EU Referendum: what it means for ME (+ a poll)

[Cheesus]

Who would have thought that Phoenix Rising had so many closet progressive economists?

 

[Hip]

It's never mentioned, but Government debt = Private savings. The plans to reduce Government debt reduces Private Savings, this is why austerity does not work.

That's very interesting. Not knowing very much about economics, I kind of assumed that when the UK government wanted to borrow money, it would get a loan from the bank of England, and the bank would then create this money by its usual fractional reserve mechanism.

But a quick Google check reveals that when governments want to raise cash, they issue bonds that the general public can buy and invest in, with these investors in the general public then earning interest from the bonds they buy, and the government paying this interest, in return for the use of the public's money. So everybody is happy. Is that generally correct?

Are there any circumstances where governments will instead get a loan from a central bank, like the Bank of England? And when countries get emergency loans from international banks like the IMF, or from international development banks like the Word Bank, are those loans counted as part of government debt, or does much of the money loaned by a country from international banks go straight into the private sector, for funding corporate development projects?

Do you have an economics background, by the way?

 

[Marco]

... I'm on tenterhooks. Gold?

Soros has gone VERY short on Deutsche Bank. Other more apolalyptic commentators have suggested investing in tangible assets that are productive and that you can protect (and not just from bank bail-ins).

Vis - Land; gold and guns.

Sounds a little extreme to me.

 

[Mark]

On the question of debt, I tried to find this out a few years ago - who the debt is owed to and whether it could be written off - I asked a few people, and the conclusion seemed to be that all this debt mountain is basically owed to big financial institutions which manage funds that ultimately translate to pension funds. In other words, the debt is basically money we all owe to ourselves - to our own future. I don't know how accurate that is, obviously it's a crude summary of the situation, but the implications are quite scary. On the other hand, with the major multinational business interests basically now being untaxed, and ever vaster sums of wealth being concentrated in the hands of a very few, the required path to restructuring the global economy seems fairly clear...

 

[Snow Leopard]

The inevitable result of excess debt is deflation.

As for Brexit - it doesn't have to be a disaster, if we asked fundamental questions and actually tried to map the fundamental needs of people (which is much more than food and shelter, just FYI) and had a model of how well those need can be met either by the market, or government involvement at different scales, and deriving a plan from this.

But no one ever asks those questions, there is no way to measure this, there is no model, so Brexit is just going to be a failure, just like all the other superficial firefighting/therewasanoldladywhoswallowedafly policies that politicians discuss these days.

 

[Hip]

On the question of debt, I tried to find this out a few years ago - who the debt is owed to and whether it could be written off

My understanding is that with fractional reserve banking, which is what most or possibly all of the world uses, banks have rules that allow them to create money. I believe the fractional reserve rule is that if a bank has X billion dollars as its own assets, then a bank is allowed to electronically create 9X billion dollars of additional money (out of thin air, so to speak), which it can use to lend out to people. So my understanding is that much of the debt of the world is in fact owned to the fractional reserve mechanism.

It sounds immoral when you first learn of fractional reserve banking, but the general view is that it is a good thing, because it allows a fractional reserve bank to financially underpin (through loans) far more commercial ventures than a bank which does not use fractional reserve.

I suspect this fractional reserve mechanism, which I believe dates back to the Middle Ages in London, is the most likely explanation of why Europe and the West exploded with economical and technical advancement, whereas the Islamic world, which was actually much more advanced than Christian Europe in the Middle Ages, got left behind from the Middle Ages onwards: because in Islamic banking, charging interest on loans is not allowed, and as far as I understand it, fractional reserve banking never developed in Islamic countries.

 

[A.B.]

The decline of the Islamic world has a lot to do with the loss of important centers of knowledge in Andalusia (due to the Spanish reconquista), in Sicily, in Bagdad (due to mongol horde invasions). Later on the middle east also lost its status as gateway to the orient (and control of the lucrative silk road trade) as Europeans sailed over the cape of Africa to India. Climate change probably played a role too. There was a period of warming from 950 to 1250, which caused droughts and famine, migrations, etc.

