Alternative Economics

Morganist Economics Perspectives

Volume I.

Articles, Essays and Concepts of the Morganist School of

Economic Thought.

By
Peter James Rhys Morgan

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 Declarations.

Contains Parliamentary information licensed under the

Open Parliament Licence v3.0.

Open Parliament Licence URL:

https://www.parliament.uk/site-information/copyright-
parliament/open-parliament-licence/

Contains public sector information licensed under the

Open Government Licence v3.0.

Open Government Licence URL:

https://www.nationalarchives.gov.uk/doc/open-government-
licence/version/3/

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 All rights reserved. No part of this book may be
reproduced, stored in a retrieval system or transmitted in
any form or by any means, without the prior written
permission of the author, except in the case of brief
quotations embodied in critical articles or reviews.

Published in November 2012 by Morganist Economics.

Revised in July 2018 and October 2023.

ISBN 978-1-62407-489-9

Blog: morganisteconomics.blogspot.com

Copyright © 2012 Peter James Rhys Morgan.

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 What is Morganist Economics?

Morganist Economics is a progressive school of economic

thought. Most of the current mainstream schools of
economic thought tend to concentrate on the size of
government, with an emphasis on whether to stimulate the
economy during a downturn or not. Morganist Economics
puts the emphasis on developing the tools used to control or
manage the economy in a more effective less costly way.

An example of this would be a Keynesian would argue to

stimulate the economy during an economic slump, a
Monetarist would argue that the economy should not be
stimulated and that the interest rate should be used to hit an
inflation target. Whereas a Morganist would question
whether the tools or mechanisms used to achieve either
objective is beneficial to the long term economy.

Morganist Economics therefore puts innovation and the

concept of the requirement of perpetual change, as the
centrepiece of its thinking. As society alters through time
the needs of the economy will also change so new tools and
mechanisms have to be introduced to allow for the
progression of social needs.

This has led to the creation of new aggregate demand

controls, a new banking system and a new taxation system
among other things, which are aimed at being able to
deliver a pragmatic economic system that can deal with the
new demands of a flexible society.

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By looking at economics through a different view point and
by developing these original ideas it has led to a new
perspective on the failings of the current economic,
banking and financial systems, which highlights the recent
problems in a way other economists have failed to see.

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 Table of Contents.

Preface. 1.

Chapter One. The Financial Crisis. 3.

Have macroeconomists misdiagnosed the financial crisis? 5.

Risk is the reason the economy is not growing. 9.

Rehypothecation Should be Banned – or at Least Capped. 13.

Credit Crunches and Bank Runs. There is a difference. 15.

Why are Sovereign Debt Restructuring Mechanisms needed? 19.

Should countries entering into SDRMs Think about National

Insolvency Products instead? 21.

Where next with the financial crisis? Pension Fund default? 23.

Chapter Two. Taxation. 27.

Taxing the rich will not solve the problem. 29.

Tax Greedy? 33.

The Trickle Down Theory and Time Progressive Tax. 37.

Chapter Three. Critique of Economic Strategies. 41.

What I think of George Osborne's economic plans. 43.

A response to Compass Plan B. 47.

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Chapter Four. Central Banks and Inflation. 55.

Is the Bank of England a failed institution? 57.

Can negative interest rates really work? 61.

Artificially low interest rates are creating Economic limbo. 65.

Could an earnings based rental control consumption

Mechanism replace QE? 67.

Chapter Five. International Investment. 71.

The Investment Currency Mechanism. 73.

Milton Friedman’s greatest contribution to Economics. 77.

A tip on National Investment Analysis. 81.

Capital Investment. 83.

Bibliography. 87.

Other Books by the Author. 93.

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 Preface.

This book consists of articles I have written for various

media groups in relation to the Morganist Economic school
of thought. For the last year or two I have written my own
blog, which has been well received. I have subsequently
been given my own blog column at the Huffington Post. I
have also written for the Adam Smith Institute, the Institute
of Economic Affairs, Left Foot Forward and a financial
media group called Mindful Money. I decided to compile
this book to increase the accessibility of the contents of my
work to a wider audience and to provide physical
documentation of my economic thoughts.

The emphasis of the content is directed at the global

economic crisis, suggesting progressive solutions to the
problems identified so far. There is no intention for the
content to be either left or right wing or to pertain to any
existing political agenda, although some articles might hold
a left, right or liberal slant. The concept of the book is one
of progressive improvement on a macroeconomic and
financial level to address difficulties seen within society.

If you find yourself in disagreement with one of the articles

you could move on to the next article and find it has a
completely different approach to remedy the economic
crisis. The articles contained in the book also vary in
complexity, from soft economic policy to advanced
international economics and central banking systems. If
you struggle with an article you can select other articles

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which you may find easier to digest or have a greater
interest in. As the book is made up of articles and chapters,
of certain topics, the area of interest can be selected by the
reader.

I continue to write at my blog and elsewhere at the time of

writing this book. I encourage anyone who is interested to
visit the blog and interact with the content.

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 Chapter One.

The Financial Crisis.

This chapter provides commentary on the financial crisis,

in which I critique the understanding and reactions to the
problems the financial markets experienced since 2007. I
explain some of the technical terminology and operations
that surrounded the financial crisis, to shed some light on
what occurred.

In addition to the explanations of the crisis I question the

actual reasoning for the occurrence of the problems. I also
question whether policy makers have fully understood the
nature of the difficulties seen within financial markets. If I
am correct the decisions made around the peak time of the
crisis (2007 – 2009) may cause greater difficulties in the
future or simply defer the problems to a later date.

If you want to have a good grasp of the underlying

problems in the economy this chapter is a must for you to
read.

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Have macroeconomists misdiagnosed the financial
crisis (Morgan, 2011)?

The financial crisis hit its most critical point so far in late
2007 and early 2008, with the failure of banking
institutions and the need for governmental intervention to
prevent further chaos. The most notable form of
intervention came with the bailout of Northern Rock, which
needed to cover the withdrawals of depositors who were
concerned about the future of the bank and the safety of
their investments.

The government stepped in and provided the funding

needed to enable depositors' withdrawals to be paid, with
the expectation that this would contain the financial crisis.
Since then the emphasis of the banking crisis has been
placed on bank reserves and in particular the availability of
sufficient funds to prevent a future bank run, such as the
one seen at Northern Rock (Congdon, 2009). Efforts have
been made by the Treasury, FSA and the Bank of England
in an attempt to absorb the damage that future reserve
shortages would create by providing the funds needed to
cover depositors' withdrawals.

However the actions that have been taken are a reaction to

solve the effect of the credit constraints, which triggered
the financial crisis, not the underlying cause. The causation
of the banks’ shortage of income due to high defaults in the
subprime debt market and the lack of interest in the
available banking products have not been tackled, in fact
this is where the real issue lies. There is a more
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fundamental problem with banking which creates an
inevitable crisis other than inadequate reserves.

This failure is the way that return on investments is

calculated and the emphasis on expected returns from
investments. For example if you went to a bank to invest
money say £10,000, the return you would receive would be
based on that principal £10,000 investment. If the interest
rate was 3% per annum you would receive a return of £300,
which is linked to the value of the original investment
(Bogomolny). This causes a problem if the amount of
money in circulation in following years decreases because
the ability to repay the existing amount diminishes.

For example if in year A the money in circulation is 100

and in year B the money in circulation is 90, it is not
possible to pay A back with B. Although not all of the
money in year A would be invested, so the investment from
one year alone would not cause this problem, the
cumulative investment over a long period creates a
situation where if the money in circulation declines
sufficiently and for long enough the repayment of the
existing debt or even the expected return, when the interest
alone is paid by the borrower, on that debt is impossible.

It is important to note that this scenario does not happen as

long as the money in circulation increases from year to
year, however this creates a requirement of exponential
growth. In short as long as the money supply remains in
growth or in effect there is year on year monetary
expansion this situation can be avoided. Due to the current
deflationary environment and the attempts to maintain
money supply through Quantitative Easing, which has been
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created through the lack of consumption due to paying debt
down, this scenario is becoming ever more likely. In fact as
soon as the artificial stimulus is taken away or can no
longer continue it is inevitable.

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 Risk is the reason the economy is not growing.

I had this published at the Adam Smith Institute on

Tuesday, 29 November 2011 at 05:44 (Morgan, 2011).

