Ann Pettifor

Women talking macro-economics

5th February 2010

My conversation earlier this week with Elena Sisti – of Italy’s Altreconomia on macro-economics, reform of the finance sector, money, and yes, how we women have left the all-important matter of finance to the boys. Big mistake. It’s time to get in there, and exercise influence. Too much is at stake.

ELENA: In the build up to 2000 you were amongst the leaders of the Jubilee 2000 campaign that helped to cancel the debt to developed countries. Do you think that the fact you were a woman helped you bring a different perspective to the issue?

ANN: I am not sure that it would be right to say that it affected my perspective. But I do believe that as a woman it was easier to bring people together to develop a fresh, more radical perspective on the issue.

I was very struck by the fact that the most effective Jubilee 2000 campaign leaders were women – Laura Vargas in Peru, Yoko Kitazawa in Japan, Wangari Mathaai in Kenya, and Paola Biocca here in Italy. They were organisationally some of the best developed campaigns – more than 2 million petition signatures collected in the mountains and desert regions of Peru, for example, an extraordinary feat.

I think it is easier for women to bring people together, because while we are strong, stubborn and often difficult (I speak for myself in particular) – we are also less ambitious for personal gain, while being very ambitious for the achievements of our group. This may be a very unfair generalisation, as I know there are plenty of selfless men out there – but very few selfless men get to positions of leadership. Women in positions of leadership – in business, in politics or NGOs – have had experience of results achieved as a result of co-operating with others, and seeking out the support of others. With Jubilee 2000 I found, and there were exceptions of course, that one always had to muscle one’s way past a man’s ego, before one could get to the campaign…..if that makes sense.

Having said that, I will undermine all I have said by this: one of the best male campaigners was an Italian – Luca de Fraia, who helped lead Campagna Sdebitarsi, after the tragic death of Jubilee 2000’s founder in Italy: Paola Biocca who died in Kosovo on 12 November 1999 while coordinating the emergency humanitarian missions for the United Nations World Food Programme.

ELENA: You have always been convinced that the complication of finance could be explained to everyone and masses could be mobilised even for finance issues. Why have you always considered the finance sector as crucial for people?

ANN: Finance is not complicated really – especially not for women, most of whom have to manage budgets, small budgets. And managing a little bit of money, making it go far, requires far more skill and intelligence than managing huge sums of money.

The fact is we all need money to be economically active. The poor in particular need money. We are intellectually mesmerised by this thing we call money, partly as a result of our dependence on it, even though many have difficulty understanding it. The ones that have the most difficulty are economists. Very few economists understand or study the nature of money – in particular bank money. Having said that, some of the greatest economists and political leaders from President Abraham Lincoln, Adam Smith, John Maynard Keynes, President Roosevelt to JK Galbraith – understood the nature of money – and acted accordingly.

One of the reasons we have difficulty understanding in particular the nature of bank money, is that for most of us our first experience of money is when we leave school; we are penniless, work for a week or a month, and then find money deposited in our bank.  We think that the money arrives as a result of our economic activity.

In reality exactly the opposite is the case: money stimulates economic activity. Credit creates economic activitiy. Credit creates deposits.  Expenditure creates income. The money deposited in the young worker’s bank account existed prior to the economic activity of that young school-leaver, and made it possible for her to get paid work.

To put it slightly differently: it existed before that young person engaged in economic activity – it did not come into existence as a result of her activity.

People find it hard to get their heads around this concept, but we must…or else we will fail to understand the financial system.

Before western societies invented bank money and institutionalised banking systems – there were often shortages of money in the economy as a whole. This was because money was linked to a commodity – like gold – which was limited, and indeed was used as an anchor, precisely to limit the availability of money.

Then some geniuses (including one John Law) discovered that it was not necessary to have the same amount of ‘money’ or ‘credit’ in circulation, as there was gold in the bowels of the earth. One just needed to create enough money equal to the amount of economic activity in the economy.

If one created less money than the amount of economic activity, the result was depression and deflation. If one created more money than the amount of possible economic activity – the result was inflation…  So central bank governors were given the task of carefully measuring economic activity and then  supplying enough money to enable that activity to take place.
Money is not the thing for which we exchange goods and services.

Its the thing by which we exchange goods and services.