Some of today migrations are probably also due to climate change.

 

[Hip]

That's very interesting, @A.B. Those could well be important factors.

They would not explain, though, why other countries with major intellectual and cultural capital did not develop in the same explosive way as Europe did since the Middle Ages. For example, the Brahmin subset of the Indian population have a very high average IQ, yet there has been very little material advance in India, until recent decades, when they imported Western banking and financial practices, and now India have put satellites in orbit around Mars, and are working on their own space shuttle.

It's clear India possesses great intellectual capital, so something must have held them back from applying that intellectual power to making great material and technological progress. Same with China: great intellectual capital, but got left far behind Europe, until recent decades.

Ever since I read about the fractional reserve mechanism in banking, I have had this theory that fractional reserve is the single most important factor behind the explosive economic, scientific and technological expansion that started in Europe in the Middle Ages, and has now spread to the world.

Fractional reserve you can think of as capitalism and commerce on steroids.



OK, in Europe you also had the renaissance, the rediscovery of classical Greek analytical thinking, which no doubt greatly promoted scientific advancement. But without commerce, and the technological advancement commerce tends to promote, my feeling is that Europe would not have become this epicenter of economic, scientific and technological growth.

 

[alex3619]

The concept of fractional reserve means banks can loan more money, not all the money is held by the bank, which can allow more investment.

The actual impact of various things is hard to figure out. The first industrial revolution started in England I think, and it really was not that long ago in historical terms. It changed everything. It first spread to Europe and the USA, and I think in large part that was a cultural thing, not a financial thing. However the increased capital availability should have made industrial expansion much easier.

The second industrial revolution is computing technology. Its currently changing everything. The primary driving force here was from the USA. Like any technological revolution its gone global. Here, China has a stranglehold on some of the rare earths needed for the current generation of electronics.

We are very much trying to leverage the new computer technologies to advance ME and CFS research. Without that we would have only small data, and the kinds of testing we are doing would cost ten times as much and take ten times as long, and I am being very conservative in saying only ten times, putting a massive brake on research compared to what we have.

Liquidity is very important for modern research though. In tough economic times, or times claimed to be tough, there are lots of excuses around to not fund research and medical infrastructure. This, in my view, is very much a mistake.

Private investment does not do basic research very much, the kind of research that leads to massive advances. They are great at creating and marketing focused medical products though. Now there are some exceptions to that, including foundations that support education and research. The development of such foundations is, in my view, a very great part of why the USA has done so well. Many other countries did not do this, and even now Australia is only toying with the idea. We do have some private foundations here though, and a large part of Australian ME and CFS research is funded by them.

 

[Hip]

The actual impact of various things is hard to figure out.

True, and it's only my feeling that fractional reserve plays this fundamental role in the economic and scientific success of the West; but of course I can't prove it. Nevertheless, I feel the fractional reserve mechanism is a vital part of our cultural DNA.

I think it we ever decided to switch off fractional reserve, we'd go back to a very pedestrian economy, and a much slower pace of life (arguably we might all be a lot happier in such a world, but I think we would not be progressing very fast in the scientific and material sense).

 

[Cheshire]

That's very interesting, @A.B.
They would not explain, though, why other countries with major intellectual and cultural capital did not develop in the same explosive way as Europe did since the Middle Ages.

I remember reading that printing was a major factor of differential evolution. While it developped in Europe, muslim authorities didn't adopt it immediately (only about the 18th c.) because they favored traditional handwriting, seen as a kind of sacred act in itself.

 

[Undisclosed]

Can I point out here that we only allow political discussions on Phoenix Rising related to ME. So please respect that rule on this thread by discussing the 'EU Referendum -- what it means to ME.'

