A defensive “no to the cuts” campaign that lacks a strategy capable of taking us on to the offensive will not do the job. We need to understand the government’s borrowing scam and the politics behind it…
Clearly the financial crisis is being used to rob the working class on a huge scale: of jobs, of services, of quality of life, of a future. But it is important to unravel the current financial position of Britain from a working class perspective, rather than simply adopt a defensive “no to the cuts” campaign that lacks a strategy capable of taking us on to the offensive.
One of the first things to unravel is the Bank of England’s recent 12-month quantitative easing programme. Many financial technical terms are as dry as dust but, once dismantled, their impact on everyday life becomes clearer. Quantitative easing (QE) is a case in point. The term has simply been depicted in the national press as a means of allowing the government to print money. But really it has been designed to temporarily create an artificial market for the sale and purchase of government debt, known as gilts.
This in turn has allowed foreign investors over the past 12 months to sell their gilt holdings to the Bank of England on favourable terms and so avoid a guaranteed capital loss now that gilt yields are set to rise. It has also allowed the transfer of institutional shareholders’ liabilities (in plain English, bank losses) to be switched to the government’s public accounts, effectively dumping debt on to us as taxpayers.
The third strand of QE is what has been described by the debt markets as the harnessing of market inefficiencies, which basically means making large sums of money by synchronising the sale and purchase of debt with the government’s monthly gilt auctions – for example, by buying 10-year gilts yielding 4.12 per cent interest on Tuesday and selling them at 3.7 per cent on Thursday. The degree of sensitivity in, for example, the 10-year gilt yield is such that the 0.42 per cent difference between 4.12 per cent and 3.7 per cent represents a near 16 per cent return on capital over a couple of days. This is a bit more exciting than the 0.5 per cent rate of annual interest that we as a working class get from our bank savings or from cash ISA accounts.
Most people have some understanding of how the stock market operates, but the workings of the gilt market remain a bit of an unknown. (UK government debt is called gilts; overseas government debt is called bonds.) Gilt prices in the UK determine how cheaply Britain can raise cash or not, compared to their overseas Bond market equivalents. The UK Gilt and European Bond markets have helped determine the course of wars, revolutions and political struggles since 1815. It was at this date when the British Government first introduced modern day gilts as an instrument to manage the war debt that had accrued following the defeat of Napoleonic France.
Another bond market example was where the Bolsheviks post 1917 successfully negotiated several international bonds in the markets to help finance their new economic plan that was successfully rolled out during the 1920s. Along with introducing a localised savings culture, bonds helped develop a successful Bolshevik banking system by 1936.
A contemporary example of how gilt prices touch our lives has been in occupational pensions where high gilt prices and historically low yields over the past 10 years have changed our retirement expectations. At one time many aspired to retire early at say age 55, but people now expect to work until age 70 and beyond. This is what happens when gilt yields that are temporarily at rock bottom are used today as an accounting standard to inflate future pension liabilities, thus painting a picture of huge deficits.
Shock and awe
The shock and awe of such deficit reporting results in the working class swapping a civilised retirement age for one of dying in harness. Over the same timescale low gilt yields (determining low interest rates) have fostered the greatest northern hemisphere credit boom of all time, along with the manipulated collapse of our retirement provision.
A good example of what we can expect can be found in the credit bubble experience of South America during the 1990s. In their study The World Bank, Pensions and Income (In)Security in the Global South, the economists S. Paul and J. Paul state that “the World Bank’s critique” of debt management “is worth analyzing in detail because it has been used to attack, discredit and abolish pension programmes around the world”.
They go on to say that “the World Bank pension reforms redistribute staggering sums to foreign debt holders and the local upper class”. This is achieved by governments at the appropriate time forcing “low-return unproductive gilt investments on to workers’ pension funds”, which are considered “a tidy means of transfer advocated by the World Bank and IMF – both institutions claiming to specialise in poverty reduction”.
Applying this analysis to Britain, we read in the press alarmist stories of who is going to buy British government debt in the medium term. The government’s answer to this problem, in line with the World Bank recipe, is to create a captive domestic market not only by using the short term QE method as outlined above but also through regulation that directs our savings towards government gilts, at a time in the financial cycle that guarantees future capital losses.
For example, since 2003 we have had the perverse government regulatory requirement of liquidity ratios, which insist that insurance companies “reduce the risk” to our insurance policy savings by increasing the holding in government gilts. This allows speculators to sell gilts to our savings and pension policies at the top of the market, having made their capital gain through falling yields during the past 15 years. Now yields are set to go the opposite way, they can dump them on us. This has now been taken a step further by the EU Solvency II directive that will force UK pension liabilities to be met only through the purchase of government gilts.
The other regulatory method currently being deployed is via the government’s Pension Protection Fund and through the Pension Regulator, where the view is that a high proportion of government gilts should be bought, along with the threat of an increase in risk-related levies if pension funds fail to cooperate.
The quality of our working class response needs to be raised. Otherwise we will be trapped at the long end of the yield curve and only able to shout “no” to anything not in our interest. We need our pension funds and savings – and with a Bolshevik industrial and financial “Can Do” mentality we can rebuild our country’s infrastructure and leave this government and its planned gilt scam twisting in the wind.