And bank money is not tangible. You cannot touch it or smell it. You cannot even see it – except perhaps as a statement on your monthly bank account. What you do touch and smell is cash – and these days only a tiny proportion of the money we use is issued as cash. The rest takes the form of cheques (declining in number now, and soon to be abolished in some stores in Britain); bank transfers; credit card and debit card payments. (Not so in many parts of Africa where they do not trust their banking system, where they may not have developed a system of bank money with credit and debit cards, and so, in some countries, carry cash around in large bags!)
Now intangible bank money is one of the most wonderful things humanity has ever invented. It enables us to engage in economic activity. That’s all. It’s effectively incidental to that activity – because without economic activity that money would be useless.

But it is potentially also one of the most dangerous of our inventions – which is why credit creation must be so carefully regulated.

Bank money comes into existence in the form of credit, issued by the central bank, and then distributed by the commercial banking system. Credit creates deposits, and in England it has done so since 1694 with the foundation of the Bank of England.

This is the very opposite of what most people think – that only once you have deposits can you obtain credit. No, credit creates deposits in the bank.

So when you are a youngster, fresh out of school, your employer has invariably obtained credit from the bank to finance her investment, and she uses part of that to pay you, and you promptly pay that into the bank as a deposit – using some of it as cash.

That credit has stimulated or generated the first month of your productive economic activity. The deposits that the young person places in her bank account are then exchanged and transferred as ‘bank money’ invisible and intangible – but very useful when she is shopping on Ebay, using her credit card, or paying by cheque.

Until recently, most people could not bring themselves to believe in something intangible and invisible called bank money. But now we have a new phenomenon to discuss over our dinner tables: quantitative easing, or ‘Queasing’ as we joke in English.

Last year on 13th March, 2009 the governor of the US Federal Reserve, Ben Bernanke gave an interview to CBS TV, in which he was asked: “where did you find $160 billion to bail out the insurance company AIG?  Was that taxpayers money that the fed was spending?”. “That was not tax money” replied the Governer. He elaborated: “the banks have accounts with the Fed, much the same way that you have an account with a commercial bank. So to lend to a bank we simply use the computer to mark up the size of the account that they have with the Fed”. The Fed did what a commercial bank does when it provides you with a loan: they entered a number into a computer and charged it to AIG’s account.

Watch CBS News Videos Online

The fact is that the Federal Reserve did not even have to print 160 billion greenbacks – they simply entered a number into a computer.

And that is what the bank does when you apply for a mortgage, to buy a house for example. All the bank needs is a) your application for a loan b) the collateral of your property and c) your promise to repay at a certain rate of interest. Hey presto! The money is transferred – digitally – to your bank account and appears there as a deposit. You may spend 10% of that money on small purchases with cash (euros), but most of that will be paid by cheque or bank transfer.
Now the point of explaining this is as follows: the creation of credit is in fact an almost effortless activity. Different for example, from growing tomatoes. To grow tomatoes one has to depend on the weather, on the rain to fall; on the land and its fertility, and on labour, yours or that of another. All of these factors can disappoint or fail a farmer.

To create credit there is no need for our banking system to depend on the weather, on land, or even on labour. “Why then”, as John Maynard Keynes once argued in his ‘Treatise on Money’:
…if banks can create credit, should they refuse any reasonable request for it? And why should they charge a fee for what costs them little or nothing?
Keynes, 1930.

The ‘fee’ that Keynes is referring to here, is the rate of interest – the ‘price’ of a loan. And the point he is making is correct: the price of money should remain low – to enable people like entrepreneurs to borrow to invest; to enable governments to borrow to invest for example in de-carbonising the economy – something that requires major investment.

However, he also argued that while the rate of interest should be low – the creation of credit should be carefully regulated. In other words, bank money should be regulated so that it is lent to stimulate productive economic activity rather than speculative, inflationary activity.
We have just lived through three decades of financial de-regulation where economic policy makers have encouraged reckless, privatised credit creation. This in turn led to crazy speculation and gambling – in derivatives, collateralised debt obligations, and a range of other parcelled up, sliced-and-diced securities.

At the same time central bank governors and finance ministers succeeded very successfully in repressing the inflation of wages and prices – while allowing the prices of assets (property, race-horses, works of art, stocks and shares etc.) to rocket upward in an inflationary bubble.
However none of the economic gurus of the time – from US Federal Reserve 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, or by the prices we can obtain as farmers or small business women… The rich live on rent from their assets – be it property, stocks and shares or an number of assets. 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.

But invariably that asset-price inflation bubble had to burst. Because if more credit is created than there is economic activity – then the result is inflation. And if inflation grows into a vast asset price bubble as it did in the 90s 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, if in 20 years time, the property that we thought would finance our old age – just keeps falling in value?

