’s savings, businesses, and jobs” . This decisive action not only helped to stabilise the UK banking system but also sent a strong signal to the markets that the government was prepared to do whatever it took to maintain financial stability.
In addition to these bailout measures, the Bank of England lowered interest rates to unprecedented levels, cutting the base rate to 0.5% by March 2009 in an effort to stimulate borrowing and investment. The Bank also introduced a programme of quantitative easing (QE), in which it injected money into the economy by purchasing government bonds. The initial round of QE in 2009 amounted to £200 billion, and the policy was extended in subsequent years to support the recovery. This unconventional monetary policy aimed to increase liquidity in the financial system, encourage lending, and avoid deflationary pressures.
Despite these interventions, the UK economy suffered a severe recession, with GDP contracting by more than 6% from peak to trough between 2008 and 2009. Unemployment rose sharply, and businesses faced significant challenges as credit became harder to access. The government also faced criticism for the cost of the bank bailouts, with some arguing that taxpayers were left to shoulder the burden of the financial sector’s reckless behaviour. At the same time, the austerity policies introduced by the coalition government from 2010 onwards, which aimed to reduce the UK’s budget deficit, slowed the pace of recovery for many sectors of the economy.
The UK government also recognised the need for regulatory reform to prevent a repeat of the crisis. The Financial Services Authority (FSA), which had been responsible for regulating the financial sector, was criticised for failing to prevent the build-up of risks in the banking system. In response, the government introduced a new regulatory framework. The FSA was abolished, and its responsibilities were divided between the Bank of England, which took on a greater role in overseeing financial stability, and two new regulators: the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). These reforms were aimed at increasing oversight of the banking sector and ensuring that systemic risks were better managed in the future.
In retrospect, the 2008 financial crash revealed significant vulnerabilities in the global financial system, including in the UK. Excessive risk-taking, a lack of proper regulatory oversight, and the interconnectedness of financial markets contributed to the severity of the crisis. The UK government’s response, while controversial, was essential in preventing a full-blown financial collapse and stabilising the economy. However, the long-term impact of the crash, particularly in terms of the slow economic recovery and increased public debt, continues to shape UK economic policy now. What we experienced was an economy entirely depended on borrowing and debt. An unsustainable system that will eventually collapse entirely.
Why The Notion Of A Financial Black Hole Is Just Tired Old Rhetoric
The notion of a financial black hole, where a country’s economy spirals into irreparable collapse, has haunted policymakers for centuries. The idea of economic systems imploding due to unserviceable debt, prolonged recession, or runaway inflation is a scenario that no nation wishes to encounter. Yet, amid these anxieties, one enduring solution stands out for its controversial simplicity: printing more money.
Many economists argue that, theoretically, a nation with sovereignty over its currency can never face a true financial black hole, since it can always issue more money to meet its obligations. This theory, however, is not without contention. Critics argue that this can lead to hyperinflation, devaluation of the currency, and a collapse of trust in the economy. Despite these dangers, proponents claim that careful management and modern monetary theory (MMT) provide a roadmap where controlled money printing can avert financial disaster and even stimulate growth.
The Fundamentals of Currency Printing
At its core, the concept of printing money to solve financial problems arises from the basic understanding of a fiat currency system. Unlike a commodity-based currency system, where money is backed by a tangible asset like gold, fiat currency has no intrinsic value. Instead, its worth is derived from the trust and authority of the government that issues it. Countries such as the United States, the United Kingdom, and Japan all operate on fiat currency systems, meaning their governments can print money whenever they deem it necessary.
In the modern era, central banks, such as the Federal Reserve in the United States or the Bank of England, control the money supply. They have the power to inject liquidity into the economy by printing more money or, in digital terms, by expanding the reserves of commercial banks. This is often referred to as “quantitative easing” (QE), a term that became prominent after the 2008 financial crisis, when central banks worldwide employed this strategy to prevent a global depression. While this tool offers an immediate lifeline, its long-term effects are a matter of fierce debate.