There is much debate over the reason behind the failed

recovery plan set by Chancellor George Osborne. The
assumption the Chancellor made anticipated an increase in
private sector output, when cuts were made to the public
sector. Unfortunately this did not occur, or at least not
quickly enough to appease the governments pressure
groups, resulting in a U-turn on their thinking. A new
programme of Quantitative Easing (QE) was introduced to
“stimulate” the economy, with the intention it will lead to
growth (Castle, 2011).

I personally do not think that QE will lead to anything other

than inflation, later on in the business cycle. I certainly do
not think it will create any constant reliable growth. At best
it may maintain a short period of artificial or “false”
growth, which many economists would call money illusion.
I believe the government has not correctly addressed the
problem which prevents growth. Some economists are
saying the expectation of future economic difficulty is
frightening consumers into saving, slowing spending.

I don’t believe this is true. When people save more, the

money saved is lent to people who use that money to
enable business or to consume. In short money is always
doing something. There may be a lag in the time between
saving and lending, which could reduce consumption.

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However this would generally be compensated for. People
who borrow money have a higher propensity to consume
than those who lend and will spend it faster. This is proven
by the borrower being prepared to pay the premium of
interest to consume now, rather than later.

However, banks are not lending the money they have. This
is partly due to the increase in the required assets they have
to hold to cover depositors' withdrawals, as a result of the
financial crisis (capital ratio) (Congdon, 2009). But it is
mainly as a result of the banks fear of the risk in the
market. This fear has prevented growth by stopping the
natural transition of money from savers to consumers
through the saving mechanism. Therefore, the real reason
for the lack of growth in the economy is the increase, or at
least the fear of an increase, in risk.

No amount of QE will reduce the risk. In fact it may make

it worse. QE is a desperate action by a government in a dire
situation. The implementation of such a policy will deter
consumers from increasing their consumption, as it is a
suggestion that their fears of economic woe are well placed.
That is not to mention the fear it will put into foreign
investors, who will be deterred from putting their money
where they think a greater risk is.

If the government found an alternative way of reducing

risk, it could restore the lending and borrowing mechanism
enabling the private sector to grow again without trying
things like QE. However current policy suggests potential
disaster based on fear and expectations, which have
originated from the messages the government is sending

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out. Reducing taxes and regulation will reduce risk, and
deliver the growth we all want.

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 Rehypothecation Should be Banned - or at Least
Capped.

I had this published at the Huffington Post on 3/02/2012 at

10:21 (Morgan, 2012).

Hypothecation occurs when assets are used as collateral

against a loan. The asset is the insurance the lender has if
the debtor defaults on repayment, in such an event the asset
can be seized by the lender to cover the cost of the lost
investment (Bank of England & FSA, 2011).

The asset used as collateral by the initial borrower is seen

as an asset of the lender and can be used as collateral for a
second time by the lender. When this happens it is known
as rehypothecation and allows banks to liquidate assets and
make further investments.

Rehypothecation can be beneficial to the banking system

because it speeds up the lending process and provides asset
backing to loans. However there are some draw backs. The
main one being debtors, who undertake the initial loan and
whose assets are used in rehypothecation, are not always
aware the asset they have used as collateral has been
rehypothecated.

Another problem arises from the value of the asset, which

can fall as well as rise. If the value of the asset falls below
the loan repayment requirement, it would not be sufficient
to cover the invested sum causing bad debt. This is true for

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hypothecation too however the bad debt is now spread
across two debt obligations.

The final problem and perhaps the worst, there is no limit

on how much an asset can be rehypothecated in the UK.
There is a limit in America of 140% of the asset value and
in Canada, it is banned entirely. Perhaps it is time the UK
followed suit and at the very least put a cap on the level of
rehypothecation.

As the UK is currently in a downturn and asset values are

currently falling, it might be prudent to introduce a limit of
60% - 80% of the current value of the asset if
rehypothecated. This should reduce the risk of bad debt if
the asset used as collateral loses value, assuming the debtor
defaults.

Such a limit could be a suggestion for the new banking

regulations put forward by the coalition government. By
putting a cap on the level of rehypothecation allowed it
could stop contagion of bad debt in the worsening financial
crisis.

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 Credit Crunches and Bank Runs. There is a
difference (Morgan, 2011).

I have noticed there is some confusion between the

definition of Credit Crunches and Bank Runs. Bankers
seem to think that the financial crisis is merely a question
of liquidity and that a second Credit Crunch is unlikely
because the banks have sufficient reserves now. The banks’
reserves are only a solution to a Bank Run not a Credit
Crunch, which in my opinion is the originating factor in the
Financial Crisis. Below I give a brief description of the two
and suggest how the former created the latter.

Credit Crunch.

When you borrow money from a bank the money lent is not
directly lent by the bank. The bank will bundle your debt
up with other borrowers' debts and sell the product to other
institutions or investment funds. These products are called
credit derivatives. When a credit crunch happens, or at least
when the 2007/2008 credit crunch happened, the demand
for the credit derivatives and debt in general declined. This
has many consequences, the first being banks have to hold
on to the debt they cannot sell themselves. Because the
banks now hold the debt the risk they are responsible for
increases and in turn the interest rate rises to compensate
for the loss of potential return.

The macroeconomic consequences are also serious. The

level of aggregate demand in recent years has been
supported by consumer consumption financed in large by

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borrowing. When the demand for credit derivatives
declined in 2007/2008 the ability for the economy to be
supported by debt fuelled consumer consumption
disappeared. This meant less aggregate demand for goods
was available and led to a deflationary gap. Efforts to
restore demand were made through Quantitative Easing and
have worked to a degree however it cannot be supported
indefinitely (Congdon, 2009).

Bank Run.

The other financial crisis and perhaps the one that everyone
seems to think is the originating factor of the current
economic situation is the Bank Run. However the Bank
Run is a consequence of the Credit Crunch and the default
of the subprime debt market. A Bank Run occurs when
people are scared that the bank will not be able to pay their
deposits back and withdraw their money all at once. Due to
the bank only holding a small percentage of the deposited
funds at one time, to maximise lending and boost profits, it
is impossible to pay all of the depositors the money they
deposited back in one go. When the depositors demand
their money and the bank cannot pay the bank fails.

When the subprime debt market defaulted money the banks

should have received as repayment from the loans was not
paid reducing the funds available to give investors. The fear
of the subprime default and the deepening Credit Crunch
made depositors scared of losing deposits and encouraged
them to withdraw their money from banks on mass. The
loss of investments caused a series of bank defaults and
triggered high depositor withdrawals.

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Conclusion.

Rather than Bank Runs being the financial crisis or at least

the start of the problems. The true origins of the current
state of affairs is the over dependence of aggregate demand
on consumer consumption and the over dependence of
consumer consumption on debt. The Credit Crunch has not
really gone away it has been concealed by the artificial
stimulus created by Quantitative Easing. As soon as the
Quantitative Easing stops the Credit Crunch will be back
with a vengeance.

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 Why are Sovereign Debt Restructuring
Mechanisms needed (Morgan, 2011)?

When governments need to generate income one of the

options they have in doing so is to issue debt in the form of
Treasury bonds, notes and bills. Although the bonds, notes
and bills differ mainly in their duration but also in their
purchase and repayment structure, the principle of the
government entering into an agreement to borrow money
upfront with the intention of repaying it at a later date is the
same. Treasury notes, which have become the predominant
method of generating income and setting the interest rate in
the long term, work on the following principle.

The initial investment or purchase value is paid, say

£10,000s, to the government at the beginning of the
agreement. Then each six months, in most cases, a coupon
payment is made to the investor which is a percentage of
the original £10,000 investment, say 3% or £300. At the
end of the contract the £10,000 has to be paid back in full
to the purchaser of the bond in one payment, this is known
as the maturity payment (Wikipedia, n.d.).

This is where the problem occurs, although it is easy for the

government to make the coupon payments of £300 every
six months the payment of the full principal amount of
£10,000 at maturity is often very difficult. This is where the
need for a Sovereign Debt Restructuring Mechanism comes
in. Governments often have to borrow more money to pay
off the debt obligations they previously entered into.

