Thursday

30th Jun 2022

Interview

Current global financial system is a 'dance with death'

  • "We need an alternative to globalisation," economist Ann Pettifor said at an event organised by the Evens Foundation in Brussels. "We need to take back control of the financial system."
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"To ensure our survival, which depends on a healthy planet, we have got to do something about the way we handle money," South African-British economist Ann Pettifor told a crowded room in BOZAR, the centre for fine arts in Brussels, this week.

People came to listen to her speak about the financial system and how its afflictions break down cohesion in our societies, generate inequality and exploit nature, causing environmental breakdown.

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  • Ann Pettifor is best known for her prediction of the global financial crisis. In her 2019 book The Case for The Green New Deal she outlines what needs to change. (Photo: Bob Foyers)

In her most recent book The Case for the Green New Deal she argues that change is possible only once we understand that finance, the economy and the ecosystem are all tightly-bound together

But trying to explain how the global financial system affects our everyday lives and the health of our planet is not easy.

We all operate within it, yet most of us do not know how to "connect the dots," Pettifor explained, between the exalted inner-workings of high finance and its real-world outcomes.

But even if it is complex, it is our duty not to despair, Pettifor said. "Money is a social construct we can understand - it's not rocket science, and we can change it."

Pettifor was one of the few economists who saw the global financial crisis of 2007-2008 coming. But when she published her book The Coming of the First World Debt Crisis in 2006, it was not an immediate success.

"It totally bombed," Pettifor told EUobserver. "Even when it [the crisis] unfolded, most people did not understand what was happening at all."

To connect the dots, one needs to zoom out. Far enough to see how financial flows shape our planet, without becoming too detached from its physical and human consequences.

And growing up in apartheid South Africa - on the periphery of the world's financial centres - may have predisposed her to take a "birds-eye view," she said - while also experiencing its consequences.

"You caught me on something very dear to my heart. I was born in a small gold mining town. My parents moved there because they thought they might get rich quick. It was a wild place.

"I have memories of sitting in the back of my dad's car having big discussions about the gold price, which was the main commodity of our town, and why its value did not change while all other prices did.

"[US president Franklin D.] Roosevelt had fixed the price of gold in 1933, and it did not change until 1973. My dad was not educated properly - he had gone to war [Second World War] when he was 17. And as a child, I didn't understand it, of course.

"But it did raise awareness of how an international system impacted our lives in this tiny little town in the African bush."

"And I grew up in an apartheid system. I understood the state played a structural role. Even if you were a 'good Christian', you had to be a racist because society was structured that way.

"You had to go on the white bus. You had to sit on a white bench. When I was young, I didn't think that apartheid could end. And yet, the apartheid regime did end, just like that, because of a weakness in the system.

"That taught me how social, legal and economic structures so deeply change peoples behaviour and that we can change those structures."

What is the weakness in our financial system?

"My thesis is a very simple one: there is an intense imbalance in our system between debt and income. I wrote a book about this in 2006. I find it hard to predict when a new crisis will erupt, but I keep talking about March 2020.

"We sort of brush over it because central banks bailed out the financial system again, at a much grander scale than in 2007 and 2008.

"But this was another global financial crisis just as big as the last one, which was only a little more than 10 years ago - and the debt to income ratio is now higher than ever.

"We are dancing with death here. We think we can continue to play this gamble and that central banks will always come to the rescue. Still, we know that QE [asset buying program providing easy access to low-interest financing] causes the underlying debt imbalance to worsen."

Are you talking about private debt or public debt?

"Private debt is the bigger problem. You cannot bankrupt a state. You cannot liquidate Zimbabwe because it has a future. It will have economic activity. But you can liquidate an energy company. A private energy company in Britain can be finished [leaving open unpaid debts]."

Could you explain how money is used to extract value from our natural world?

"In our monetary system, credit - derived from the Latin word 'credere', which means: to believe - means: I promise to pay.

"Credit is like a lubricant. It enables things to happen and transactions to take place. But then we charge interest on that credit, and that increases the level of extraction.

"If I lend you money to build a wind farm. I put five percent interest on the loan. That means you have to make a profit of at least five-percent a year, but probably even 10 percent to have some money for yourself.

"If Brazil is stripping its forests, that is because it has to repay foreign debts."

How does this relate to the dollar?

"Countries like Brazil, or African countries where I am from, are encouraged to borrow dollars instead of their own currency.

"Malawi, for instance. It has its own currency: Kwacha. It is worth nothing. Wall Street investors will not accept it. So when World Bank and the IMF say to poor countries: here, use dollars. You don't have to build a central bank, you don't need a legal system, you don't need to develop your criminal justice system. Just borrow dollars, and the dollars will pay for it.

"But these countries have to repay those dollars, with interest, often at a disadvantageous exchange rate. To pay for this debt, they now have to strip the forests, fish the seas and exploit the labour while doing it.

"For me, that is the connection between the financial system and the ecosystem."

What needs to happen?

"We should localise. We should nationalise. We should buy local, eat local because then you can know the provenance of your food. And those concepts are fundamental to the Green New Deal. We are going to have to be much more self-sufficient.

"Africa is incredibly rich. All the resources are there, and it could easily be self-sustaining. But many states have lost the ability to be self-sufficient. It depends on foreign know-how and imports, and it has to rebuild its ability to house and clothe its people and grow its own food.

"The question is: how do we finance that? I argue that we first need to change the global financial system so that people can manage themselves more domestically."

What kind of systemic financial intervention does this require?

"Capital controls. That's a dirty word in today's world, but if you can't control the movement of capital across your borders, then elites take the money and put it away in tax havens.

"The financial transaction tax is a form of capital control, but there are many forms. For example, the Bank of England recently said foreign investors have to deposit more capital before buying a house.

"Many say it is difficult to stop money from flowing across digital borders. But there are many ways to slow money down.

"That doesn't mean to say you must not have cross border flows. It just means it should be managed and not be left to Wall Street."

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