Case Study: The United States and the 2008 Financial Crisis
One of the most striking examples of a nation averting a financial black hole by printing money can be found in the United States during and after the 2008 financial crisis. Faced with a potential collapse of the banking system and a deep recession, the Federal Reserve, under the leadership of then-Chairman Ben Bernanke, initiated several rounds of quantitative easing. The Federal Reserve purchased massive amounts of financial assets from commercial banks, including mortgage-backed securities and government bonds, in a bid to pump liquidity into the system.
By the end of the QE programme in 2014, the Federal Reserve had added trillions of dollars to its balance sheet. At the same time, interest rates were slashed to near-zero levels to encourage borrowing and investment. The immediate result was a stabilisation of the financial system and a gradual recovery of the economy. Bernanke, in a 2012 speech, defended the policy by saying, “We should not rule out using means such as asset purchases to support the economy, especially in extraordinary times.”
Despite fears of hyperinflation or the devaluation of the US dollar, neither scenario materialised. Inflation remained subdued, and the dollar maintained its status as the world’s reserve currency. Critics, however, argue that the policy disproportionately benefited financial institutions and the wealthy, exacerbating income inequality. Nevertheless, the US economy, for all its imperfections, did not spiral into the abyss.
The US experience during the 2008 crisis showcases a nation with the ability to print its own money can stave off economic collapse. However, this is not a blanket endorsement of money printing as a foolproof solution. Other nations have not been as fortunate.
The Hyperinflationary Pitfall: Zimbabwe
If the United States is an example of how money printing can work under certain conditions, Zimbabwe represents the dangers when it is mismanaged. Zimbabwe’s economic collapse in the early 2000s is often cited as a cautionary tale against the overuse of money printing.
Faced with enormous debt, shrinking revenues, and the costs of a war in the Democratic Republic of the Congo, the government of Zimbabwe, under Robert Mugabe, turned to printing money as a means of addressing the nation’s financial woes. By 2008, inflation had reached astronomical levels, reportedly peaking at 79.6 billion percent month-on-month. The country was producing $100 trillion banknotes, and yet these bills were almost worthless. Prices changed multiple times within the same day, and ordinary citizens lost all trust in their currency. Zimbabwe eventually abandoned its currency altogether, opting for the US dollar and other foreign currencies as legal tender. (Was this crisis manufactured externally? That is for another day).
Zimbabwe’s case illustrates the disastrous consequences of unchecked money printing. When a government continuously prints money without corresponding economic growth, inflation surges because more money chases the same amount of goods and services. This lesson from Zimbabwe serves as a stark reminder that printing money is not a magic bullet. Economic fundamentals, such as productivity and trust in the currency, must be aligned for money printing to be successful.
The UK: Quantitative Easing in the Face of Financial Crisis
The United Kingdom presents another compelling example of how money printing has been employed to stave off financial collapse. During the 2008 financial crisis, the Bank of England initiated a programme of quantitative easing to inject liquidity into the economy. By purchasing government bonds and other financial assets, the Bank of England aimed to lower interest rates and encourage lending and investment.
Mervyn King, the then governor of the Bank of England, justified the move by stating that the global financial system was on the brink of collapse and extraordinary measures were necessary. “There’s a big black cloud out there, and we’re just trying to keep things going,” King said in a 2009 interview. The Bank eventually pumped around £375 billion into the economy through various rounds of quantitative easing between 2009 and 2012.
The effects of this money printing strategy were significant in preventing a deeper recession. While the UK experienced a sharp downturn, with GDP shrinking by more than 4% in 2009, the economy stabilised more quickly than many had feared. Unemployment did not spike to the catastrophic levels seen in some other countries, and the financial system avoided collapse.
However, as with the United States, there were criticisms. Some economists argued that quantitative easing in the UK disproportionately benefited the wealthy, particularly those with significant financial assets, as stock markets and asset prices surged due to the influx of liquidity. Additionally, while inflation did not spiral out of control, there were periods where it exceeded the Bank of England’s target, raising concerns about the long-term sustainability of such policies.
The UK’s experience demonstrates that printing money can indeed avert immediate financial disaster. However, it also highlights the complexities of such policies, including the potential for unequal benefits and inflationary pressures.