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Sometimes they can do this by issuing more debt directly
and deferring the maturity payment but sometimes they
have extreme difficulty in doing so and have to ask for the
help of other countries or the IMF. If there is support from
other countries or the IMF then the funds required to cover
the maturity payment are lent to the indebted government
in exchange for a new repayment agreement.

This is where the term Sovereign Debt Restructuring

Mechanism derives from. The debt agreement has been
rearranged to fit in with a realistic repayment time frame.
This however comes at a cost, which is in the form of a
higher interest rate, which is linked to the relative risk.

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Should countries entering into SDRMs think about
National Insolvency Products instead (Morgan,
2011)?

In my previous post I explained why countries needed

SDRMs due to their inability to pay the maturity payment
on expiry of the debt contract. The necessity to enter into a
SDRM is unfortunately growing as many countries are
currently seeking help from the IMF and in my opinion
many more are likely to do the same in coming months too.
However I am unsure as to whether the restructuring of the
debt repayments is going to solve the real issue, which is
the level of public debt and in some circumstances private
debt too.

The levels of debt across the western world, in particular

Britain and the Euro Zone member states, exceeds any
realistic ability of repayment. Even if the immediate issue
of the maturity repayment is eliminated, or at least
deferred, the initial sum of money loaned is so enormous
that I cannot see it being paid off in a way that is deemed
satisfactory by any debtor. Britain for example has an
estimated total of £4.8 trillion debt.

This however includes all debt from the bailout, future

pension liabilities, private sector debt, public sector debt
and the private finance initiatives (Silver, 2010). I
personally cannot see Britain ever being able to pay off this
level of debt. Even if it could it would be so damaging to
the economy in terms of the reduction in domestic demand

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that it would prevent economic recovery for decades to
come.

If it ever got to the point where Britain needed to enter into

a SDRM, would it not be better to come to another form of
arrangement to appease the creditor and the debtor? Surely
it makes more sense to acknowledge the severity of the
situation and to reach a compromise on repayment rather
than deferring the repayment to a later date at a higher cost.

There could come a point in time where it would be so

unlikely that repayments could be made to the creditor in
full that an agreed write off or repayment alteration might
be considered. The damage to the economy would become
more acute the longer the repayment was deferred and the
cost would also accumulate.

The point I am trying to make is, is it worth entering into a

form of National Insolvency Product now to prevent this
deterioration of the existing debt contract from damaging
both creditor and debtor too severely? This question is a
question for many countries not just Britain. The level of
debt in the west has become so high that it may be worth
considering new options that are less detrimental than the
current methodology.

In my opinion the current SDRM process is not up to the

challenge that the next couple of years will pose to national
debt repayments and it is likely that it will fail to meet its
expected duty. A National Insolvency Product could
potentially deliver a more agreeable solution if it is
implemented in an effective manner.

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Where next with the financial crisis? Pension Fund
default (Morgan, 2011)?

It is useful for people to know what has happened in the

past, but more importantly it is useful for people to know
what will happen in the future or at least what is likely to
happen. Due to the uncertainty in the financial markets and
the possibility of default in many countries across the
world, a prediction of the likely events that will unfold
would be of great benefit. One observation of the financial
situation is the high level of debt in both the private and
public sector.

It seems unlikely that the level of debt outstanding can be

paid off especially with the growing level of
unemployment. UK private sector debt is around £1.46
Trillion and rising, in addition to that the public sector debt
exceeds £900 Billion and it is expected to rise to over a
Trillion pounds in the next year. Around 65% of the public
sector debt is from domestic investors. The majority of the
domestic debt is lent by pension funds and insurance
companies making up 40% of all of the public sector debt
creditors, including overseas investment (Bombshell, n.d.).

This is what terrifies me. The most likely outcome of this

situation is default on a large scale. Even if it is not
complete default, meaning a complete write off of debt, a
partial default on a large number of debt contracts would
still mean a huge loss of investment capital. As such a large
percentage of the debt is from domestic pension funds and

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insurance companies, a default on this scale would cause
many of these institutions to fail. This is what I predict to
be the next step that unfolds during the economic
deterioration that will take place over the next few years.

I foresee pension funds and insurance companies collapsing

due to their inability to pay dependents or claimants
directly as a result of bad debt. This will be created from
the indirect investments these firms have made with
financial institutions and governments. Who I feel will
have difficulty generating capital to repay even the interest
on the money lent, let alone the initial investment. The
knock on effect of similar institutions that fail and the fear
of closure or an inability to “make good” on agreements,
will deter people from such products and will make the
situation even worse for the remaining pension funds and
insurance companies.

It is a horrible thought that so many people could lose their

pensions or not get a pay out on their insurance claim. I do
not think the government would be able to intervene if one
or more of the big pension providers went into
administration due to the existing level of debt it holds.
Also if the government failed to make debt repayments it
would be the leading factor that triggered the situation in
the first place.

Even if the default occurred as a result of the private sector

debt obligations failing, which is the more likely starting
point in my opinion, there would be no opportunity to
remedy the situation. Once the damage has been done it has
been done. If the government was to intervene in any way it
would take the form of compensation that would be paid
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for with higher taxes, that would do even more damage to
the economy. Or further money printing, which would
devalue savings as a result of inflation.

The most likely outcome of mass default would be the loss

of pensions for existing pensioners and the generation that
will retire in the next twenty years. I am so certain of the
likelihood the outstanding debt will not be repaid that to me
the current protests to maintain the current pension rights
being lobbied by civil servants seem almost comically
unrealistic. They will be lucky to receive an income that is
a livable allowance let alone the expectations they have
been told they will get.

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 Chapter Two.

Taxation.

This chapter comments on the nature of taxation and the

impact of fiscal policy on the economy. I question whether
a high level of taxation is beneficial to an economy and
suggest it might create more problems than solutions. I
critique ideas for taxation policy to show the impact of such
actions questioning the macroeconomic consequences of
increasing taxation to reduce the deficit.

I also put forward arguments that any taxation reduction

should be received by the poorest sector of society to gain
the full benefit of the action. If you want to know the impact
the financial crisis has had on fiscal policy or you would
like to see arguments against current taxation policy, you
should read this chapter.

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 Taxing the rich will not solve the problem.

I had this published at the Huffington Post on 12/7/11 at

06:52 PM ET (Morgan, 2011).

I have recently read a number of articles stating the solution

to the economic crisis is merely to tax the rich. However, I
doubt it is that simple and it may in fact create more
problems than it solves. I provide my justification below,
by explaining the use of the money held by the “rich” and
how this benefits the rest of the economy.

So what about:

The money they have in the bank?

Savings in banks provide investment into the economy,

when banks lend the funds deposited. This lending enables
businesses to borrow money to start up, pay staff and cover
overheads. It also enables homebuyers to arrange
mortgages and it works as short term credit for borrowers,
when it is lent out through credit cards. This money
provides a service when it is invested, by taxing the rich the
money will be taken from banks, reducing their ability to
lend in the future. This would do tremendous damage to the
economy and labour market.

The money they have in shares?

Share ownership is another investment favoured by the

rich. They receive dividends and potential increases in
share value as incentive to buy shares. Although a huge

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amount of money is invested in shares, making the rich sell
their shares to pay tax will have a negative impact on the
economy. If shares were sold at the magnitude that would
be required to pay off public sector debt, the share price
would plummet. By owning shares on a huge scale, the rich
provide an artificial value to share prices. This would no
longer exist if they were forced to sell them on the level
needed to balance the national debt. This would have a
catastrophic effect on private sector pensions, which are
largely funded by share investment. It could push
thousands, perhaps millions of pensioners into poverty.

The money they have in assets like property, cars and

yachts?

In the same way the share price drops when shares are sold
on mass, asset prices will fall when sold on mass too. If the
wealthy sector of society were expected to sell off their
assets to “pay off” the public debt in one go, the price they
would receive for the assets would fall dramatically. It
would become a buyer's market. Who would buy these
assets anyway? If you are taxing all of the people who have
the means to buy expensive assets, who will have the
money needed to buy them? The situation is not simply a
matter of the rich having assets worth X amount of money,
but who has X amount of money to buy the assets from the
rich? And more importantly do they want to buy them?

The money they have in cash?