So 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).

(Many argue that low interest rates were the cause of the crisis. Not so. Interest rates were lowered after the bursting of the first of the asset bubbles – the bubble after 2000. In reaction to that first manifestation of the crisis – central banks lowered base rates. But that did not mean that, for example,  sub-prime borrowers, or companies wanting to undertake risky investments paid less…they paid usurious rates, because of course they were risky, but to the bankers, very profitable borrowers! )

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.

This is so if they are businesswomen, or consumers.

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 perpetrators of this crisis – orthodox economists/central bank governors/regulators, politicians, reckless and irresponsible bankers and financiers – should be imprisoned and punished; but not a single one has even been indicted!

The real worry is this: in a deflationary environment the cost of debt (including interest rates) rises. While the price of e.g. 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…

Its a wicked old world. Which is why we women should make a strong effort to understand finance and economics – monetary policy as well as fiscal (taxation) policy – and not let the boys in pin stripe suits run the economy. They have amply demonstrated their incompetence.

There I go again! Another broad generalisation!  And apologies for the very long answer…

ELENA: The world collapsed exactly as you predicted in  “the real world economic outlook” (Palgrave, 2003), why do you think it happened?

ANN: It happened because the United States, under President Nixon, had unilaterally dismantled the Bretton Woods System in 1971. Under Bretton Woods governments had to maintain some balance in the national accounts. It was not possible to build up a massive trade or capital account deficit, or surplus. There were constraints in the Bretton Woods System which obliged governments to periodically re-balance their economies. It was a form of periodic structural adjustment.

After the Vietnam War, the US found that it was about to exhaust its gold reserves in the vaults of Fort Knox. Advisers approached Nixon, and warned him of this. President De Gaulle, for example, insisted on being paid in gold, and would not accept paper or bank money. President Nixon in 1971 effectively shrugged his shoulders and told De Gaulle to ‘eat cake’ – much as Queen Marie Antoinette suggested to the poor of Paris. If De Gaulle would not accept printed greenbacks, suggested President Nixon – then tough.

That was when the US defaulted on its obligations to repay its debts in gold – at that time (1971) the biggest default in history, although it is never described as such in the history books. It makes the Argentine default of 2001 appear a minor event.

After that the US instituted (informally and without proper consultation) a new international currency standard. Instead of the gold standard the world adopted the US debt standard, or the Treasury Bill standard. Instead of holding their trade surplus in the form of gold, central banks now held that surplus in the form of US Treasury Bills – IOUs signed by the governor of the US Federal Reserve, and lent to the US at very low rates of interest.

Today China has, reportedly (there is a great deal of secrecy surrounding China’s reserves) $2-3 trillion of reserves, held as loans to the USA – at low rates of interest.

This contrasts with the predicament of poor countries, who unlike the US , cannot borrow money in their own currency – and when they do borrow, borrow at much higher rates of interest.

Anyway, the post Bretton Woods System allowed the United States to behave as if she owned a credit card with no repayment date on it, and with no limit to her expenditures. Couple that with the de-regulation of credit at a domestic level – and the US was set for a prolonged and wonderful shopping spree.

This credit, which financed US expenditures ended up as income (or deposits) for China and the rest of the world. It was good while it lasted – but invariably the bubble burst. Sadly, China is now often blamed for holding a surplus – but under the post Bretton Woods international financial architecture, and under a system in which Americans became reluctant to make and grow their own goods and services, and instead depended on the cheap and hard labour of poor Chinese people for the provision of these goods and services, the government of China had little choice but to hold excessive American expenditures as a surplus.

After working within Jubilee 2000 to cancel about $100 billion of the debts of more than 40 of the poorest countries, I took time out at the New Economics Foundation to try and understand why poor countries had built up such large debts, and why the global economy had become so unbalanced. I poured my newfound understanding into the book I edited:  ‘the real world economic outlook’ (palgrave, 2003). It soon became clear to me that the crisis taking place on the periphery of the global economy, was a limited one. The real crisis was still to come – at the centre – the Anglo-American economies. We worried about the debts of the poor countries – but they were a drop in the ocean compared to the debts building up in economies that had adopted the neo-liberal and Anglo-American economic model.

ELENA: Are women underrepresented in the finance sector in the world?

Definitely. For too long, we have left these important matters to the boys. Big mistake. We have to get in there, and exercise influence. Too much is at stake.

ELENA: Women still face discrimination in the financial sector?