In 2020, the COVID-19 pandemic led the Bank of England to once again resort to quantitative easing, expanding its asset purchase programme by hundreds of billions of pounds. This helped the government fund its massive pandemic response, which included furlough schemes and business support. The Bank of England’s actions reflected the recognition that, as a nation with control over its own currency, the UK could afford to print money in times of crisis without risking a financial black hole.
The Rise of Modern Monetary Theory (MMT)
In recent years, the debate over money printing has been reignited by advocates of Modern Monetary Theory (MMT), an economic school of thought that challenges conventional wisdom on government spending and deficits. MMT proponents argue that a country that issues its own currency can never go bankrupt, as it can always print more money to cover its debts. In their view, the real constraint on government spending is not debt, but inflation.
Stephanie Kelton, one of the leading voices of MMT, contends that governments should not be afraid of deficits, especially when unemployment is high and the economy is underperforming. In her book The Deficit Myth, Kelton writes: “The real challenge is to deploy our resources in a way that ensures full employment and sustainable growth. The federal government doesn’t need to ‘find the money’ to spend; it creates money every time it spends.”
In this framework, a government’s priority should be to ensure that its economy is operating at full capacity, rather than worrying about balancing the budget or controlling deficits. MMT also calls for an active role of government in reducing unemployment and creating economic stability. Advocates argue that the fear of inflation is often overstated and can be controlled through targeted fiscal policies such as taxation or regulating demand.
Japan: An Example of Managed Money Printing
A more nuanced example of money printing is Japan, which has engaged in aggressive monetary easing for decades without experiencing runaway inflation. Since the 1990s, the Bank of Japan has pursued an ultra-loose monetary policy to counteract deflation and stimulate growth in an economy burdened by an aging population and sluggish domestic demand.
In 2013, under the leadership of Prime Minister Shinzo Abe, Japan embarked on a policy known as “Abenomics”, which involved massive quantitative easing, increased government spending, and structural reforms. The Bank of Japan has purchased significant quantities of government bonds and even equity-backed securities, a bold move aimed at boosting inflation and investment.
Despite these measures, Japan has not experienced the hyperinflation that critics of money printing often warn about. Inflation in Japan has remained low, and the yen has not suffered a significant loss of value. This has led some economists to argue that Japan’s experience disproves the notion that money printing inevitably leads to inflation or currency collapse.
However, Japan’s experience also highlights the limitations of money printing. While it has prevented deflation from worsening, it has not succeeded in fully reviving Japan’s economy. Growth remains sluggish, and the country’s debt-to-GDP ratio is among the highest in the world. Japan’s situation demonstrates that money printing, while useful in avoiding financial catastrophe, is not necessarily a panacea for deeper structural issues in the economy. However, one must also remember that if different countries adopt different economic models there will also be a fluctuation in harmony.
The Eurozone: The Constraint of Not Controlling Currency
One of the key arguments made by proponents of money printing is that a nation with sovereignty over its currency can always avert a financial black hole. The Eurozone provides a unique counterpoint to this, as member states such as Greece, Spain, and Italy do not control their own currency; instead, they use the euro, which is managed by the European Central Bank (ECB).
During the Eurozone crisis of 2010-2012, countries like Greece found themselves in severe financial distress but were unable to print their own money to escape their debt burdens. Instead, they were forced to undergo harsh austerity measures and negotiate bailouts with the European Union and the International Monetary Fund (IMF). This inability to print their own currency exacerbated the crisis and prolonged economic suffering in the affected countries.
In contrast, countries like the United Kingdom, which did not adopt the euro and retained control over its own currency, were able to implement quantitative easing programmes and other measures to stabilise their economies. This divergence in outcomes underscores the importance of currency sovereignty in managing economic crises.
Therefore, the lessons are clear. Talk of ‘financial black holes’ are a political strategy to bamboozle. Where one has control over one’s currency there can never be a ‘financial black hole’, as long as the country’s productivity is managed properly. This rhetoric is a lie for those who do not pay attention to reality. Unfortunately, this relates to the majority of people. Once we all become aware of the lie they continuously tell, they will have to stop using it and start managing the economy for all not just the few.
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