Thank you

 

[Luther Blissett]

That's very interesting. Not knowing very much about economics, I kind of assumed that when the UK government wanted to borrow money, it would get a loan from the bank of England, and the bank would then create this money by its usual fractional reserve mechanism.

But a quick Google check reveals that when governments want to raise cash, they issue bonds that the general public can buy and invest in, with these investors in the general public then earning interest from the bonds they buy, and the government paying this interest, in return for the use of the public's money. So everybody is happy. Is that generally correct?

Are there any circumstances where governments will instead get a loan from a central bank, like the Bank of England? And when countries get emergency loans from international banks like the IMF, or from international development banks like the Word Bank, are those loans counted as part of government debt, or does much of the money loaned by a country from international banks go straight into the private sector, for funding corporate development projects?

Do you have an economics background, by the way?

No economics background, just interested in Political Economy.

When a Government wants to spend money, all it does is instruct the Central Bank to credit certain accounts. The issuance of bonds is a holdover from when there was a gold standard. Under a gold standard, the amount of spending was constrained by the gold reserves that were held. Theoretically, a holder of currency was able to 'convert' the currency into gold by applying to the central bank, and exchanging the coins or notes. After gold standards were abolished, the currency became 'un-convertable'. If you go to the central bank now and give them say a £100 note, and ask for it to be converted, they might amuse themselves and exchange it for 2 £50's.

A government that is 'sovereign' in its currency owns and runs the central bank for the public good. It does not need to 'borrow' any of its own currency, it is the monopoly issuer of it. This is called a 'fiat currency'. (by decree or order)

This is the difference between say the UK and Greece. The monopoly issuer of the £ is the the British Government. (if I start issuing pounds, I'm going to jail for counterfeiting) The monopoly issuer of the Euro is the European Central Bank (ECB), not the Greek Central Bank. The Greek Central Bank works for the ECB, not its own government.

So why does the central bank issues bonds, if it can just create the money from nothing? Well, for one thing, it provides the markets with a long term stable investment. Pension funds for instance, would and do prefer this type of investment because of its stability. Say a 10 year bond, with 3% interest is a good investment from a stable institution, that is not going to go bankrupt, or run off with the money, or find a way to refuse to pay.

When a country gets a loan from an institution like the IMF it is counted as public (government debt). As I understand it, the loan is given in a major (such as the U.S. dollar, euro, yen, or pound sterling). One of the problems of Greece is that to pay back such a massive loan, it has had to sell real things such as state property. Once you start selling property to generate income to pay off a loan, especially when you then give up revenue earned by that property, (such as a state owned port) you find yourself trapped in a vicious circle. This is good for multinational corporations, as they have a desperate seller, willing to take what they can get. This is why the IMF loans are attached with conditions, such as mandated selling off of public goods, such as healthcare, industries etc.

To help you untangle the mysteries and myths of 'fractional reserve banking', I'll have to leave that to this blog to explain. http://bilbo.economicoutlook.net/blog/?p=14620 His explanations are excellent for those of use who are trying to learn, especially the links in that piece for 'Deficit Spending 101'.

Some further reading I would recommend would be http://moslereconomics.com/mandatory-readings/innocent-frauds/

or David Graebers book 'Debt: The First 5000 Years'. https://en.wikipedia.org/wiki/Debt:_The_First_5000_Years

I must stress that these facts are non-ideological, in that they are based on basic accounting principles. (i.e the assumptions and deductions are based on agreed fundamental descriptions) What the economists do with the deductions are up to personal choice.

There is a similar disagreement between economists like there is in ME, with 'Neo-classical
Theories' akin to the BPS school, and the Modern Monetary Theorists like the biology based researchers.

The most important thing to grasp from my POV, is that a government sovereign in its currency is NOT like a household.

Hope that answered some of your questions, it's complicated

On the question of debt, I tried to find this out a few years ago - who the debt is owed to and whether it could be written off - I asked a few people, and the conclusion seemed to be that all this debt mountain is basically owed to big financial institutions which manage funds that ultimately translate to pension funds. In other words, the debt is basically money we all owe to ourselves - to our own future. I don't know how accurate that is, obviously it's a crude summary of the situation, but the implications are quite scary.