Money held in cash could be taken in tax, however, even if

the money is seemingly doing nothing, it is doing
something. Money not used in the economy reduces the

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price of goods, which would otherwise increase demand
pushing up prices. In short, money not spent prevents
inflation, which makes the cost of goods higher. As
inflation is currently high it would not be advisable to take
this money and spend it. If this was done the price of goods
would rise and would be counterproductive to reducing
poverty, which I assume is the intention of the taxes.

Conclusion.

There is one underlying principle in the above points.

Money always does something. It is always being used to
enable the functions an economy needs. By taxing the rich,
all that is achieved is a transfer of wealth from the private
sector to the public sector. Most economists would argue
money in the private sector is “better” at increasing output
and providing employment. It also has to be said, if the
public sector has racked up this level of debt. Surely it is
not effective at managing money? Taxing the rich is no
different from cutting government expenditure. It will
simply take money working in the economy out, to reduce
the debt. This action will have the same consequences to
employment, investment and services that public sector
cuts have.

31 | P a g e
32 | P a g e
 Tax Greedy?

I had this published at the Huffington Post on 26/03/2012 at

21:24 (Morgan, 2012).

I often wonder why so much money is taken in tax. The

excuses range from the need to pay for services provided
by the government to subsidising the poor. However I am
not so sure it is anymore. In at least, it may be causing
more poverty than taking less tax in the first place would.
The money taken in tax could be used to buy products,
which in turn will generate jobs to produce and sell the
goods demanded. By taking high percentages of the GDP in
tax this free market wealth generation mechanism is
damaged. This impacts employment, the skills of the labour
force and the level of output in the country or region.

The argument for taking high tax is the money is used to

produce goods increasing output. The tax revenue is paid
out to civil servants who provide services and create output,
switching the economy from a free market structure to a
command structure, in which decisions are centralised. In
the UK nearly 50% of the national output is taken in tax.

But do they get value for money?

I don't think they do. In a total command structure economy

the government will pay for everything you need. They will
pay for your housing, health, pension, energy, transport,
insurance and even food. The fact of the matter is people in
the UK have to provide for their own housing, energy,

33 | P a g e
transport, insurance, food etc. I admit they get their health
care for free, but at the price it costs the government a year
I would argue it could be provided at a lower cost in the
private sector (Martin, 2011).

In any event the largest expense, housing, is a personal

responsibility in the majority of cases. So although there
are some benefits provided by taxation the services
provided do not cover the bulk of living costs. I personally
think the return on investment from tax is very poor in the
UK. I certainly don't think it justifies taking almost half of
the national GDP (Silver, 2010). I also think the high tax
has created a dependent society with minimal skills.

As almost half of the country's revenue is taken in tax it has

reshaped the way income is provided. It is harder to get a
job in the free market because there is less demand for
private sector goods as a result of the income of the
consumer being taken by the government. Therefore
workers are dependent on public sector employment, which
is dependent on centralised decisions and distribution of tax
revenue.

Has this created a culture of dependency?

The other way of receiving income in a high tax, highly

centralised, system is to be dependent on the government.
The more money is taken in tax, the more people will be
dependent on government subsidies. This creates a cycle of
dependency because of the need to create more dependency
to receive a higher income from the state. A benefit
dependency is created by the lack of opportunity in the free

34 | P a g e
market, which in turn creates a benefit maximisation
strategy creating more poverty.

Rather than increasing output or reducing poverty, higher

taxation will dampen demand in the free market and make
people reliant on the state. The only thing that changes is
who controls the money in the economy, which is taken
from a dispersed group of individuals and received by a
centralised body which makes decisions on how the money
is spent.

The objective of high taxation is to change the structure of

the economy from a free market system to a centralised
command structure system. The justification of
maximisation of output and the alleviation of poverty is
difficult to argue when used as an excuse to take money
from the free market through taxation. Especially when the
government in the UK is in record levels of debt and there
are nearly three million people unemployed.

Is the deficit a justification for taking tax?

Personally I don't think the current argument for taking

high tax is justifiable either. The high levels of debt, which
exist in the UK, are a result of public sector overspending.
The idea that taking more tax will reduce the deficit in a
period of low growth is ridiculous. Lower taxes are needed
to encourage growth and to create employment in the free
market again. This tactic will not only increase growth but
reduce dependency and decentralise decision making in the
UK.

35 | P a g e
The argument for lower taxes is just as justifiable as further
stimulus. However rather than using the money, which is
either borrowed or quantitatively eased, to provide jobs in
the public sector the money could be used to pay for tax
reductions in the short term. This would switch the
economy from an inefficient command structure model to a
free market model. This would put an end to the cyclical
dependency culture in the UK, which has dominated the
country for the last fifteen years.

The current taxation policy and the huge government

deficit suggest one thing in my opinion. The central
government is greedy for the money created in the free
market and will use excuses to control it. The fact that such
high levels of debt were generated in a prosperous period
indicates a culture of poorly planned ostentatious central
government, which is unaccountable to the will of the free
market.

36 | P a g e
 The Trickle Down Theory and Time Progressive
Tax (Morgan, 2011).

The Trickle Down Theory suggests that tax breaks for big
businesses and the wealthy are beneficial to the broader
economy. Although I agree that any tax cut is beneficial to
the economy in the current environment, I think that the
cuts could be more effective if put in another direction.

In particular small businesses would benefit the economy

more if they were given the tax breaks instead of big
businesses. I think this because small businesses often fail
in the first year of trading due to financial constraints. If
small businesses were given tax breaks it would encourage
growth and enable funding without bank lending.

The concept of risk does also not come into the equation
with tax breaks like it does with loans, which charge a
higher rate of interest with greater risk. This puts additional
pressure on small businesses through higher lending costs
than their larger counterparts, which carry less risk.

In terms of consumer consumption smaller businesses also

have a greater impact pound for pound than larger
businesses, due to the funding difficulties they have. This
creates a situation where as soon as they receive the money
they borrow or generate they have to use it to pay existing
suppliers or creditors.

This speed of spending is beneficial to the economy as it

increases the velocity of trades. In short in terms of

37 | P a g e
increasing aggregate demand a tax cut for a smaller
business is more beneficial than a larger business because
of its higher propensity to consume. This also works for
individuals, the poorer someone is the higher the
percentage of their income that is consumed through
necessity.

Both of these examples suggest that although an increase in

tax breaks for big businesses and wealthier people does
create a trickle down benefit it is not as beneficial as it
could be if the same tax cuts were directed to the
organisations and people that depend on a greater necessity
to consume.

Therefore a better way to encourage growth in the current

environment would be to introduce a progressive tax for the
length of time that a small business or sole trader has been
operating rather than basing it on size of profits alone. For
example a business in its first year could pay only 1% or
2% of profits in tax. Then after a year it could rise to 4% or
5% and after that it could progress to the standard rate once
the business has become established.

This would firstly accelerate growth due to the higher

increase in aggregate demand that smaller business entities
create. Secondly it would provide a cushion of funding for
start-up companies that do not have the luxury of easily
accessible and inexpensive lending. Further to that it would
provide funding for organisations that would become a
worthwhile investment for venture capitalists.

A lower rate of tax in the early years would create less risk
and higher returns. This may be a more appealing

38 | P a g e
investment for entrepreneurs than bank returns and bonds,
taking the emphasis of debt capital away from the small
business model by replacing it with a new form of equity
capital.

The concept of time progressive tax could be an original

and unique way of creating growth in the uncertain
economy and also help deal with the problems new
business start-ups face due to growing competition from
larger and multinational businesses, which have been seen
with globalisation.

39 | P a g e
40 | P a g e
 Chapter Three.

Critique of Economic Strategies.

This chapter reviews the economic strategies of the

political parties in Britain. As the two strategies critiqued
dominate political debate across the world the comments
made can be universally applied to any country. The
arguments for austerity and growth both have their
limitations in my opinion. I personally question whether
either will be sufficient in the current climate.

If you would like to see why I think the current strategies

will fail you can read my opinion explaining the full extent
of the problems in the global financial markets in Chapter
One. I think the problem is more one of insolvency than
growth or austerity. Any resolution should be directed in
making outstanding debt repayments viable, if this is not
done the consequences to international trade will be so
devastating any strategy is doomed to failure.

If you are interested in learning about the limitations of

existing economic strategies on a macroeconomic and
financial level this chapter is worth reading.

41 | P a g e
42 | P a g e
What I think of George Osborne's economic plans.