ANN: I don’t work in the banking sector, so cannot speak authoritatively, but every so often here in London the popular press explodes with a story of a rich woman banker suing her bosses for discrimination…and it never comes as a surprise to me.

ELENA: Why do you think that microfinance –  mainly concentrated on women – has been a huge success from the start?

ANN: I worry about the microfinance movement. On the one hand, it has done great good, because intelligently, it has targeted women borrowers. And bankers have found something that would not have surprised you or me: namely that women are skilful at managing money and budgets, and, on the whole,  rigorous about maintaining repayments.

The movement has been good in that respect: it has bypassed men, on the whole, and put funds directly into the hands of women, many of whom live in communities where they would have been stripped of their earnings or assets by male members of the family. So in that respect the movement has been successful.

But on my travels I have come across micro-finance institutions (in Orissa, India, but also in Pakistan) lending to women at very high, real rates of interest. Usurious rates of interest. To be honest, I am not an expert on microfinance, but it would astonish me if there were not default rates on these high interest rates…and if they did not in some way enslave women borrowers to their lenders. It would only take one failed harvest, or one extreme weather event for a woman to lose her crop, and her ability to repay, and then no doubt the lender would compound interest on the defaulted loan and bankrupt the borrower. As I explained earlier, credit creation is an effortless activity, by and large. For that reason it should be carefully regulated. In English we use the phrase ‘tight’ lending – i.e. lending only after careful scrutiny that the borrower will have the income stream to repay. But while lending should be ‘tight’ – it should also always be ‘cheap’ – i.e. at low rates of interest – to be sustainable – i.e repayable without great sacrifice.

Debt has an environmental impact too. If compound interest is allowed to ‘compound’ – then borrowers have to strip the land (the earth) of its assets to repay. The woman farmer has to double the productivity of her land – presumably with fertilisers and other chemicals. Or else she has to strip the forest of more trees; or the sea of more fish – to repay her ever-rising debts. Simultaneously, labour has to be exploited. People have to work twice as hard, and twice as long, perhaps, to repay rising debts. For that reason, debt should not be allowed to grow exponentially. If it does, it has environmental and human costs – as we have known since pre-biblical times. It is why all faiths have strong laws about debt. Islam expressly forbids interest, and in Christianity we abhor debt slavery and ask our God to forgive our debts, as we forgive the debts of others. We celebrate the Jubilee – a periodic (every 7 x 7 years in the 49th year) correction to imbalances that build up in the form of debt – by cancelling debts in the Jubilee (50th)  year. Just as every 7 days we honour the Sabbath, by resting the land, and by refraining from labour. These periodic corrections to imbalances are fundamental to western Christian civilisation – 2,000 years of a form of regulation that was banished over night e.g. when in Anglo-American economies the notion of 24/7 was introduced: 24 hour working or shopping for 7 days a week.

ELENA: Do you think it will be possible for macrofinance to feminise the way it operates?

ANN: No, that will not be possible. Women will have to feminise macrofinance – by taking economics courses; by challenging economic orthodoxy; by taking positions in banking and finance. Above all, by understanding the nature of credit and bank money. The boys have hidden these secrets from us all for too long.

ELENA: Which ones do you consider to be the main advantages of feminisation of finance?

ANN: I am getting into deep waters here – and by answering your question will fall once again into generalisations – but for me I hope it will be that women will bring a sense of responsibility to the finance sector. The realisation that self-interested greed does not result in care for others, in responsibility for others. It turns us into alienated monsters – which is why we need to assert or re-assert old values.

That love and companionship and altruism matter more than money.

That community is more important than individualism and acquisitiveness – the ability to consume and acquire more and more things.

That we live within a world of finite resources – we live within a world of limits. We must humbly accept those limits – not act like supermen busting out of the limits!

That when we find ourselves out of tune with nature, disrespecting nature and her constraints – we go a little mad. Crazy.

That sanity means accepting constraints with humility, and remembering that the economy is just a subsidiary of the natural system – not the other way around!

ELENA: Everyone is blaming the finance sector for what happened do you agree?

ANN: Yes, and no. The bankers lobbied politicians and pressured them to de-regulate credit creation – and to transfer the power to create and regulate credit, and to set rates of interest, from the state to the private, invisible, hand of the market.

But ultimately it was politicians that transformed our economy. It is they who succumbed to the lobbying of the bankers – they who weakened and de-regulated in face of that pressure. Many politicians of course profited from this lobbying. There was a great deal of corruption – let’s not beat about the bush.