To make it less scary, would you rather have the promise to get your pension income from an institution that can always pay, or Philip Green?

Or looking at it another way, why would a government deliberately choose not to give money owed to pensioners? (slightly simplified)

All it means is that in the future, pensioners will receive an income, which will be used to either do nothing, destroy (you could burn the actual notes), exchange or leave for others, or buy goods and services.

 

[Jonathan Edwards]

OK, in Europe you also had the renaissance, the rediscovery of classical Greek analytical thinking, which no doubt greatly promoted scientific advancement. But without commerce, and the technological advancement commerce tends to promote, my feeling is that Europe would not have become this epicenter of economic, scientific and technological growth.

I don't personally think commerce has anything much to do with success in biomedical science. It never entered my head that what I was doing had anything to do with commerce. The UK has always had one of the strongest outputs in major biomedical discovery per capita (also Scandinavia and Holland) and our healthcare and university systems have been non-commercial. In the US people similarly made big steps forward in academia and just patented things quicker. Rituximab was made by some nerds in a university lab who then sold it on to the commercial sector. It was not made by the commercial sector. Milstein first made monoclonal antibodies in Cambridge. The current problem is that science is effectively driven by the desire of publishing companies to make money and as a result most of what is being produced is trash. Biomedical science was much more productive thirty years ago.

We need people to realise that 'growth' is a con. Material wealth in the future will be having fewer buildings to obscure the view, fewer cars polluting the atmosphere, fewer lights polluting the night sky, more space to breath and enjoy the natural world. And having science done by the few people who are actually interested in solving problems, rather than building empires.

 

[A.B.]

We need people to realise that 'growth' is a con.

Not so much a con as relying excessively on a single or a few measures when evaluating the performance of a system. These measures are used because they are convenient. Some ignorance of the complexity may be involved as well.

I became familiar with this idea when reading how the performance of software engineers is evaluated. Some managers use lines of code written per day. It's a very simple metric but also extremely misleading because it tells you nothing about the quality of the code. It doesn't take much effort to produce large amounts of badly written code in a short amount of time. This would be cost effective on paper but there are hidden costs in terms of errors, poor extensibility and maintainibility that only become apparent in time. Quality code takes time to write and is typically shorter in terms of lines of code.

The stock market seems to act like a feedback system for politicians. Numbers go up or down depending on decisions. Very simple. Anyone can understand whether a decision was good or bad. Or that is the illusion at least.

 

[Marco]

True, and it's only my feeling that fractional reserve plays this fundamental role in the economic and scientific success of the West; but of course I can't prove it. Nevertheless, I feel the fractional reserve mechanism is a vital part of our cultural DNA.

I think it we ever decided to switch off fractional reserve, we'd go back to a very pedestrian economy, and a much slower pace of life (arguably we might all be a lot happier in such a world, but I think we would not be progressing very fast in the scientific and material sense).

Maybe so. The development of joint stock companies (including William III's transformation of the Bank Of England) made large scale ventures such as exploration viable in a way never imagined when companies were either wholly owned or partnerships.

One pundit claims that the modern economy and economic growth is based on cheap (and crucially readily accessible) energy and that the current global woes are due to the fact that we have exhausted much of the easily accessible energy and other sources are much more costly to access. This added cost isn't factored in to standard economic measures like GDP :

https://surplusenergyeconomics.wordpress.com/

 

[Marco]

I don't personally think commerce has anything much to do with success in biomedical science. It never entered my head that what I was doing had anything to do with commerce.

It could be argued though that the wealth created through mercantilism/commerce enabled the existence of the professional scientist as opposed to the gifted amateur; rich enthusiast; the religious orders or patronage of prior eras. Wealth over and above that required to cover Maslow's basic needs could then be apllied to support the 'liberal arts'.

