Policy Research in Macroeconomics

How to transfer power away from markets to democratically elected governments

This article was written in July, 2020 for Project Syndicate where it was finally published on 1st October, 2020.

The global economy suffers from dangerous imbalances.  Economic goals for endless ‘growth’ lead to rises in heat-trapping gases that conflict with the earth’s limited capacity to manage rising toxic emissions.  Urbanisation, pollution, soil erosion, deforestation, depletion of wildlife, degradation of marine ecosystems – these and other economic activities disturb the equilibrium of nature – humanity’s life support system.

Ecological imbalances are compounded by economic imbalances. The production of gluts of for example, oil, steel, diamonds and cocoa contrast with trends towards under-consumption, driven by falls in global purchasing power. Deflationary pressures are but one of the consequences of over-production and the repression of labour’s share.

Persistent imbalances between countries with large current account surpluses and deficits create tensions and lead to trade wars.  Capital account imbalances expose a country’s vulnerability to sudden outflows or sudden stops.

Of even greater concern are global financial imbalances, including apparently boundless private and public credit/debts that eclipse the global income needed to pay down debt. The reckless issuance of credit for spurious activities undertaken by ,for example, ‘Special Purpose Acquisition Companies’ (SPACs) that borrow to finance “undertakings which shall in due time be revealed” – has led to a proliferation of financial bubbles.

The system has generated historically unprecedented imbalances in wealth – a feature, not a bug. Capital wields vastly greater power over the economy than labour. Global plutocrats lord it over a global precariat, as Guy Standing explains.[1] Imbalances in economic power between OECD nations and poorer nations have led to an alarming rise in global political tensions.

The structure of the system is so unstable that in 2020 it took a tiny microbe just a few months to topple the whole global economy. To be collapsed by one microbe can be considered careless; to be unprepared for future shocks is downright reckless.  While scientists advise that future climate and pandemic shocks are already in the pipeline, societies and governments are stoically unprepared to act to prevent or mitigate shocks.  

Financial, ecological and trade imbalances can be traced back to the man-made (sic) ‘architecture’ of the international financial system. Insofar as there is conscious design, it is of a ‘structure’ whose architect or engineer is ‘the invisible hand’ of capital markets. Its implied, if not overt purpose: to prioritise and protect the interests of international creditors, investors and speculators.  Its construction bears a close resemblance to the ‘barbaric relic’ that was the nineteenth century gold standard, designed then to protect the interests of the world’s biggest creditor, the City of London.

The system’s fundamental design flaws were exposed when creditors, investors and speculators buckled under the strain of COVID19 and were hurriedly, and generously bailed out by taxpayer-backed central banks. Rather than stabilising the system central bank action aimed to flood financial markets with new loans, so that, as Trevor Jackson writes in The Sovereign Fed  , banks could keep lending, buyers of stocks could keep buying, and institutions could keep making their debt payments.“ 

At the apex of the system stands the Federal Reserve: issuer of the world’s reserve currency. During the pandemic, the Fed became the sole source of global liquidity, providing dollars (via ‘swap lines’) not only to every bank and creditor in the world, but also to a chosen few of the world’s central banks. Those excluded from this imperious largesse included most low-income countries, but also China.

How to transform the system to end imbalances & prepare for future shocks?

As a priority finance must once again be made servant of the global economy, removed from its role as master.  As Pettis and Klein argue in Trade Wars are Class Wars, today’s key conflict is “mainly between bankers and owners of financial assets on one side and ordinary households on the other – between the very rich and everyone else.” [2]  That conflict has to be resolved. To tackle such conflicts and threats to human survival requires democratic oversight and management of the international system. Such management to be undertaken by states with democratic, public authority, reversing governance effectively by the private authority of Wall St. or the City of London. We know it can be done. Such a transformation of economic power was achieved in the recent past by the 1933-45 Roosevelt Administration. Henry Morgenthau, Roosevelt’s Treasury Secretary explained succinctly how the transformation was achieved: “We moved the financial capital from London and Wall Street right to my desk at the Treasury.” [3]

Next we must accept, as Pettis and Klein argue, that while the US, as issuer of the world’s reserve currency, is able to exercise great power, it is also simultaneously “the largest single victim” of “global integration.” We need an alternative to the dollar as the world’s reserve currency. Mark Carney, until recently governor of the Bank of England proposed an alternative to the current system in a speech to the 1919 Jackson Hole meeting: a new Synthetic Hegemonic Currency (SHC) that would be best provided by the public sector, perhaps through a network of central bank digital currencies. As Carney argues:

An SHC in the International Monetary and Financial System (IMFS) could support better global outcomes, given the scale of the challenges of the current IMFS and the risks in transition to a new hegemonic reserve currency like the Renminbi. An SHC could dampen the domineering influence of the US dollar on global trade. If the share of trade invoiced in SHC were to rise, shocks in the US would have less potent spillovers through exchange rates, and trade would become less synchronised across countries. By the same token, global trade would become more sensitive to changes in conditions in the countries of the other currencies in the basket backing the SHC.

To manage the financial system in order to ensure sufficient finance is available to design and maintain a stable, steady state economy that delivers well-being for all within ecological limits, it will be necessary for governments to do what they would do in case of war. Bring offshore capital onshore: both to manage capital flows, domesticate finance and ensure financial stability; but also, to manage the exchange rate and interest rates both important policy levers for the prosperity of the domestic economy.  From the perspective of the ecosystem, perhaps the most damaging aspect of globalised, largely deregulated credit-creation is the finance sector’s demand for high, real rates of return on a relatively effortless process: the creation of new money/credit. If interest rates are higher than the capacity of the earth, or the economy, to renew itself, then interest rates become brutally extractive. That must change.

Above all, managing capital outflows will help a government ensure taxes are not evaded by big mobile corporations.

The primary purpose of these policies would be to empower democratic governments to manage the domestic economy while collaborating at an international level to stabilise the global economy. Only such a ‘great transformation’ can hope to end the imbalances that plague the global economy and ecosystem.


[1] Guy Standing, 20 November, 2014: The Precariat in the journal Contexts. https://journals.sagepub.com/doi/full/10.1177/1536504214558209  

[2] Matthew C. Klein and Michael Pettis, 2020, p. 221. Trade Wars are Class Wars.

[3] Cited in Eric Rauchway, 2015, p. 227: The Money Makers: How Roosevelt and Keynes Ended the Depression, Defeated Fascism, and secured a Prosperous Peace.

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One Response

  1. Bringing off-shore wealth under effective taxation is worthy but difficult. Why not impose a global bank tax (EFT tax, Tobin Tax) on corporate commerce to support the SHC? It could also back a global job guarantee and GND projects in developing nations.

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