 Welcome, welcome once again to the Institute and I'm really delighted to be introducing to you today Anne Pettifor. I followed Anne's activities and she's an economist but she's an activist really. She's an activist economist which is a rare bird really and I think we all know our earliest really explosions the public scene was in Jubilee 2000 and all that debt especially African countries wiped out and since then she has been very active in a number of fields. She's a big interest in anything to do with money and debt and she's going to talk about that today but in the special context of the Green New Deal so it's environment plus money. You can't get better than that. Let me remind people the talk is on the record Q&A afterwards will be Chatham House Rules. Right, thank you very much and it's a great honor to be here I was saying to Patrick that I've been here before with the wonderfully book height at the height of the crisis I think it was so I have happy memories of this Institute and the good work that you do. Is this working like that? Ah yes, right. So I want to be just to say to you that I this is a presentation that I give on this subject. I am perhaps I should just say something about myself. I did work on the sovereign debt crisis and I worked on the sovereign debt of the poorest countries and at the end of that campaign when we had persuaded the IMF the World Bank and the Paris Club to write off about a hundred billion dollars of debt for 35 of the poorest countries I retired if you like to the New Economics Foundation and where I try to understand why it was that these countries had got into such debt after the 1970s and when I looked up I saw they owed about the amount we wanted to write off was about 300 billion dollars and when I looked at Anglo-American debt I thought oh my god you know this is this makes these poor countries look like very small bear. Anyway I then edited a book in 2003 and then later wrote a book called the coming first world debt crisis which fell like a lead balloon at the time and I should have retired then and gone off to look after my grandchildren but fortunately for me the crisis broke in actually in August 2007 but people really only became aware of it after layman's and that's then I became one of the few people to predict the crisis I have to say I did but I also lent or stood on the shoulders of many giants including the chief economist of the Bank for International Settlements so that's my background and then in 2007-08 I was part of a group of people that got together to talk about to prepare a report called the Green New Deal and that's the basis of this discussion today and then last year January last year is approached by a couple of young Americans who were preparing a manifesto for Alexandria Ocasio Cortez and they were looking for advice and for help on the question of economics and and the green issues the climate issues and so on so we've been working with them and I was very chuffed when she picked up the Green New Deal idea 11 years after we launched our report and now of course she's made it world famous and now the question becomes we know the task we had greater Greta Thunberg in London last week we know the scale of the task we've heard the IPPC report the question now comes becomes how do we pay for this how do we finance it so my mission if you like is to help activists to understand that this can be paid for so I will apologize in advance if some of this is you know well known to you and not very helpful to you but it is the basis on which I'm currently talking to people on the Green New Deal issue so so this is the system change we need according to climate scientists it's really dramatic there's a big transformation that has to happen if we're to get down to zero net carbon by 2050 by 2030 is even more ambitious but this is what they're saying we have to do if we want the planet if we want life on earth to survive basically and especially human life so it's a huge challenge to us we are at a sort of tipping point and that's the good news that the old paradigm of the fossil fuel lobbyists the energy security people the feasibility issues the NIMBY attitude to the inertia and and so on the cost versus the global warming that balance of forces has tipped and now the fossil fuel fuel lobbyists and inertia are on the wrong side if you like of the of this particular balance so it's beginning to become clear that renewables are cheaper than fossils cleaner and local and this is this is becoming the new reality and of course it's also going to happen as policy as politicians subsidize renewables and then gradually remove subsidies from fossil fuels which we again we think is inevitable and so that is again another example of a political turning point tipping point and why the politics of energy will follow the economics so how much will the Green New Deal cost and I'm here speaking in a global sense at the global picture the if you don't mind I'll take my jacket off it's hard work talking and so the global Commission on the economy and climate has estimated 90 trillion dollars over 11 10 11 years or 8.2 trillion dollars a year for the global economy as a whole and that's transformation in the poor countries as well as in the north that is a removal of subsidies for coal and fossil fuels and the investment in new energies and so on they bundle it all together and it comes to 90 trillion dollars over 10 or 11 years the OECD has a slightly more conservative estimate of 6.3 trillion dollars per annum between 2016 and 2030 but we're in that ballpark in that ballpark of numbers so the 90 trillion is the infrastructure requirements for a high carbon economy and this is about how to invest in this high carbon economy to transform it across transport energy water sits and cities and that's what it comes to and over the next 50 six trillion they argue the new climate economy crowd over the next 15 years and they say that it's a unique use it or lose it moment in economic history ensuring that this infrastructure is sustainable will be a critical determinant of future growth and prosperity so this is a this is a moment in time that we that they're urging us to take switching to renewables they argue would cost less bias effectively they talk with talk about reducing fossil fuel investment they mean by removing subsidies from fossil fuels and having more compact cities and more efficiently managed energy demand low carbon infrastructure will increase investment requirements by only an