General Mamduh Shahin (R) and army spokesman Ismail Etman. Photograph: Getty Images
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Forget the Egyptian Brotherhood, says Mehdi Hasan - it’s the generals who should worry us

Morsi is far, far from perfect - but we shouldn't write him off yet.

Should we be worried by the Muslim Brotherhood’s victory in the Egyptian presidential election? Earlier this year, I interviewed Wael Ghonim, the young Google executive and anti-Mubarak activist who became the face of Egypt’s inspiring revolution back in January and February of 2011.

Was he concerned by the Muslim Brotherhood’s victory in Egypt’s parliamentary elections in December? “No,” he said. “The western media, and even some sections of the Arab media, are taking a very pessimistic view. But what is going on here is very healthy. The Muslim Brotherhood was the strongest party and got almost 50 per cent of the seats.” He argued: “We should give democracy a chance and respect the choices of the Egyptian people.”

Six months on, Ghonim remains hopeful. “1st elected civilian in modern history of Egypt as President,” he tweeted, after the Muslim Brotherhood’s Mohammed Morsi’s cliffhanger victory over the Mubarak loyalist and ex-premier Ahmed Shafiq in the presidential run-off on 24 June. “Critical milestone. Revolution isn’t an event, it’s a process so it continues!”

There is a stark contrast between the undim­med optimism of Ghonim – the young, secular, liberal Egyptian activist – and the pessimism of western politicians and pundits, petrified by the rise of the dastardly Muslim Brotherhood. The latter, the world’s oldest and most influential Islamist movement, is seen by many as a threat to women’s rights, non-Muslims and, of course, western interests in the Middle East.

Bigger picture

We need to take a collective step back and look again at the big picture. The Arab world’s most populous nation has, for the first time, elected its own head of state in a multi-candidate, free and fair election. The repulsive Hosni Mubarak and his corrupt sons are gone; their 30-year reign of terror is over. Lest we forget, in 2006, Morsi was in prison and Mubarak was in the presidential palace; today, just six years later, Mubarak is in prison and Morsi is in the palace. This is a remarkable and historic moment for Egypt, and for the wider Arab world.

That said, Morsi is far from perfect. He wasn’t even the Muslim Brotherhood’s first choice as presidential candidate (the party’s deputy chairman, Khairat al-Shater, was barred from standing). Morsi is a 9/11 conspiracy theorist (“Something must have happened from the inside,” he declared in May 2010) who has said that the state should enforce sharia law and has called for women and Christians to be banned from running for president.

But we shouldn’t write him off – yet. On winning the election, he promptly quit the Brotherhood, pledged to be the “president of all Egyptians” and promised to appoint a cabinet of “technocrats”, not card-carrying Islamists.

Here in the west, however, our obsession with Muslim Brothers such as Morsi distracts attention from two points. First, the changes we want to see in the Middle East won’t happen overnight. Revolutions, as Ghonim pointed out, take time. Yet there seems to be a wilful amnesia on the part of some pessimistic pundits in the west.

At a recent Oxford Union debate on the future of the Arab spring, a retired US general, Keith Dayton, decried the ongoing discrimi­nation against women, homosexuals and religious minorities in countries such as Egypt and Libya. I couldn’t help but point out to the good general that it took his own country, “the land of the free”, 89 years, between independence in 1776 and the passage of the Thirteenth Amendment in 1865, to abolish slavery. Here in the UK, there was a 96-year gap between the first Reform Act of 1832, which extended the franchise to property owners, and the sixth Reform Act of 1928, which gave women the vote on the same terms as men.

Second, the most powerful man in Egypt is not President-Elect Morsi but Field Marshal Hussein Tantawi, the chairman of the Supreme Council of the Armed Forces (Scaf), which, in effect, has ruled Egypt since Mubarak left office on 11 February 2011.

It is the military that dominates modern Egyptian politics. All four presidents since a group of officers overthrew the monarchy in 1952 have come from the military. The country’s armed forces – the world’s tenth-biggest – are believed to control between 30 and 40 per cent of the Egyptian economy. And in June Scaf dissolved the elected parliament and claimed legislative power for itself. Egypt, in the words of one commentator, is a military with a state rather than a state with a military.

Making waives

Shamefully, the United States has spent the past three decades propping up Egypt’s generals. Since the 1979 Egypt-Israel peace treaty, the US has lavished $35bn in aid on the Egyptian military, making it the largest recipient of US military and economic aid after Israel.

