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Real world problems can’t be solved by finance fictions

  • 18 October 2022
In order to deal effectively with a crisis, it is necessary to understand what is happening and to navigate the options skilfully. The world is facing cross-currents: a collapsing financial system that is balanced by the benefits of massive, long term improvements in production efficiencies, mainly because of technological advances. It is a bad news/good news story that can only be seen accurately if the intractable errors of contemporary economics are jettisoned.

The stresses in the system are similar to those in 2008, when the Western financial system went within hours of collapsing. Stock and bond markets have fallen sharply – something that is not supposed to happen at the same time – and global debt is out of control (including in China). The energy crisis is contributing to sharply rising inflation, forcing regulators to raise interest rates, which makes the excessive debt even more problematic. It is likely to spill over to stagflation, although we are not quite there yet.

There have been signs in Britain of the kind of sovereign debt crisis that can imperil banking systems in the developed world. If it is not possible to get buyers for government debt, then the only options are either to increase interest rates on government debt instruments, which has the effect of flattening the whole economy, or to get the central bank to buy back the debt (quantitative easing) which only digs the hole deeper.

It is a time for intellectually skilful leadership, yet there are few signs of it. The main reason is the appalling quality of the economics discipline and economic analyses. Ask this question: why is it that virtually every economist in the Western world thought financial deregulation was a great idea, failing to notice that the whole thing is nonsense because finance is regulations? Economists seem to be incapable, either because of poor training or an inability to reflect, to think through the meaning of words. So they did not see the circularity of the whole thing. Deregulation was supposed to increase the ‘efficiency’ of the financial system. How do you measure efficiency? With money. So what are you doing? You are measuring money with money: chasing your tail.

In an odd sense, though, deregulation was a success, at least on its own terms, because it did increase the output of capital. After the financial rule setting was handed over to the private players, the amount of money was