We've become so accustomed to science as a profession that it's easy to forget it wasn't always that way. I also wonder sometimes how much of what we call science is actually useful and not just 'busy work' to retain a tenured post.

 

[Yogi]

There are a number of reasons why the UK voted to leave the EU (1) Some of these are due to the well documented concerns over sovereignty and democracy and immigration in the British media.

I have for the last decade felt the UK government due to the policies of the DWP would increase tensions and people would vote against that if given the choice.

It appears that British politicians and the UK are incredibly short-termist and have huge blind spots. The UK being in the EU was untenable and would be forced to leave if a referendum was ever given due mainly in part to the UK DWP's benefits system. Migration has been mentioned by the media but once again the root cause of this has not been examined.

Since 2004 when the accession states entered the EU I felt it was going to be very problematic for the UK uniquely (2). Why this would be the case is due to the UK benefits system operated by the Department for Work and Pensions. The UK is the only country where benefits such as unemployment benefits and disability and housing benefits are payable to those who have not worked or contributed to the UK. These are referred to as means tested benefits. All other countries such as all of Europe, US and Canada have a social security system in which the social security benefits are provided depending on the contribution that a person has made - the contributory principle. By comparison in the UK the contributory principle has been broken in the UK for years and each government has over the years has further diluted the link between contributions paid and benefits received.There are virtually no contributory benefits in the UK and the few that remain are also time limited. For example the two contributory benefits are Job Seekers Allowance (JSA) and Employment Support Allowance (ESA) WRAG for disability are time limited at 6 months and 12 months. After this period benefits are paid on a means tested basis. Many people could work for decades from school to age 50 and if they were to fall ill or unemployed would be eligible for hardly any social security benefits although they may have paid hundreds of thousands of pounds into the so called UK National Insurance fund which is not anything of the sort as understood by other countries and is instead used as general taxation.

The UK benefits system has become very demeaning and abusive for genuine claimants who may have contributed thousands to it and has been well documented in the Blacktriangle website (3). On the other hand the UK benefits is remarkably generous on a means tested basis for those who may not have contributed anything at all and in the case of migrants who may have recently just arrived in the country with no assets or no income.

Another particular characteristic of the UK system is that of in work benefits or inappropriately named "Tax Credits" which are not tax credits but simply cash social security benefits for low paid workers. No other country has such a system of in-work benefits. Someone for example can arrive in the UK and earn £10 k and pay no tax due to personal allowance but receive £10k or more in benefits. It was obvious that this was would attract millions of low paid migrants from the former communist countries with the 2004 accession to the UK especially as the UK is the main English speaking country in the EU and the second language of most people is English.

The heart of the issue is that the UK benefits system administered has caused the tension between resident UK population and incoming migrants and the widespread support for Vote Leave by UK residents which was obvious to anyone except the Westminster "elite".

What is really galling is that DWP has been so actively involved in "saving money" paid to the genuinely ill in which it could not have been done without the collusion of Mansell Aylward and Sir Simon Wessely/Peter White creating the monster that is the Biopyschosocial school with the PACE trial (see Aylward boasting about Gordon Brown in (4)) but have been unnecessarily spending billions of pounds on other benefits to non UK citizens which has caused one of the main tensions over migration which have now led to Brexit and a divided Kingdom.

For years I have noted the anomaly in UK benefits system and waited to see if this would ever occur to any UK politician but no politician has even made the connection or acknowledged the flaws in the DWP and the peculiar UK benefits system. Despite examining whether this would ever occur to the UK political class it never has.

However the Dutch Foreign Minister Bert Koenders has noted this and pointed this out many times and again repeated this after Brexit (5).

"He told Sky's Lisa Holland: "You have relatively low wages and at the same time immediately people get a lot of benefits. "That attracts a lot of migration. It has nothing to do with Europe. It has to do with your domestic rules and regulations."