I had this published at the Huffington Post on 9/12/11 at

12:54 GMT (Morgan, 2011).

First, I would like to discuss credit easing, which I do not

think will work. To start with it is too small an amount.
Twenty billion in loan guarantees will not provide the
security needed to put confidence back in a market of an
economy worth £1.4 trillion a year (Castle, 2011). It will
not have a multiplier effect, because the guarantee is only
for the first twenty billion. After that the risk of the market
returns again on any further trades, even if the trade was
initiated from the original twenty billion credit easing
programme, which most will not be. It will also only affect
unique risk, not systematic risk, which is the real problem
the market faces. On top of that it only reduces the risk for
the supply side of debt. The demand to buy goods through
consumer credit has not been increased through reducing
risk. This is also needed to enable growth.

I also think that the Chancellor is looking at the problem in

the wrong way. He has stated he intends to increase capital
investment by £30 billion, however the way he has gone
about it makes me wonder how he expects to achieve that.
Yes capital investment is a good idea, it restructures the
economy and provides the means to produce more goods,
or make manufacturing and trade more efficient. The
problem is the execution of the plan. The method of
funding is flawed and the incentive to provide the said
funds is unlikely to work.

43 | P a g e
Since the Thatcher government the conservative party have
become obsessed with debt as a method of providing
investment and returns. I do not know why? And it
perplexes me to this very day (perhaps Monetarism?). It is
an obsession, to the point that they do not even understand
any other way of doing it. They have become stuck in one
way of thinking, which has impaired their judgement to a
dangerous level. But it is not just them. I watched an
interview with Will Hutton, in which he publicly exclaimed
the difficulty of the current economic situation and how
few options there are. I disagree with him.

The big problem in my opinion is that they are still using

debt or credit as the main method of investment. Why?
They do appreciate debt is the worst product in a recession,
especially when there is high risk. Why you say? The price
of debt is the interest rate, which rises when the risk
increases. This makes debt based products more expensive
when there is high risk, which occurs in a recession. There
is another option, equity. Equity is the opposite of debt
when risk increases the price, which is linked to value,
falls. This makes equity the ideal method of investment in a
high risk environment.

So why are they using an investment model which is not

structured to work well in the current environment? And
more importantly why are they not putting efforts into
expanding equity investment? The £30 billion capital
investment program, for example could be funded by
foreign investors in a much better way and that will stop Ed
Balls arguing, “Where are you going to get the money
from?” To start with the investment in equity products from

44 | P a g e
abroad would get the funds needed to the best projects.
Savvy investors will not want to put their money into a
project that could likely fail, so the money will circulate
projects that are most likely to succeed.

In addition to that and to address Ed Balls incessant attacks,

the money would come from abroad. The foreign
investment would act like a credit to the economy
increasing the size of the funds available. Nothing has to be
cut or taken away from anything else it is a simple addition
to the economy. So to answer Will Hutton, there is a lot
you can do if you do not get yourself stuck into one way of
thinking, which the Chancellor and the majority of
economists clearly have. If the Chancellor wants a solution
to the lack of investment and a reduction in systemic risk, I
would recommend he put his efforts into attracting foreign
investment in UK equity products.

45 | P a g e
46 | P a g e
 A response to Compass Plan B.

I had this published at Mindful Money on February 1, 2012

(Morgan, 2012).

A response to Compass Plan B.

I have been asked to review a suggested Plan B to remedy

the economic crisis in response to the economic strategy set
out by Chancellor of the Exchequer George Osborne, as
there is a growing movement against the austerity measures
he has put in place. Plan B was put together by a leading
left wing think tank called Compass (Reed & Lawson,
2011). The report supports a view of increased spending to
encourage growth and reduce unemployment. An article by
the Guardian newspaper has stated that over 100 leading
economists have supported the report (Boffey & Stewart,
2011).

The synopsis below gives my opinion on the viability of the

proposal.

My response to Compass’s Plan B report.

My first concerns with the general emphasis of the paper

(which seems to be to spend more money through the
public sector in an attempt to stimulate growth) is the
ability, or lack thereof, of the government to borrow in the
future or for them to even pay off the existing debt. This
situation is extended by the downgrading of sovereign debt,
seen across the rest of Europe for countries that either do

47 | P a g e
not adopt austerity plans or do not fulfill the requirements
of austerity plans they have committed to.

This has been a common occurrence in the Eurozone and

even the larger wealthy countries, such as France and
Austria have been downgraded (Sky, 2012). This indicates
credit rating agencies are not bluffing when it comes to
debt downgrades and Britain will be no different if it does
not stick to its austerity plan. If such a downgrade was
implemented the cost of borrowing in the UK would
increase making debt repayments more expensive.

The level of UK public sector debt has just surpassed £1

trillion, which in itself will be a mammoth task to pay off.
Regardless of an increase in debt and a potentially higher
interest rate, which is likely to occur if Plan B was adopted
(Ryan, 2012). Plan B is also very assumptive in relation to
economic outcomes. It assumes if spending increases
employment and economic growth will increase in tangent.

This is something argued by the macroeconomic

community and is not a proven fact. In the 1970s a similar
economic situation to today’s economic downturn
happened. The period was seen as being in stagflation,
where there was stagnant growth and high inflation. This
was a turning point in economic thinking, when previously
the post second world war Keynesian economists believed
an increase in government spending would lead to higher
employment and economic growth (Economy, n.d.).

The increase in government spending in the 1970s did not

lead to an increase in growth and led to a new perspective
on economics, spearheaded by the Rational Expectations

48 | P a g e
school of thought. This new thinking suggested an increase
in spending rates would only lead to inflation later on in the
business cycle and claimed a real sustained increase in
employment would only happen if the unemployed took
jobs for less pay. The Expectations Augmented Phillips
Curve was developed to support the theory that an increase
in spending rates does not lead to an increase in growth or
long term employment.

There are some counter arguments to this research and

some economists, such as the post Keynesians and neo
Keynesians, believed the inflation seen in the 1970s was
directly attributable to an increase in oil prices and the cost
of foreign goods. An increase in the cost of manufacturing
as a result of costs or commodity prices is called cost push
inflation (Palley, 2008).

To give an indication of how far apart Keynesians and

Rational Expectations or Supply Side economics are in
general, in their economic understandings the concept of
cost push inflation is not acknowledged by the Rational
Expectations school of thought. In short the thinking in
economics is so far from one school to another that any
assumption made by one organisation can be easily
criticised by another making it hard to make any real
argument stand. Regardless of the school of thought, let’s
assume the increase in spending will stimulate growth and
increase employment.

Even if that is the case the suggestions of job creation in the

report do not seem sustainable in the long term. One
proposal was to give young people a job by installing loft
insulation. However this is only effective for a certain
49 | P a g e
period of time until all houses have loft insulation, after
that the workforce would have to go abroad and this
assumes there is foreign demand. The only real demand,
which is artificial, is from the government. It is not possible
to sustain free market growth by producing something that
the free market does not want, at least not in the long term.

I get the impression from the report that all of the work
incentives, surround environmentally friendly proposals
which is great and would help the environment and cut the
cost of energy. However this is not something the free
market desires on its own or in perpetuity, as soon as the
artificial stimulus stops the market for the work will stop
and the workforce will be unemployed again.

A better suggestion is for investment into projects the free

market desires, which can be achieved through tax
incentives and reducing regulation. If the government is
going to borrow more money, the money would be used
more effectively by allowing a reduction in short term tax
revenue, through a tax cut, to encourage free market
growth.

I also have my reservations about the Investment Bank

suggestion for low carbon sectors. If the projects were
likely to be successful the existing investment banks would
have sought them out. This is not the case otherwise the
new “Investment Bank” would not have to be set up. The
simple fact is that low carbon operations are expensive,
expensive means uncompetitive and thus will be unlikely to
succeed in the free market. They are not the kind of
investments needed to encourage growth.

50 | P a g e
If I am completely honest I find it difficult to understand
how any kind of public sector spending can create growth
in the private sector. The whole point of the private sector
is that it generates its own services and income. The best
way to encourage that is to cut tax and reduce regulation.
The real weak point in the UK is the government’s high
income from taxes and low output through inefficient
spending. If the British Government was good at managing
money there would not be a £1 trillion national debt. It is
estimated the government spent £12.7 billion on an NHS
computer system which did not work and was never
implemented during the New Labour period (Martin,
2011).