But things have changed since the fall of Mubarak, right? Wrong. “Once imperilled, US aid to Egypt is restored”, read the headline in the New York Times on 23 March. In December 2011, President Obama signed a law that required the Egyptian government to support the transition to civilian government and protect freedoms of speech and assembly before any US military aid could be approved. But, said the NYT, Secretary of State Hillary Clinton “used her authority under the new law to waive a requirement that she certify Egypt’s protection of human rights”, thereby allowing “the Egyptian military to continue to arm and equip its forces”. So much for Obama’s vow, in May 2011, “to promote reform across the region, and to support transitions to democracy”.

The biggest obstacles to greater freedom and democracy in Egypt are the generals, not the Brothers. Yet they, too, like their former boss Mubarak, as well as their paymasters in the US, are on the wrong side of history. The “reform genie”, as an unnamed western dip­lomat told the Financial Times on 20 June, is out of the bottle. The Egyptian people, whether secularist or Islamist, Muslim or Christian, won’t tolerate another three decades of Mubarak-style rule. As Ghonim told his half-million followers on Twitter in June: “The only thing that will make us go back to living in fear, oppression and silence is a time machine – they haven’t invented that yet.”

Mehdi Hasan is a contributing writer for the New Statesman and the co-author of Ed: The Milibands and the Making of a Labour Leader. He was the New Statesman's senior editor (politics) from 2009-12.

This article first appeared in the 02 July 2012 issue of the New Statesman, Clegg the martyr

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We're racing towards another private debt crisis - so why did no one see it coming?

The Office for Budget Responsibility failed to foresee the rise in household debt. 

This is a call for a public inquiry on the current situation regarding private debt.

For almost a decade now, since 2007, we have been living a lie. And that lie is preparing to wreak havoc on our economy. If we do not create some kind of impartial forum to discuss what is actually happening, the results might well prove disastrous. 

The lie I am referring to is the idea that the financial crisis of 2008, and subsequent “Great Recession,” were caused by profligate government spending and subsequent public debt. The exact opposite is in fact the case. The crash happened because of dangerously high levels of private debt (a mortgage crisis specifically). And - this is the part we are not supposed to talk about—there is an inverse relation between public and private debt levels.

If the public sector reduces its debt, overall private sector debt goes up. That's what happened in the years leading up to 2008. Now austerity is making it happening again. And if we don't do something about it, the results will, inevitably, be another catastrophe.

The winners and losers of debt

These graphs show the relationship between public and private debt. They are both forecasts from the Office for Budget Responsibility, produced in 2015 and 2017. 

This is what the OBR was projecting what would happen around now back in 2015:

This year the OBR completely changed its forecast. This is how it now projects things are likely to turn out:

First, notice how both diagrams are symmetrical. What happens on top (that part of the economy that is in surplus) precisely mirrors what happens in the bottom (that part of the economy that is in deficit). This is called an “accounting identity.”

As in any ledger sheet, credits and debits have to match. The easiest way to understand this is to imagine there are just two actors, government, and the private sector. If the government borrows £100, and spends it, then the government has a debt of £100. But by spending, it has injected £100 more pounds into the private economy. In other words, -£100 for the government, +£100 for everyone else in the diagram. 

Similarly, if the government taxes someone for £100 , then the government is £100 richer but there’s £100 subtracted from the private economy (+£100 for government, -£100 for everybody else on the diagram).

So what implications does this kind of bookkeeping have for the overall economy? It means that if the government goes into surplus, then everyone else has to go into debt.

We tend to think of money as if it is a bunch of poker chips already lying around, but that’s not how it really works. Money has to be created. And money is created when banks make loans. Either the government borrows money and injects it into the economy, or private citizens borrow money from banks. Those banks don’t take the money from people’s savings or anywhere else, they just make it up. Anyone can write an IOU. But only banks are allowed to issue IOUs that the government will accept in payment for taxes. (In other words, there actually is a magic money tree. But only banks are allowed to use it.)

There are other factors. The UK has a huge trade deficit (blue), and that means the government (yellow) also has to run a deficit (print money, or more accurately, get banks to do it) to inject into the economy to pay for all those Chinese trainers, American iPads, and German cars. The total amount of money can also fluctuate. But the real point here is, the less the government is in debt, the more everyone else must be. Austerity measures will necessarily lead to rising levels of private debt. And this is exactly what has happened.