estimated 270 billion dollars a year that's a lot less than six trillion so they think that all of this is doable doing nothing will cost a lot too right this is going to cost us great this is Zimbabwe a couple of weeks ago after Cyclone Idio I think they call it and the the cost of disasters amounted to something like 320 billion dollars in losses in 2017 so you know it's not doing anything it is going to be expensive too and then of course we could just do this and leave it all to burn and that would be hugely costly and I say this where I've come from Britain where we have a drought and where Oakley more has already been burned down this is the spring unheard of in our in our weather patterns and the same apparently is and I've just come from Sweden last weekend and they have exactly the same phenomenon incredibly warm spring very very dry and already wildfires wildfires in spring so we we've got a lot to worry about so I want my my contribution here is to talk about how we're going to finance all this these numbers sound very very big numbers is it doable and I want to argue it's entirely doable and as Patrick and I were discussing over lunch if we were going to war it would be doable and there'd be no problem so all money originates in the first instance is credit and believe us or not there are still many who don't believe that who don't accept that but it is the case and we know that there's only two sources of finance and that's credit or savings those are the two sources of the finance that we're going to have to look for to enable this to happen so the question for greener deals is the big question we're going to have to ask ourselves is this and I think this is a really important question because what people are looking at is how to tax current behavior and current practice in order to disincentivize that practice so we see that's happened in France where the president has decided to increase taxes on fuel and we have the gilet jaune we have real resistance to that so do we go that down that route or do we go down the route of actually first of all investing in an alternative public transport system so that when you have to ask the guys in their white vans to get out of their white vans and stop consuming fuel they have they have the capacity to move stuff around and to move around themselves these are the the big questions that we face and I personally favor first of all the big public investment before you ask the public to change their ways make it possible for them to change their ways don't punish them for not changing their ways or for for the fact that they they are caring as they are in France they need their cars there is no other way for them to get around and so to punish them for the fact they're using their cars and using petrol is the wrong kind of logic but the investment is the costly thing and so let's talk about that in more detail and then do we first finance transformation via credit or do we first then impose tax incentives or disincentives or do we impose taxes and use those revenues for investment these are the big questions that we face so credit is money money credit as Joseph Schumpeter argued is nothing more than a promise to pay it is an intangible thing it is a promise to pay the tangible thing which is our cards as I now wave my card at a machine to have a coffee in Dublin or it's a bank note or it's a piece of gold or it's a commodity but the commodity represents that promise to pay represents the trust to pay so if I have a an ordinary credit card the bank doesn't fully trust me it allows me to spend say a thousand pounds if I have a a gold card then the bank trusts me enough to spend ten thousand pounds if I have a platinum card then the bank trusts me enough to spend I don't know a million pounds right so we see that these things represent the degree of trust in our promise to pay and it's so important for us to understand that that is what money is it is not the commodity it is not the tangible thing that represents our promises of course that system has to be backed up by law my promise to pay you know can I be trusted to uphold it and if I don't uphold it if I don't promise there is a penalty it's guaranteed by collateral and I want to stop at this point because collateral is the big big story that we have to to focus on here in my view and that is because the financial crisis was brought about not by a run of money on the banks not by a shortage of money but by the collapse in confidence in collateral so what happens is banks had on their balance sheets mortgages which they called assets which they used as collateral with which to leverage additional borrowing come the crisis and when investors looked at those balance sheets and looked at those assets looked at that collateral they asked the question is it really worth as much as you say it has you borrowed three hundred billion dollars against this collateral but is that collateral worth what you say it's worth and it was the lack of faith in collateral and the valuation of collateral that actually precipitated the crisis and this is why and it's incredibly important because collateral is the thing that determines how much we can borrow eventually but how collateral is valued and how much collateral there is there's a finite amount of solid collateral in the world right if only financiers would recognize that against which we can leverage additional finance and those financial assets are ecological assets and human assets and physical assets but there's a finite amount of them but there's almost an infinite amount of credit or the promise to pay the rate of interest is incredibly important it's a function of trust in the promise if i don't trust you i am going to charge you 15 percent on your mortgage but if you're a professor of economics i think your sound of mind and body i probably won't charge you as much so every loan that's given and it's nonsense to talk about interest as a kind of natural thing every loan that is given is the rate of interest on it is decided by the risk assessor in the bank right and it's a social it too is a social construct so the rate of interest is again a trust the function of trust in the promise and i always like to tell the story of the pole dancer in the the movie the big short who had five mortgages even though her her income consisted of tips from from the users of the bar where she performed she had very precarious income but the banks had lent her five mortgages and charged her very high and they