I noticed the report claimed the economic crisis was from

the banking system. That is partly true. The banking system
did not regulate properly, but this was the fault of the New
Labour introduced regulator the Financial Services
Authority. The government was responsible for the
regulation of the banking system, which failed indicating
an inability to manage either a budgetary or regulatory
body. Before the FSA the Bank of England regulated the
banking system, which seemed to work and there is a
reason for this.

Each bank has a reserve account at the Bank of England,

which is used to balance the accounts of transfers between
the other banks at the end of the day. This operation gives
the Bank of England a deeper insight into the solvency and
stability of the bank under hard economic conditions. When
the regulation of the banks was taken over by the FSA this
insight was lost and bank reserves were allowed to become

51 | P a g e
dangerously low. It could be argued the near collapse of
Northern Rock occurred as a result of the ineffective
reserve regulation from the FSA (Bank of England & FSA,
2011).

There is a justifiable argument that the level of national

debt is higher than it would be due to the bailouts given by
the government. However even without the debt liabilities
from the bailout the public sector debt is a colossal size and
is said to exceed £1 trillion excluding the bank bailout
(Kollewe, 2012). In addition to the visible public sector
debt there are also potential government liabilities arising
from Private Finance Initiatives, which are not included in
the national debt figures or at least not to the extent an
official government liability would be.

Summary.

Overall I do not think the shift in thinking away from

austerity to debt fuelled stimulation would benefit the
economy, considering there is such a high level of debt
already. I would question whether further debt expansion
would be cost effective or even possible under the current
global economic situation. I also do not think the methods
of investment in green or low carbon sectors will create
growth or reduce unemployment. However I do think they
are a moral suggestion for a better economic period and
may have some pedigree in the future. The suggestion that
the financial crisis is the reason for the public sector debt is
not completely true. There is some validity to potential
government liabilities that exist if the banking crisis
continues to deteriorate. Although the majority of the

52 | P a g e
national debt has been created through New Labour’s
overspend.

53 | P a g e
54 | P a g e
 Chapter Four.

Central Banks and Inflation.

This chapter reviews the operations and policies of central

banks. It also evaluates the role and understanding of
inflation in modern economics. I am quite critical of central
banks and use the Bank of England to demonstrate
problems that have arisen from monetary intervention. One
area I am particularly critical of is the use of the interest
rate to control inflation and the impact this has had on the
housing market and financial markets, which I feel at least
added if not created the debt bubble that led to the financial
crisis.

If you dislike central banks then you will enjoy reading this
chapter. You can also gain a lot from the explanations on
how central banks operate.

55 | P a g e
56 | P a g e
 Is the Bank of England a failed institution?

I had this article published at the Adam Smith Institute on

Saturday, 08 October 2011 at 06:30 (Morgan, 2011).

Many banks have problems managing the expected

withdrawals depositors make and often have to borrow
money to cover the shortfall. This service was originally
provided by a number of private wholesale banks, which
lent money in emergency situations to prevent bank runs.
Over time a number of wholesale banks were merged
together and given regulatory powers over the banks that
they would lend to. When this merger happened it was the
birth of the Central Bank, which acted as a lender of last
resort for banks with short term cash flow problems.

Since then central banks have taken on a greater role within

the economy. The main secondary role of the central bank
is to control money supply. The amount of debt that can be
lent by banks is set by the central bank through the reserve
requirement. The reserve requirement is a percentage of the
funds banks have, which have to be held to cover
depositors' withdrawals. By increasing or decreasing the
required reserve the availability of debt, which can be lent
out to borrowers alters. The greater the required reserve the
less money that can be lent out and the higher the price of
debt, the interest rate, becomes. Conversely the lower the
required reserve the more money that can be lent out and
the lower the price of debt, the interest rate, becomes.

57 | P a g e
The Bank of England has two main functions. The first is
the original function of the private wholesale banks, to lend
to other banks to prevent bank runs and enable them to
function in an effective manner. The second is the control
of the money supply within the economy, when alterations
to the reserve requirements set by the Bank of England are
made to control inflationary and deflationary gaps. Both of
these functions are made possible by the Bank of England’s
control of the supply of debt. This control has been
enhanced over time by allowing the Bank of England to
create money through functions like Quantitative Easing.

During the rescue of Northern Rock and the subsequent

bank bailouts the Bank of England failed to provide its
primary function of acting as a lender of last resort. The
size of the bailout required was so great that Bank of
England Governor Mervyn King refused to lend the funds
required to prevent a bank run. The Government had to step
in and act as lender of last resort meaning the primary
function of the Central Bank was no longer provided by the
Bank of England. The secondary function of the Bank of
England in regards to money supply control has also failed.
The Bank of England sets a two percent inflation target that
it is supposed to meet to maintain “economic stability”,
however in recent months the rate of inflation has stayed
far above this target (Bank of England & FSA, 2011).

Interest rates cannot rise due to the impact on the wider

economy, which would be devastating for homeowners and
businesses alike. The ability of the Bank of England to
control inflation by increasing the interest rate is a bygone
era. The lax control of the interest rate in the past has

58 | P a g e
flooded the market with cheap debt that now has to be
repaid. Due to the need to make these repayments possible
the interest rate has to remain low to prevent default.
Interest rates could fall further or become negative,
however this would not necessarily provide the desired
effect of increased consumption and may make the scale of
debt even worse, kicking the can further down the road.
The only real function the Bank of England can perform
effectively is pump priming, which will devalue the
purchasing power of the currency later in the business cycle
(Congdon, 2009).

Perhaps it is time to push for the reintroduction of private

wholesale banks to provide emergency loans and to stop
using the Bank of England as an aggregate demand control
mechanism?

59 | P a g e
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 Can negative interest rates really work?

I recently had this article published at the Adam Smith

Institute on Thursday, 08 September 2011 at 11:35
(Morgan, 2011).

There has been much speculation recently as to whether the

interest rate could become negative if the economic climate
continues to worsen. Expectations of a deflationary gap in
the near future have deterred an interest rate rise to quell
current inflation. The aim of negative interest rates is to
increase liquidity in the market creating higher demand for
goods, artificially compensating for the decline in
consumption. However there are questions as to whether a
negative interest rate would actually have an impact on
consumption and create the level of demand desired.

When someone borrows money from a bank their debt is

bundled up with other borrowers' debts and packaged as a
credit derivative. This product is then sold to other
institutions who receive the payments the borrowers make
on the debt. The risk is now held by the institution that
purchased the debt enabling a lower rate of interest than the
original bank alone could offer the potential borrower.
When the credit crunch started in 2007/2008 packaged debt
products became less desirable to purchase due to the
increased risk of default created by the subprime market.
As a result of the lower demand for credit products banks
had to hold on to more of the debt they issued themselves,
meaning the interest rate rose to compensate for the higher

61 | P a g e
risk they carried. If the interest rate did not rise then less
debt was offered and lending declined (Congdon, 2009).

The interest rate in this circumstance changed from being

led by a macroeconomic target to stimulate the economy, to
being led by the risk element of the lending mechanism
fuelled by the uncertainty of repayment. Even if the interest
rate set by the Bank of England reduced and more funds
became available to lend the return required by the banks to
compensate for defaults increased. The demand for
borrowing and risk of inability to make repayments in
combination with the lack of demand for packaged credit
products pushed up interest rates for borrowers. Even if the
Bank of England base rate has reduced the actual rate of
borrowing has increased in many cases.

In addition to the risk element of lending and the effect on

the interest rate, the actual link to the base rate is not
present in all lending products. Only about half of the loans
in the UK are linked to the base rate. Tracker and variable
rate products follow the base rate and CAT standard
mortgages (Charges, Access and Terms) have to have an
interest rate within two percent of the base rate. However
other banking products can have an interest rate at any level
the bank is prepared to offer. Even if the borrowers with
outstanding debt, which are linked to the base rate, receive
a reduction in repayment costs due to an interest rate cut it
does not guarantee they will spend it and increase
consumption. In fact the majority of borrowers are taking
advantage of the low interest rate to pay debt down.

