The new Arab revolt

What if democracy brings Islamist government? And other key questions.

One of my favourite lines from David Gardner's Last Chance: the Middle East in the Balance is the following: "Liberals tend to be coteries who like whisky and the west but the masses incline towards men in beards" – or "men in turbans", as Gardner, now the FT's international affairs editor, puts it elsewhere in the book.

This has been the dilemma at the heart of western attitudes towards the Middle East for decades now. Should we support friendly autocrats who oversaw regimes with secular veneers or condemn their repression and give our backing to pro-democracy groups? That we have done the former is to a large extent because our governments have feared the consequences of the dictators' departure. Whisky-drinking liberals are small elites that are unlikely to be elected. Men in turbans, however, are popular . . . but we don't like the idea of dealing with any more of them than we have to.

It is unclear what a democratic, post-Mubarak Egypt might look like (Tunisia, where secularism is entrenched and the Islamist opposition insignificant, is no guide). Nor can we be certain of the stripe of government that would be elected in other Arab states that were granted the luxury of a free vote.

But it is worth asking a few questions about the possible results, both in Egypt and in any other states in the Middle East that may follow suit.

1. If we – by which I mean the governments of Europe and North America – come out in favour of popular uprisings that sweep away dictators, how do we justify our past (indeed, our very recent) support for autocrats such as Mubarak?

2. If we are in favour of democracy in Tunisia and Egypt, how does this fit with our continuing friendly relations with the absolute monarchies of the Gulf?

3. We say that we wish the voices of the people to be heard. But will we want to listen to what they say? Or does this only apply if Egypt, say, elects an internationally respected moderate, such as Mohamed ElBaradei? (And already some are warning about him – see this Jerusalem Post article.)

4. If we say that only a democratic vote confers legitimacy on a government, why did the US and the EU refuse to recognise Hamas's election victory in 2006?

5. How will we deal with, and how will we view, the likes of Sheikh Yusuf al-Qaradawi? Condemned as a "preacher of hate", he was not allowed into the UK in 2008. On the other hand, he has been condemned by jihadist groups for denouncing the 9/11 attacks and al-Qaeda. Foreign Policy magazine and others regularly refer to him as "probably the single most influential Sunni Islamist figure in the Arab world".

He has turned down the position of Supreme Guide to the Muslim Brotherhood at least once. Figures such as al-Qaradawi will have enormous importance in Arab democracies. Will we engage with them – or will we continue to ban them from our countries?

It may be that, contrary to the opinion of David Gardner and many other long-time observers of the Middle East, liberals turn out not to be just small coteries, but to have much wider appeal. If so – and it sounds like wishful thinking to me – they'd better keep quiet about the whisky-drinking.

If, however, the democratic transitions that we are now so delighted to see end up bringing Islamist-leaning governments to power, how will we react? At the very least, such administrations are not the most naturally ardent defenders of western notions of sexual freedom and equality. Will our first act be to castigate them for that?

In the light of ongoing developments, my recent posting on a new book on the Muslim Brotherhood was more timely than I could have realised. My series last summer on Rethinking Islamism is also relevant. I am aware – how could I not have been! – that it proved distinctly unpopular with many readers. But here is my problem with some of the comments. I closed Rethinking Islamism IV last June by quoting the highly regarded scholar Olivier Roy:

If democratisation means more nationalism and more sharia, this is far from what the western promoters of democratisation envisaged. But this problem must be faced head-on by saying: there is no way not to engage the Islamists. There is no alternative. We in the west have to make a choice between [Turkey's Recep Tayyip] Erdoğan and the Taliban. And if we don't choose Erdoğan, we'll get the Taliban.

The first comment after the piece was published began: "I totally reject both Erdogan and Taliban . . . It is outright insane to wish to dally with Islamists to any degree."

But this is not about "wishing" to "dally" with anyone. This is about the possible consequences of democracy in the region, which on any reasonable analysis includes the likelihood of Islamist-leaning governments coming to power. Are we ready to deal with them, to be open to dialogue and understanding? Or will our minds be so clouded by fear of the word "Islamist" that we cannot even recognise Turkey's AKP government as a moderate administration with which we should be glad to do business?

If so, it will be us who put a dampener on the euphoria accompanying the removal of the tyrants. Not to mention that we'll have shown that "democracy" to us means the freedom to choose your own government – so long as we approve of it.

Sholto Byrnes is a Contributing Editor to the New Statesman
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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?