Anyone for prestige gilts?

There is an interesting article in the New Statesman by Ann Pettifor where she indicates that currencies are made stronger by the taxpayer.

She appears to share her view with Thomas Edison:

If the Government issues bonds, the brokers will sell them. The bonds will be negotiable; they will be considered as gilt-edged paper. Why? Because the Government is behind them, but who is behind the Government? The people. Therefore it is the people who constitute the basis of Government credit. Why then cannot the people have the benefit of their own gilt-edged credit by receiving non-interest bearing currency.

I too, can see this is the case but it is looking at the world through the eyes of a banker or currency trader and surely it is really the Rule of Law that is the nub of the value. A promise to pay is worthless if it cannot be kept or enforced. Taxpayers pay tax because the law obliges them to do it. That is key.

Ann Pettifor continues:

Europe’s aversion to public debt is embedded in the German psyche. The Germans have the same word for debt – schuld – as they do for “guilt” Yet while fears about public debt occupy the minds of economists and journalists, it’s a different story for the finance sector. For bankers, the public debts of Britain, Europe and the US are gifts that keep on giving. They can’t get enough of them. Demand for UK bonds currently exceeds supply, with investors so keen to get hold of government bonds that they are willing to pay negative rates for them. This is because the sovereign bonds of advanced economies like Britain, Japan and the US offer the safest collateral in the world.

which is certainly no less than the complete truth.

The safety and value of this collateral is almost entirely due to publicly financed tax collection systems backed by millions of law-abiding taxpayers. Put simply, taxpayers are the collateral that guarantee the safety and value of government bonds.

Here I disagree – I’d suggest it is simply government money creation and the legal system that proves you’re going to get your money back. It is only the UK government that produces pounds sterling – and that is the important part. Taxpayers do, of course, indicate that you have a population, a functioning economy and, importantly, that it operates under the rule of law.

She continues:

The weakness of [Malawi’s] public institutions means that Malawi has virtually no money. Instead the country is reliant on other people’s money.

The deep irony of capitalism’s obsession with both austerity and the need to shrink the state is that this approach has also shrunken the availability of collateral for the private finance sector. Players in the shadow banking system of free-wheeling financial markets are heavily dependent on the public debt of government bonds for collateral. There is no private collateral – property, works of art, yachts, race horses, jewellery – considered as safe as sovereign debt. By rendering public debt scarce, politicians not only harm the interests of their citizens, but also the interests of Wall Street and the City of London.

Given that safe public assets are fundamental to the health and stability of the globalised private financial system, why would right-wing politicians contract their supply? The answer is ideology: politicians on the right are opposed to the collective role of the state, and think financial markets should be detached from regulatory democracy.

Until we fully understand how the monetary system functions, a wealthy elite will continue to extract rent from publicly produced collateral. Economic inequality will continue to widen across the world, while public anger and discontent deepen.

I entirely agree with this, too, particularly  “until we fully understand how the monetary system functions”. ProgressivePulse has been pretty diligent in that regard…

Now here she strikes, as it were, gold (my bolding):

If enough people understood the latent power that taxpayers have over the private finance sector, we could demand that government bonds were made available to investors and speculators only if certain conditions were met. These could include the payment of taxes and the management of cross-border capital flows.

This is the key to the article. We don’t have to accept all these footloose and suspect investors. We could actually increase our prestige and perhaps, demand, by suggesting only members of an exclusive ‘rule of law’ club could invest. Those that didn’t might be frowned upon or even perhaps…eventually… be downgraded by Standard and Poors!



Note, later, 25 January: The author has written a more expansive and informative article which indicates how the current monetary system works (albeit, for me, with the provisos I have indicated above). It includes most of the text from the FT and is available here.