The interest rate mechanism leading to changes in

consumption no longer works due to the high levels of debt
62 | P a g e
that already exist. The reduction in interest is merely
providing more liquidity and not taking into consideration
the problem is one of insolvency. The situation questions
not only whether negative interest rates will be ineffective,
but whether the interest rate mechanism as an aggregate
demand control is capable of working at all anymore (Bank
of England & FSA, 2011).

63 | P a g e
64 | P a g e
 Artificially low interest rates are creating
economic limbo.

I had this published at the Adam Smith Institute on Sunday,

06 November 2011 at 06:57 (Morgan, 2011).

Usually in an economic downturn there are compensations

for the negative effects of reduced demand. The reductions
in income and rise in unemployment are to a degree offset
by a fall in asset prices especially the housing market. The
economic strategy of the Bank of England has been to set
an artificially low interest rate to maintain “economic
stability”. The actions of the central bank are based on the
assumption that when house prices increase consumer
consumption also increases (Congdon, 2009).

This assumption may be true to a certain extent however it

is built on a false sense of wealth due to temporarily high
house prices created by long term unsustainable borrowing,
a bubble that is inevitably going to burst. As soon as house
prices start to fall dramatically the false sense of wealth
will disappear and the impact low interest rates will have
on aggregate prices will go with it.

In the meantime people who have seen a reduction in

income have not seen a reduction in the cost of housing.
The housing market has been artificially subsidised through
low interest rates, which not only make first time buying
harder but also make the cost of renting higher. Greater
demand for rented accommodation has been caused by a
growing number of people that cannot afford to buy a

65 | P a g e
house as a result of lower wages, which have not been
reflected in house prices due to the low interest rate.

The consequences of this are real and severe. In the last

year the number of homeless people in England rose by
14%, which could be partly attributed to the rising levels of
unemployment (Homeless Link, n.d.). However there has
been a 26% increase in the number of homeless people who
are not helped by the local authorities into accommodation,
which would indicate the cost of housing has been an issue
when attempting to re-house people.

If interest rates were higher the price of housing including

rented accommodation would fall and provide the
compensation that a normal recession would create. This
raises the question is the Bank of England’s strategy
hindering more people than it helps?

66 | P a g e
 Could an earnings based rental control
consumption mechanism replace QE?

I had this published at Left Foot Forward on September

26th 2011 (Morgan, 2011).

Recent attempts to increase the level of demand in the

economy to tackle a deflationary gap, created by the lack of
credit fuelled consumption, have consisted of the expanse
of the money supply through quantitative easing. However,
this method of increasing demand is often considered a last
resort due to the impact of currency debasement often seen
after the application of such a policy (Castle, 2011).

Many economists do not believe an increase in money

supply will increase the level of output and consider it to be
a monetary illusion of wealth creation.

Interest rates are already at record lows and further

reductions seem unlikely if not impossible. The lack of
lending and the resulting lack of spending hamper the
ability of the western economies to recover.
This would suggest the key to economic growth lies with
the low to middle income consumption brackets that have
been kept out of the market due to increased risk
assessment on borrowing and the fear of negative growth.
This would indicate that a successful mechanism to
encourage consumption enabling growth should direct
funds to the lower or middle income brackets.

67 | P a g e
One of the largest expenses for lower and middle
income earners is housing. Renting is becoming more
common place due to the difficulties in getting a mortgage
as a result of employment uncertainties and market risk.
Currently the cost of renting a property is based partly on
demand and partly on the value of the property.

Landlords usually receive an income of 3% – 5% of the

value of the property per year. Dependent on the cost of
housing the disposable income of the individual will
increase or decrease, enabling an increase or decrease in
consumption due to the funds made available or retained by
the landlords’ income.

As the tenant in this case is a lower or middle income

earner they will likely receive a lower income than the
landlord so their propensity to consume will be greater,
partly as a result of necessity. Therefore by the landlord
receiving less rent and the tenant keeping what would
have been paid a greater level of consumption is likely
to be attained.

Instead of charging rent by the level of demand or by the

current value of the property a charge of a percentage of the
tenant’s earnings makes the cost of living more transparent
and potentially fairer. The cost of housing is now based on
output and directly linked to the individual tenant’s income.

By introducing a cap on the percentage of the tenant’s

income a landlord can charge the cost of housing is now
relevant to what the tenant can pay and helps them maintain
a good living standard.

68 | P a g e
A universal maximum percentage could be introduced
setting a standard limit on the cost of housing. This
percentage could alter to increase or decrease the
disposable income of tenants throughout the affected area.
In turn, the level of consumption will increase or decrease
dependent on the percentage set.

Through this mechanism it is possible to control demand by

giving the lower to middle income brackets access to funds
that they can use to consume, compensating for the lost
consumption created by the decrease in availability of
credit. In this suggestion there is no debasement of the
currency, merely a transfer of wealth from affluent
people who do not consume to less affluent people who
consume at a greater velocity.

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 Chapter Five.

International Investment.

This chapter examines the impact domestic economic

policy has on an international level. I go into particular
detail about the use of currency value and how it is or can
be an economic mechanism in itself. I feel politicians,
policy makers and even the macroeconomic community fall
down on this area of economic understanding more than
any other.

It frequently disappoints me when decisions are made

which have a negative impact on international trade purely
for short term gain or political stance. If there is one
chapter to read in this book it is this one, as it is my opinion
the most important part of understanding economics. After
all, no country compares to the entire global economic
system so effective interaction with other nations is an
absolute must for economic success.

71 | P a g e
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The Investment Currency Mechanism, the UK and
the Financial Transaction Tax.

I had this published at the Huffington Post on 26/01/2012 at

20:03 (Morgan, 2012).

When investments are made the currency the purchased

asset is held in has to be bought by the investor, as it is the
desired medium of exchange the seller has requested.
Buying into a currency to invest in an asset increases the
demand for the currency and artificially increases its
purchasing power. This mechanism is what I call the
“Investment Currency Mechanism” and is in my opinion
the driving force of economic control on the international
stage.

Investors seek security, this leads them to put their money

where it is most likely to maintain its value and provide a
steady return. The countries that can provide that security
will generate demand from foreign investors, whose
domestic economies are less stable. In short the more stable
an economy is the more investment it will receive from
abroad. This currency strength then enables the strong
country to buy goods from other countries at lower prices
due to the high desire to hold its currency as an investment
vehicle.

This enables successful countries to enjoy an artificially

strong purchasing power against other countries. However
for this to happen, the country has to start with a certain
level of stability to provide that security. America for

73 | P a g e
example receives an additional artificial source of demand
for its currency due to the standard medium of exchange for
trading oil being the US dollar. Almost every time oil is
purchased US dollars have to be purchased first to enable
the transaction. This is partly because of the security the
dollar has and the desire for the seller of oil to use the
dollar as a safe investment vehicle in exchange for parting
with the commodity.

The relationship with America and Oil is synergistic and

perpetuating. It provides stability for the US dollar, which
then provides a demand from the seller of oil to hold the
US dollar due to its stability. It has been one of the main
reasons for the economic strength of America for the last
hundred years. The UK also has a commodity like oil that
requires investors to purchase the British pound to obtain it.
This commodity is not a physical commodity but the
security of investment in itself. British investment products
have a worldwide reputation for security and reliability that
stretches over centuries.

The desire to hold British financial products creates

demand for the British pound that gives the currency an
artificially high purchasing power on an international stage.
Therefore regardless of the commissions and bonuses the
city earns and the amount the government receives in tax,
the real benefit of the financial sector is the artificial
purchasing power it creates for the British pound. The
income generated in the city is only a small percentage of
the total investments made. It is this investment demand
that creates currency demand which creates the real benefit
of the British financial sector to the rest of the economy.

74 | P a g e
If the financial sector in the UK declined not only would
the income earned by banks and the government diminish,
but the ability of the UK to purchase foreign goods would
also fall. Anything that effects the operation of foreign
investment in the UK will affect the currency value and
thus the international purchasing power of the pound. I
therefore believe the introduction of a financial transaction
tax would be devastating for the UK, as it would act a
repellent for foreigners to invest in the UK due to the
increased cost of doing so.

Not only would it decrease British investment but drive it

to other currencies making competing nations more
powerful due to the strength the redirected investment
would provide their currency with. I believe the Investment
Currency Mechanism is the maker and breaker of nations
on the international stage and that decisions made on
investment regulations and taxation act as an invisible war
of nations.