So it is they, the politicians, who must take the full blame. The bankers only did what most would do if given the chance to make money effortlessly. After all that is what we all do when we go and buy lottery tickets – we believe that we will make money effortlessly. In that sense we are no different from those bankers. Which is why we need constraints and restraints – regulation, just as we need the regulation of traffic to prevent ourselves killing others, as well as ourselves, on the road.

Between 1945 and 1970 we lived through what economists commonly define as the ‘golden age’ – an age in which the financial regulation recommended by Keynes was the norm. It was not as he would have wanted – but it was a lot more stable than the chaos pre – 1929, and the destruction that prevailed prior to his influence over both the US and UK economies from 1933 onwards.

And then in the 1970s the politicians gradually de-regulated. Not all, of course. It is my understanding that Italians do not have the same levels of debt as we do in the Anglo-American economies – and for that the Italian state and Italian politicians must be congratulated – if I am right about that. The same is true in France where the credit card is not as ubiquitous as it is here in the UK, or as it was in Iceland and Ireland.

ELENA: What are the reforms that you would introduce for the international finance sector?

ANN: Now, I will hopefully be brief: capital mobility should be constrained. The Finance sector should be made accountable to democratic institutions – i.e. to the governments where they are based. Those governments should have the power to regulate flows of capital across borders – an essential power if central banks are for example, to be able to exercise control over interest rates – rates for short-term loans, long-term loans, safe loans and risky loans. Right now central banks only have control over the ‘bank rate’ the base rate, the rest are controlled by private sector bankers, and in particular the LIBOR rate is fixed by a secretive and quite unaccountable group of London-based bankers – the British Bankers Association.

The rate of interest is too important to be left in the hands of unaccountable individuals, keen only to turn a quick profit. The rate of interest is a ‘public good’ – and as such should be managed in the interests of society as a whole – industry, labour – and not just the finance sector.

By constraining capital mobility (and capital controls are not the same as exchange controls, which affect the currency individuals can take on holiday. Capital controls are taxes on the movement of capital across national borders) – by constraining capital mobility, we will restore to governments the power to regulate credit creation, and fix interest rates. In other words, the power to determine major aspects of economic policy.

And don’t let anyone tell you that in this digital age it is not possible to control the movement of capital. Iceland has had to introduce capital controls, and has done so successfully since  her crisis broke in the autumn of 2008.  When I met with officials in the Prime Minister’s office in Iceland, they assured me they had no difficulty making capital controls work, but it did require constant attention, as the owners of capital were always finding loopholes…By these means will we restore economic policy autonomy to democratic institutions.

That is how it should be. That’s what our grandmothers fought for, when they fought for democratic government.


2 thoughts on “Women talking macro-economics”

  1. Oil prices hit $147/barrel in 2008. That was a key factor in the financial crisis. We were in recession

    before the banks started collapsing. All banks will collapse if economic activity declines. In our credit money system debt is always greater

    than savings. High debt levels mean faster and deeper collapse.

    Peak oil and gas means recession will the norm for the forseeable future. A

    renewable energy economy is desirable and inevitable , but it is far away and will be smaller. Any future economic growth recovery will hit a wall

    of high oil prices. We need to learn to live with permanent recession.

  2. On oil prices and the end of growth:

    Sorry, don’t agree. Oil prices were a key factor.


    energy prices didn’t start in 2007. Richard Branson first complained about oil prices killing profits at $25/barrel.

    Oil prices bounced

    around $25/ barrel for 20 years,
    1998 oil bottomed at $10,
    $50 in 2005,
    $70 in 2005,
    and went on rising to $147.
    Oil exports

    from N Sea and Alaska declined from 2000 on, a significant cut. Oil prices were killing growth from 2002. High US nat gas prices were killing

    growth from 2000.

    $70 barrel oil = death to airlines, GM and US style motoring.

    Debt ridden consumers, banks, other companies and

    nations were due for a crisis of debt, it would have happened anyway. High oil prices reduce real work and cuts profits in the economy. With less

    profit paying off debts was bound to get harder. The effects of oil prices are also global in action. You cannot hedge them except by buying

    energy. They affect every corner of our oil-junkie ecomomy. We cannot move without the darned stuff.

    Until we go renewable real economic

    growth is over. The comimg renewable energy ecomony will be tiny in comparison, plenty of jobs though. More manual work I expect.

    We cannot

    create imaginary money and do real work with it, thats a perpetual motion machine.

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