had done that because they could charge her very high rates of interest on that and so the rate of interest is a function of trust in the promise to pay then of course there's a term you repay over a certain period so credit money only functions with that those institutional backups so the big institutional uh what's the word i want uh the institutional upholders of the promise are the criminal justice system which as i've said holds up the promise upholding contracts the banking system both of commercial banks but also of the central bank which plays an important role in the value of the currency as well the accounting system the double entry bookkeeping for assessing assets and liability and a and a tax and tax collection system all of these these institutional functions within the OECD economies uphold the value of money uphold if you like the promise to pay and the reason why this is terribly important is when i've worked in african countries where they lack these institutions they don't have a sound criminal justice system for upholding contracts they don't invariably have an independent central bank they don't have a functioning banking system they don't have an accounting system properly regulated and they don't have a sound tax collection system and as a result they have no money uh they use other people's money so countries like malawi or parts of nigeria use other people's money they use the dollar because they don't have the institutions to uphold their monetary system so these institutions are very very important in this intangible thing called a promise to pay so it consists of claims and obligations assets and liabilities credits and debts and again this point for me is terribly important because right now there's a big debate going on with the modern monetary theorists and many in britain who argue that the central bank can just print money people's qe helicopter money you name it and the mnts argue that that actually the government never has to borrow it can simply issue the currency because it has this enormous power and i disagree with that because all money consists of claims and obligations assets and liabilities credit and debt i argue so the central bank can create liquidity out of thin air if you like but it always has to do that by accepting an asset again the valuation of the asset is a question but there's always that relationship of someone acquiring an asset but then issuing a liability and uh in the mnts understanding of this there is no exchange simply the credit of the central bank simply prints the money and i think that is wrong and the reason why just on that question of the role of the central bank and the reason why i think it's important to the borrish the government should borrow even if the central bank plays a role in financing that borrowing is because it makes the process transparent i'm not in favor of giving good people like patrick the enormous power to issue currency for the nation to issue money right what should happen is that the democratically elected government applies for credit if you like applies for alone into the the private markets says i would like to have 330 billion pounds for investments in green technology or whatever that goes to the market and the central bank can help to finance that by swapping that promise to pay that asset in exchange for liquidity for the government or it can also be purchased by pension funds or whatever but in the process you have a democratic government making the request for the finance and doing so publicly so we can all see what's going on and you have the central bank playing a role in supporting that but the central bank cannot act unilaterally and nor can the government and for me the really important part of the market for for bonds is that it makes transparent what the government is doing now i've worked in Nigeria where they don't have a set of independent central bank and the politicians keen to dip their fingers into the especially the hard currency vaults of the central bank and help themselves to money so there needs to be a process of kind of keeping the two separate but keeping them transparent and and honest essentially so in a bank money economy as opposed to a barter economy society is no longer dependent on those with savings or surpluses for finance or credit and that's really important in the debates about is there when we're told there is no money is because we're told that there aren't any savings there aren't enough savings for this investment for this expenditure and that is not the case that's the great thing and this is why i argue that the monetary system is a great public good the question is who manages that good who controls that public good but it is like the sanitation system it is a great public good and as a result of it of the development of the monetary system by geniuses like john law back in 1704 but we'll talk about him later was that in a sense the access to finance was democratized by the establishment of a banking system it was no longer necessary to go to the robin baron living in a castle on the hill to ask if you could have access to his surplus or his savings it was possible to go to the bank and make a rational case for your product or for your activity and to be able to access finance so a bank money economy is in my view more democratic in a sense so we no longer need to rely on those that have accumulated capital so the bank of englanders has stood up the story of how money is created differs from the description found they say in some economics textbooks but they should actually have said all economic textbooks explain that money banks rather than banks receiving deposits when households save and then lending them out bank lending creates deposits this is very hard for the public to understand it's hard for them to to understand that logic when they've been taught so much about how it all comes from mrs jones putting your money in the bank and mr smith borrowing that money this is widespread people like paul krugman still argue that banks are just intermediaries between savers and borrowers and so the public naturally is confused the bank of england here put them right banks do not act simply as intermediaries lending out deposits that savers place with them and nor do they multiply up central bank money to create new loans and deposits the majority of money in the modern economy is created by commercial banks making loans so that's cleared up that and the key thing is that what we have is a system