The UK was a Divided Kingdom and becoming more so for anyone who chose to look. Now it is clear for anyone to see (6). Whilst the UK spends years and billions of civil service man hours extracting itself from EU laws (7) and Scotland possibly going for independence (not to mention Northern Ireland calling for reunification with Ireland and even London petitioning to become a city state) the UK government and civil service hopefully will be in paralysis and unable to do anything else to further damage disabled people and the frequent changes to disability benefits we have become accustomed to since welfare reform.

If anyone was in any doubt our political "elite" are really are a bunch of fools Brexit proves it!

(1) http://www.bbc.co.uk/news/uk-politics-eu-referendum-36574526

(2) https://en.wikipedia.org/wiki/2004_enlargement_of_the_European_Union

(3) http://blacktrianglecampaign.org/2011/09/07/new-labour-the-market-state-and-the-end-of-welfare/

(4) http://www.meactionuk.org.uk/PROOF_POSITIVE.htm

(5) http://news.sky.com/story/1717464/benefits-to-blame-for-brexit-dutch-minister

(6) http://edition.cnn.com/2016/06/24/europe/eu-referendum-britain-divided/

(7) http://www.theguardian.com/politics...-civil-service-paralysis-over-eu-negotiations

 

[Artorias]

There was a time when my brain was capable of a discussion like this

 

[Hip]

I don't personally think commerce has anything much to do with success in biomedical science. It never entered my head that what I was doing had anything to do with commerce. The UK has always had one of the strongest outputs in major biomedical discovery per capita (also Scandinavia and Holland) and our healthcare and university systems have been non-commercial. In the US people similarly made big steps forward in academia and just patented things quicker. Rituximab was made by some nerds in a university lab who then sold it on to the commercial sector. It was not made by the commercial sector. Milstein first made monoclonal antibodies in Cambridge. The current problem is that science is effectively driven by the desire of publishing companies to make money and as a result most of what is being produced is trash. Biomedical science was much more productive thirty years ago.

I do agree with your views about how the best science is done. I was attracted to science precisely because it is (or at least was) generally a non-commercial venture, a world of ideas rather than a hunt for profit. I like the blue sky approach to science and research you are talking about, unfettered by commercial considerations. I tend to feel I am selling my soul when I working in a business environment, and would have preferred to work in research, but because I struggled academically (mainly due to ADHD), that did not work out.


However, no matter how commercially unfettered the thinking was behind biomedical discoveries in previous decades, these discoveries still relied on the whole commercial and material infrastructure developed over the centuries to bring them about — all the lab equipment, from the light bulbs on the ceiling to the microscopes, centrifuges, glassware, etc — all depend on a commercial and material infrastructure, with factories and supply chains.

What intrigues me is why the classical Greeks, who created much of the foundations of mathematics, logic, science, and analytical thought in general, did not continue straight onwards into an industrial revolution, and then into modern scientific and technological era, like we have now. That could have easily happened 2,500 years ago, but it didn't. Why?

Greek literature was lost in Christian Europe, but once Greek analytical thinking was rediscovered, it only took a few centuries before we had people like Newton and Leibniz furthering Greek thought by developing differential calculus, etc, and soon after we exploded into the scientific enlightenment and industrial revolution, with all its associated technological advance, which then further fueled scientific progress.

So it seems to me that Greek thought was just on the cusp of a scientific enlightenment and industrial revolution. But for some reason, it did not progress any further in classical Greece. OK, I know ancient Athens was ravaged by wars and plague, which did not help; but Greek ideas were still available to all in the region at that time, including the Romans.

My feeling is that the main reason the classical Greeks did not take the next step into industrialization comes down to a lack of banking infrastructure, and in particular, a lack of the huge increase in available credit facilitated by fractional reserve banking. The way I see it, fractional reserve banking is the mechanism that transmogrifies pure ideas into business ventures and new technologies. I see credit-based banking as a kind of mind-to-matter conversion mechanism.