Now, if this seems to have very little to do with the way politicians talk about such matters, there's a simple reason: most politicians don’t actually know any of this. A recent survey showed 90 per cent of MPs don't even understand where money comes from (they think it's issued by the Royal Mint). In reality, debt is money. If no one owed anyone anything at all there would be no money and the economy would grind to a halt.

But of course debt has to be owed to someone. These charts show who owes what to whom.

The crisis in private debt

Bearing all this in mind, let's look at those diagrams again - keeping our eye particularly on the dark blue that represents household debt. In the first, 2015 version, the OBR duly noted that there was a substantial build-up of household debt in the years leading up to the crash of 2008. This is significant because it was the first time in British history that total household debts were higher than total household savings, and therefore the household sector itself was in deficit territory. (Corporations, at the same time, were raking in enormous profits.) But it also predicted this wouldn't happen again.

True, the OBR observed, austerity and the reduction of government deficits meant private debt levels would have to go up. However, the OBR economists insisted this wouldn't be a problem because the burden would fall not on households but on corporations. Business-friendly Tory policies would, they insisted, inspire a boom in corporate expansion, which would mean frenzied corporate borrowing (that huge red bulge below the line in the first diagram, which was supposed to eventually replace government deficits entirely). Ordinary households would have little or nothing to worry about.

This was total fantasy. No such frenzied boom took place.

In the second diagram, two years later, the OBR is forced to acknowledge this. Corporations are just raking in the profits and sitting on them. The household sector, on the other hand, is a rolling catastrophe. Austerity has meant falling wages, less government spending on social services (or anything else), and higher de facto taxes. This puts the squeeze on household budgets and people are forced to borrow. As a result, not only are households in overall deficit for the second time in British history, the situation is actually worse than it was in the years leading up to 2008.

And remember: it was a mortgage crisis that set off the 2008 crash, which almost destroyed the world economy and plunged millions into penury. Not a crisis in public debt. A crisis in private debt.

An inquiry

In 2015, around the time the original OBR predictions came out, I wrote an essay in the Guardian predicting that austerity and budget-balancing would create a disastrous crisis in private debt. Now it's so clearly, unmistakably, happening that even the OBR cannot deny it.

I believe the time has come for there be a public investigation - a formal public inquiry, in fact - into how this could be allowed to happen. After the 2008 crash, at least the economists in Treasury and the Bank of England could plausibly claim they hadn't completely understood the relation between private debt and financial instability. Now they simply have no excuse.

What on earth is an institution called the “Office for Budget Responsibility” credulously imagining corporate borrowing binges in order to suggest the government will balance the budget to no ill effects? How responsible is that? Even the second chart is extremely odd. Up to 2017, the top and bottom of the diagram are exact mirrors of one another, as they ought to be. However, in the projected future after 2017, the section below the line is much smaller than the section above, apparently seriously understating the amount both of future government, and future private, debt. In other words, the numbers don't add up.

The OBR told the New Statesman ​that it was not aware of any errors in its 2015 forecast for corporate sector net lending, and that the forecast was based on the available data. It said the forecast for business investment has been revised down because of the uncertainty created by Brexit. 

Still, if the “Office of Budget Responsibility” was true to its name, it should be sounding off the alarm bells right about now. So far all we've got is one mention of private debt and a mild warning about the rise of personal debt from the Bank of England, which did not however connect the problem to austerity, and one fairly strong statement from a maverick columnist in the Daily Mail. Otherwise, silence. 

The only plausible explanation is that institutions like the Treasury, OBR, and to a degree as well the Bank of England can't, by definition, warn against the dangers of austerity, however alarming the situation, because they have been set up the way they have in order to justify austerity. It's important to emphasise that most professional economists have never supported Conservative policies in this regard. The policy was adopted because it was convenient to politicians; institutions were set up in order to support it; economists were hired in order to come up with arguments for austerity, rather than to judge whether it would be a good idea. At present, this situation has led us to the brink of disaster.

The last time there was a financial crash, the Queen famously asked: why was no one able to foresee this? We now have the tools. Perhaps the most important task for a public inquiry will be to finally ask: what is the real purpose of the institutions that are supposed to foresee such matters, to what degree have they been politicised, and what would it take to turn them back into institutions that can at least inform us if we're staring into the lights of an oncoming train?