where actually the private sector private banks private financial institutes are dominant within the financial system at the moment and have enormous power but when the public decides not to borrow when firms and individuals decide not to borrow they disempower the banks the banks can't act can't create money out of thin air can't exercise this enormous power unless the public applies for loans as well so we see that the story about how powerful they are is lost when you discover that they are actually dependent on a thriving economy if you like for their power so credit creates savings not the other way around spending public and private generates income part of income generated is used to repay the debt and keep the credit system in balance but only if spending generates employment and with it income so we all know from our own experience that when we get a job at the end of the month we get a salary we get income we don't get it before we get it at the end of the month right so employment directs income it's the best way if you like of raising income and it's also the best way by the way of raising tax revenues and but if that spending is invested in speculation in gambling for example on the Dublin housing market or the or the Sydney housing market which is in freefall I'm told or in the London housing market that is gambling that is that is investing in an existing asset not in a new asset in an existing asset hoping that your investment in it will inflate the price which indeed it has done massively right that speculative activity and that does not necessarily generate the income needed to repay the debt indeed that's when financial crises occur when too much investment has gone into speculation and that hasn't generated income for the repayment of debts so in a monetary economy savings and this is something I really want everyone to have imprinted on their brain savings are not needed for investment in a monetary economy tax revenues do not pay for investment tax revenues are a consequence of investment and that's very hard for people to grasp as well and is considered controversial when what we're doing is saying well we can't spend any money on the climate unless we raise the money here by taxing those gilet jaune right only when we get the money from then can we do something about the climate that's not right and the people know it's not right instinctively tax revenues do not pay for investment instead the investment is created by credit in this case the the government's credit so the world savings are a consequence of credit creation not a source of investment and tax revenues are a consequence of government investment financed by credit creation right so the central bank creates credit if you like at the macro level and i've got a picture here of the irish central bank but i think it's not entirely accurate here for the story because of the ECB but anyway i like the picture of it i think it's an amazing building but in so for any any central bank which has its own currency the credit is created what i call the macro level of the economy when you think about it the central bank creates credit for big financial institutions like pension funds for for the banking system itself for the commercial banks but above all their biggest customer is the government right whereas and unless in the case of the eurozone it is actually the ECB that plays this role or doesn't play this role and more to the point and so the central bank creates liquid liquidity QE reserve central bank money whatever you want to call it by exchanging an asset usually a government bond but could also be a corporate bond or even a mortgage for a liability which is liquidity reserves central bank money that's how it works at the micro level a commercial bank provides credit for individuals and for firms and that's that's the distinction so we know the world's biggest banks generated huge amounts of credit 13 trillion dollars is the estimate since 2009 and massively increased their balance sheets so we know that they can do that and actually a lot of this debate around money has emerged since the crisis because people could see what happened and they began to ask the question what is QE so central banks can create as we can see very large amounts we don't need to put it in there of credit and commercial banks too and we're talking about sources of finance for the transformation which is the Green New Deal but then there's also savings existing savings if you like a consequence of existing credit creation and existing investment so government savings is equal to tax revenues so governments have tax revenues as their savings the OECD countries have pension funds to the value according to the financial stability board of 40 trillion dollars they're sitting on 40 trillion dollars of the world's savings the pension funds alone according to the FSB no actually according to Andy Haldane in 2014 asset management funds managed 87 trillion dollars of financial assets but this year the FSB in 2019 has said that global financial assets are equal to 377 trillion dollars now I just need to remind you because I had I forgot actually there are 12 zeros for a trillion it's just hard to imagine how much that is but according to the FSB that's as much as he's floating around in the financial stratosphere and shadow banking assets amount to 185 trillion dollars so my point is this we know that central banks and commercial banks can create credit enormous amounts of it but we already know that there's already masses of savings out there masses of savings huge numbers now the the real issue is how real are these financial assets especially relative to the collateral that backs them up that's the question is this real or fantasy these numbers but that's what they're making money on at the moment if you get your hands on some of that stuff you'll be pretty rich really and then of course there's another source of finance which are the national development banks which use publicly use tax who take taxation from the government and use that to leverage additional funding and then there's other savings institutions crowdfunding credit unions private savings banks and so on so there's a load of savings out there as well as the capacity to create credit so when you talk about we need 90 trillion dollars over the next 10 years it doesn't seem like a very big deal because there's only two sources of finance and we know where that's coming from that's where i'm going to stop thank you very much