75 | P a g e
76 | P a g e
 Milton Friedman’s greatest contribution to
economics and the real point of inflation targeting,
have Monetarists misunderstood Monetarism
(Morgan, 2011)?

If you discuss economics with a Monetarist they often, in

fact almost always, claim the reason they intervene with
aggregate demand is to achieve slow economic growth.
Whether you believe this action to be virtuous or not it has
other benefits which most Monetarists do not seem to
understand. My personal view on inflation targeting has
changed over the years, originally I deposed the concept
due to the negative attributes, the main one being the
inflexibility it can create in free markets (Congdon, 2009).

Now I have come to appreciate what I think Milton

Friedman was noticing when he pushed the concept of
monetary control, in the shape of Monetarism, in the
1970s. This revelation comes in the form of the benefits
that a constant level of inflation creates for the transparency
of financial products and in particular the consistency and
accuracy of return, which in turn enable risk (in particular
long term risk) to be estimated more accurately.

I think the reason why Friedman advocated inflation

targeting was not as the Monetarists claim, to achieve slow
economic growth, but rather to enable the effective
functioning of the investment market. I have come to this
view point from my own re-modeling of the valuation and
risk calculations, which I have been developing to provide

77 | P a g e
a solution to what I think the real root of the banking crisis
is. During this I found it was extremely beneficial when
estimating future returns and in turn the risk, to make the
variable rate of inflation constant.

For example if you are attempting to estimate the return on

an investment over four or five years the rate of inflation
will depreciate that return. When inflation is variable the
estimation is almost impossible, although there are models
that can provide questionably accurate results it is not a
constant result which inflation targeting provides. With a
constant rate of inflation over a long period of time I can
make the calculations reflect the expected return with a
much greater level of accuracy. The longer the investment
the more beneficial this function of inflation targeting
becomes and the greater the transparency of risk and the
desirability of investment becomes.

As Friedman was a statistician he would have appreciated

the financial modeling aspect of long term economics, I
believe this is what he was really trying to achieve with
Monetarism rather than the mainstream view that it is an
effort to control the business cycle. Although I agree with
the idea of inflation targeting I do not think the target has to
be a static number and that it is not required to achieve this
aim. If the rate of inflation is planned in advance, even if it
is variable it can enable accurate prediction.

The main benefit is the pre-event information that enables

investors to accurately compute the reducing factor that
inflation has on return. For example the inflation target
could be two percent one quarter, then three percent the
next quarter, then four percent the next quarter etc. As long
78 | P a g e
as the target has been set in advance and it is met the ability
to estimate the expected return is retained. This brings me
to the conclusion that although I agree with inflation
targeting I do not necessarily believe the inflation target
should be a constant rate.

79 | P a g e
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 A tip on National Investment Analysis.

I had this published at the Adam Smith Institute on

Saturday, 12 November 2011 at 05:46 (Morgan, 2011).

One of the main areas in macroeconomic analysis is the

long term prediction of economic growth on a national
level. It is done for many reasons, such as a guide to see
which countries sovereign debt products are safest or which
country provides the economic stability to enable free
market enterprises to flourish. There are many methods of
doing national investment analysis that provide a
benchmark on the best countries for long term growth and
safe returns. As an economist I have developed my own
methodology to analyse where the best investment
opportunities reside on a national level.

I therefore call the method the Morganist National

Investment Analysis or MNIA. In this model I first find out
the long term sovereign debt surpluses or deficits and then
calculate the mean average over the last decade or two, if
possible. This shows the level of dependence on outside
investment each country has. Then I calculate the standard
deviation of the borrowing over the same period to show
the volatility. So why is this useful? Well, if there is high
debt and a high standard deviation over that period it shows
there is a period when the government had to borrow a lot
more than at other times.

This indicates two things. The first is the country is

following some kind of business cycle, which can then help

81 | P a g e
an investor estimate each country’s business cycle with a
closer analysis of the debt levels over the period measured.
The second is the country has to borrow in the downturn
period of the business cycle, which indicates that either the
country’s domestic economy is reliant on fiscal stimulus to
enable growth in the downturn period or that the boom
period was created through outside investment. Either way
a country with both high debt and a high standard deviation
is an alarm bell to an investor.

Does it work? In my recent book on the Euro crisis I used

the method to predict which countries would be next to
default. I stated that Latvia, Lithuania, Hungary, Malta,
Poland, Slovenia and Slovakia would have a sovereign debt
increase in proportion to their GDPs and may require
intervention from outside sources. A recent article states
that Olli Rehn, the European Commissioner for economic
and monetary affairs, has issued a warning that Belgium,
Cyprus, Hungary, Malta and Poland are on the brink of
recession (RTE, 2011). Although my prediction did not
include Belgium, its concern is mainly down to the
problems with Dexia, which is a large owner of Greek debt.
As a result I would suggest that Latvia, Lithuania, Slovenia
and Slovakia could be added to the list.

82 | P a g e
Capital Investment. The two words that should be
on the lips of all leaders of countries at the
moment, so why aren’t they (Morgan, 2011)?

Capital investment is the investment in goods and

machinery used to produce other goods and services. For
example factories, diggers, tractors, hand tools and even
stationary (in an office environment) enable workers to
create output. Without investment in these goods it is
impossible for the economy to grow in any way that can be
considered progressive and long term.

Infrastructure improvements and new technological

innovations are the most common forms of capital
investment that are initiated to restart growth during
downturn periods. It is a way of increasing aggregate
demand which is not dependent on consumer spending
habits or meeting individual people's wants. At least in the
initial stages as most of the big efforts to increase capital
investment improve national infrastructure or services,
which in themselves enable greater prosperity through the
efficiencies they create.

It is important to point out to economists and governments

in particular that capital investment is a crucial and in fact
the most important component of aggregate demand during
a recession. Remember aggregate demand is made up of C
+ I + G + NX (consumer consumption, investment,
government expenditure and net exports) (Palley, 2008).
Consumer consumption and exports seem to be receiving

83 | P a g e
all of the attention from western governments at the
moment.

This is indicated by the competitive price war for consumer

goods that has been emerging over the last eighteen
months, which is likely to accelerate over the next couple
of years. In the countries that have expanded government
expenditure, such as America, there have been efforts to
increase capital investment but only in the public sector
through centrally funded projects in the form of
infrastructure improvements and innovations in
environmentally friendly sciences. These efforts have only
been mildly successful so far (although it is early days).

The aspect of aggregate demand which I believe has been

neglected is investment in the private sector. This is the
form of investment that is required to get the free market
functioning again to increase output and employment. This
has partly been down to the limitations in the banking
system due to the constraints on lending required by the
higher reserves demanded on banks. It has also been
created through fears in the future of the economy and risk
of losing investments. However there are other ways to
increase investment in the private sector (Castle, 2011).

Canada, China, India, Brazil and Russia among other

countries are all increasing their investment in other
countries, which could be used to increase demand.
Currently foreign demand creation already exists in the
form of lending to consumers to purchase foreign goods.
However the borrowed money would be better invested in
private sector funded infrastructure or capital goods. For
example funds could be started to build new bridges which
84 | P a g e
would then generate a profit when people pay to use them,
like turnpike trusts.

This is just one example of many methods of increasing

capital investment in the private sector. The problem is that
western governments are not taking any actions to make
this investment possible due to the high cost of
employment and high levels of taxation in their domestic
economies. Unfortunately it is very hard if possible at all to
grow if the means of production are not available to enable
the creation of output. The question is why are western
governments so slow to acknowledge this is where action
needs to be taken and more importantly why have they
made such poor attempts at relieving constraints on
growth?

85 | P a g e
86 | P a g e
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92 | P a g e
 Other Books by the Author.

Euro Crisis.
Aggregate Demand Control is European
Single Currency Weakness.

Description.
A review and critique of the Euro Crisis,
with progressive solutions suggested.
ISBN 978-1-61364-207-8.

Modern Applied Macroeconomics.

Description. A Conceptual and Technical

Paper, Putting Forward Pension and
Economic Reforms.
ISBN 978-1-5136-4833-0.

Economic Growth.
In a Highly Constrained Environment.

Description. New Techniques and

Alternative Governmental Dynamics
to Enable Economic Growth.
ISBN 978-1-5136-5076-0.

Available at leading online book retailers.

93 | P a g e
 Notes.

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